Securing funds for the renovation of an HMO

What was the situation?

I was approached by a client who was looking to purchase a property for investment purposes. The property in question had been owned by the vendor for several generations as a primary residence, but, was now in substandard condition. The client’s ideal scenario was to eventually let out the property on a house of multiple occupancy (HMO) basis. They were therefore looking for finance to make this a reality.

What was the issue?

As the property had been used as a primary residence, it was not currently licenced as an HMO. Nor did the property meet the requirements to pass the HMO tests. Furthermore, due to the condition of the property, the client was wary that it would not achieve the true rental valuation when applying for the mortgage (which determines the loan amount).

The client had agreed to purchase the asset for £400,000 and had identified £50,000 worth of renovation and HMO licencing costs.

What was the process?

The client was previously advised to apply for a standard Buy to Let (BTL) product, but this would not provide the required finance due to the property condition and would tie them in for several years at a lower leverage, which may have prevented them from completing more projects as too much of their capital would have been tied up in this property.

What was the solution?

The solution involved approaching a specialist lender that would offer a refurbishment loan to advance the clients with the necessary funds to complete the purchase. Due to the strength of my lending proposal, the lender offered to fund the renovation works. During this refurbishment process, the property would be untenanted and so to protect the clients cash flow, the lender agreed to roll up the interest payments for a period of 9 months. This allowed the client to complete the renovation work, secure the HMO licence, let out the property and refinance to a term BTL mortgage based on the uplifted rental & property valuation.

The lender agreed to lend 65% towards the purchase of the asset, and fund all the build costs if required. The client was very happy with this solution as he was previously advised that he could only secure a 50% mortgage towards the purchase, locked-in for 5 years, and fund the build costs, which proved unworkable due to the large initial cash requirement.

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