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We are often approached by property investors asking about the different funding options converting a property into a HMO. These properties are proving to be increasingly popular high-yielding investments for professional landlords. For those landlords considering converting properties into HMOs, there are various financing options that are available. We have provided a comparison of two options below.
Specialist HMO Mortgages
There is a specialist lender that can consider lending on a residential property where the intention is to convert it into a small HMO (6 or less bedrooms), providing there is no structural work or planning permission required.
Pros
- Financed from Day 1 on a long-term specialist HMO mortgage.
- Avoids bridging finance, therefore it is a cheaper form of financing.
Cons
- You will be required to fund the works
- The valuer would need to confirm that the project is viable, which from our experience has resulted in cases being both approved as well as declined therefore there is a risk involved.
- Restricted to a simple HMO conversion up to 6 bedrooms where no planning is required.
- The property must be in a lettable condition.
Bridging/Refurbishment Finance
Leading bridging lenders offer various products that vary from funding the conversion works, to guaranteeing a long-term exit onto competitive HMO mortgages.
Pros
- 100% of the works can be funded (subject to lenders criteria)
- Interest can be rolled up, meaning no monthly payments during the loan term
- No Early Repayment Charges
- Allows you to capital raise upon completion by refinancing onto a high LTV long-term HMO mortgage
- Short-term finance offers more flexibility as the property does not need to be in a lettable condition
- No limit on number of bedrooms, therefore the need for planning permission can be included in the project
Cons
- Usually more expensive due to higher interest rates
- Arrangement fees can be higher
- Lender needs to be satisfied that the exit strategy and post works value is credible
If you are considering converting a property into a HMO or have recently carried out a conversion and need to refinance the property to move onto the next project, then please contact us today for a free consultation.
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