Photo by ELM Property

It’s been an interesting month with cases. My director, Jackie often says that despite her many years in this industry and the constantly changing landscape from lenders, every day is still a school day.

This month, I want to share an example of an HMO conversion and subsequent refinance. It would be easy to provide examples where everything has gone perfectly to plan, but I believe that a case with some challenges is more realistic. Recently, my conversations with potential clients have leaned towards more positive, ‘best case scenario’ situations, but I think it’s always important to bring a dose of reality to the table.

As with everything I share, my intention is not to discourage anyone but to emphasise the importance of entering these projects with your eyes wide open. We prefer to keep our shirts on throughout and beyond our journey together!

Our clients approached us back in November. They had purchased a property in Kent for £272,000 using a bridge loan from a lender we consider a last resort (arranged by another broker) due to their challenging ‘divorce’ terms.

As they were nearing the end of the bridge loan term, they needed to refinance before incurring a fee of 5% of the loan – over £10,000. There was still around £60,000 worth of work to be done, including moving a water main before the cellar could be finished. With delays from the water company, the builder, and a shortage of funds, we had to act quickly to secure a term mortgage.

We had the property valued, hoping a re-inspection would suffice once the work was completed, allowing us to move to a term mortgage. It quickly became apparent that we wouldn’t be able to secure the term mortgage in time. By this point, the bridge loan had expired, and they had paid over £10,000 in charges.

Always thinking of solutions, and with another late fee looming in four weeks, we decided to switch the application to a new bridge loan to repay the existing one. The lender we chose also offers bridging and has a great bridge-to-term option to reduce fees later on. We completed the bridge loan, saving the extra fees and allowing the clients to borrow additional funds to finish the work.

During this time, the clients were also struggling with the HMO licencing team. They had checked the minimum room sizes for bedrooms and communal spaces before starting the work, aiming for a 6-bedroom HMO with a GDV of £470,000. However, a new HMO officer revised the minimum space requirements, forcing them to remove the sixth bedroom to add space to the communal area. This adjustment reduced the expected GDV to £430,000, lowering the amount they could refinance.

All in all, it has been a very expensive project. We are currently awaiting the valuation for the refinance and hope to complete it by the end of July. Once completed, they can finally have an asset generating cash flow rather than depleting it.

Key Learnings:

• It never goes wrong until it does. Jackie often compares it to a divorce; you never truly know your partner until you’re in it! You wouldn’t expect to be on a bridge loan longer than the term, but it happens. Always check the fees if you can’t redeem in time. Many reputable bridging companies do not charge late fees, increase the default interest rate, and will work with you to pay them back. All the lenders we work with follow this approach.
• Never base your case on best-case numbers; they are unlikely to happen. Fortunately, these clients could pay the late fees and keep going, but otherwise, the outcome could have been very different. Cash flow problems are often the biggest issue.
• You can never check and double-check enough and be cautious about where you get your information. An error in calculating sizes on this property reduced its value by around £40,000, meaning £30,000 less on refinance. There’s a minefield of information out there, so make sure you go to reliable sources. The HMO Roadmap is a great place to start, and all its partners are reputable. Don’t seek out the one person who tells you what you want to hear – you want honesty.

I hope this was useful. As always, please drop me a message if you want to chat about anything further.

About the Author:

Ellie Broadhurst is a specialist mortgage broker working at Baya Financial in partnership with The HMO Roadmap. She works with HMO property investors throughout their journey, from clients starting on their first project through to experienced portfolio landlords and developers. Learn more about Ellie here.