Funding for HMOs show signs of improvement 03.06.2009

Author: David Whittaker Posted on: 03 June 2009

It seems bizarre that the one area within the Buy to Let sector which has performed better than most is excluded "vanilla" funding at the moment. But there is some capacity out there and early signs that new entrants will help to improve criteria in the coming months.

The strength of HMO funding is drawn from................

• Higher than normal yields
• Numerous tenants to spread vacancy risk in each building
• HMO landlords tend to be more experienced investors
• There are normally well defined geographical areas where HMOs "work" in a town or city

Lenders tend to discount the headline rent to cover voids so it is important to have a higher yield or LTV figures come in below 60%. Current appetite is mostly at 60%, and occasionally 65%.

Pricing is mostly linked to 2.5% to 3.5% above 3 month LIBOR rate although fixed rates can be provided. Watch out that the fixed rate doesn't impact the rental cover calculation

Lenders will charge between 1% and 2% dependent on the transaction.

All applications currently have to go through a full credit process more akin to procedures of 5 or 6 years ago rather than the streamlined processes of the last 2 or 3 years.

Market rumours hint at the return of one or two lenders in this area later this summer. Their capacity to lend will be less important than the perception of the rest of the market in terms of improving their criteria and processes as a reaction to perceived competition.

If you've got an HMO property and want to understnd how well it could be funded, give us a call on 0845 3456788.

Author: David Whittaker