Few things in property are as misunderstood as HMO finance, let alone HMO bridging finance. Most HMO investors, even the more experienced ones tend to avoid it.
Over the years as the bridging sector has matured, the HMO bridging sector has followed suit, and the range of HMO bridging products and HMO bridging lenders willing to consider HMOs has increased.
It is still relatively expensive, and can be confusing, but armed with the correct information and used properly, HMO bridging can be an incredibly powerful tool – allowing HMO investors to do potentially profitable deals that wouldn’t otherwise have been possible.
In this guide we’ll run through everything that is needed to know and understand how to use HMO bridging finance with confidence – start to finish
What HMO bridging is, and how it differs from an HMO mortgage.
Situations when an HMO bridging loan is useful.
What loan to values can be achieved.
The detail behind the methodology.
The process, and where and how to start.
How to get started and where to get the best guidance.
1 – HMO BRIDGING BASICS.
Bridging can effectively be thought of as a short-term mortgage or finance. HMO bridging finance, therefore, is the application of bridging finance to an HMO project, simple.
HMO Bridging vs HMO Mortgages; there are both similarities and differences between HMO Bridging and HMO Mortgages.
Security – this is in the form of a “charge” over the property, meaning the lender can repossess the property if there is a default on the loan, or any other terms of the loan are breached by the borrower.
Valuation – the potential loan amount is based on lending a percentage of the property value, whether that be bricks & mortar, or commercial valuation.
Loan Redemption – this will be payable on the loan, and the loan is to be paid back at the end of that term.
Entry Fees – both HMO bridging and HMO mortgage lenders charge a fee to enter the agreement, and this is usually added to the loan. Typically they come in around 2%.
Early Repayment Charges – once a loan has been issued, if repaid within the minimum or initial term, there will be an early repayment charge due to the lender, for both HMO bridging and HMO mortgages.
Loan Term – HMO bridging loans typically have a shorter term, normal between 3 months and 2 years. HMO mortgages on the other have an initial loan length of 2 years but normally last for up to 25 years.
Interest Rates – HMO bridging interest rates are typically from approx 8-15% per annum, whereas HMO mortgage rates are currently approx 2-5% per annum.
Max LTV – the maximum loan to value is up to 70-75% for HMO bridging and 85% for HMO mortgages.
Interest Payments – interest payments on HMO bridging finance sometimes are paid monthly but are typically ‘rolled up’ within the loan, and deducted from the gross loan amount at the start of the loan. Interest on an HMO mortgage is payable monthly in advance, like any other normal mortgage.
Exit Fees – these are rarely charged by HMO mortgage lenders, however, HMO bridging companies are known to typically charge an exit fee of around 1% to terminate the loan, but can be higher.
Personal Income Requirement – HMO bridging lenders don’t care about personal income, so it is possible to get a bridging loan with low or no earnings. Whilst there are some great HMO mortgage lenders that don’t need to see any personal income over half of the HMO lenders out there do require a minimum personal income, normally £25,000 per annum.
Property Condition – HMO bridging lenders don’t care about the condition of the property. HMO mortgage lenders, however, using a stand HMO (non-refurb) product, need to see that property has certain characteristics, such as a working kitchen, and bathroom to meet their lending requirements.
Interest Coverage Ratio – HMO bridging lenders aren’t bothered about the rental income whatsoever. HMO mortgage lenders will have set income coverage requirements to make sure the rental income or potential rental income is going to be sufficient to service the monthly loan interest payments. These are normally set at between 125% and 160%.
For example: if the monthly mortgage payment was £1000 per month and the interest coverage ratio was 160%, the gross income would need to be £1600 per month.
Speed – HMO bridging lenders can act fast, in as little as a few days. Whereas HMO mortgage lenders normally take around a month and sometimes a good few months in complex cases.
2 – WHY USE HMO BRIDGING FINANCE?
Even though HMO bridging finance is more expensive than an HMO mortgage, there are 3 main situations when HMO bridging finance is very useful and can be very profitable.
1. When speed & certainty is required.
HMO bridging can be arranged in as quick as a few days, it allows buyers/borrowers to be able to compete with cash buyers. Auctions are a good example of where speed is needed and so HMO bridging is suitable for this purchase method and has benefits over using an HMO mortgage.
2. Where the property isn’t mortgageable.
From a mortgage lender’s point of view, a property doesn’t need to be perfect, but it does need to be in a rentable (habitable) condition before they’ll lend against it. This can be a problem if you want to buy a property in need of refurbishment at a good price, then bring it back up to scratch.
One could instead use an HMO bridging product, and then take out an HMO mortgage to repay the bridging loan once the refurbishment is finished.
Some HMO lenders have a product specifically for this, called a bridge to let, which means you don’t have to find a new lender at the end of the refurbishment,
3. Where the borrower doesn’t want to hold the HMO property for a very long time.
- The borrower could be in a position to remortgage quickly, to realise an uplift in value. The borrower could use HMO bridging during the purchase and refurbishment, then borrow using an HMO mortgage once the refurbishment is complete, and the value increased.
- The borrower could be doing a quick flip. When doing a quick flip on an HMO property that is undervalued to begin with, it would be foolish to use an HMO mortgage, because it is intended to be held for a number of years, normally a minimum of 2.
In these instances, cash or HMO bridging are the only 2 remaining options.
Of course, these three situations can overlap. Often properties that are in disrepair and are unmortgageable are being sold quickly (sometimes at auction). Often, a purchaser might not want to hold a property for long – just enough time to refurbish then sell on again for a profit.
3 – HOW MUCH CAN BE BORROWED?
The size of bridging loan you can take out is based entirely on the value of the property – factors like the amount of rental income and your own personal income don’t come into it. However, different lenders look at the value in different ways – which creates complication, but also an opportunity.
Understanding Loan-to-Value (LTV)
You’ll probably already know what loan-to-value is: the size of the loan divided by the price of the property.
So a loan of £75,000 against a £100,000 property will have an LTV of 75%.
But what determines the “value” part in the case of bridging can vary.
For mortgages, the “value” of a property will always be the lower of its current value or the purchase price.
Example HMO Mortgage Valuation:
Purchase Price = Value
Market Value £100,000
Purchase Price £85,000
Lenders Value £85,000
Maximum LTV 70%
Loan Amount £59,500
In the case of bridging, it’s the same, but some HMO bridging lenders will lend based on the current market value rather than the purchase price!
The HMO Bridging Valuation
Just like with an HMO mortgage, the HMO bridging lender will always instruct a chosen RICS qualified surveyor to inspect the property and determine its value.
If the borrower has had a recent valuation, a lender might agree to that valuation being updated so long as it’s addressed to them. The borrower may have to pay for this but it will no doubt be cheaper than getting a new valuation!
What Other Things Will An HMO Bridging Lender Want To Know?
The valuation is the main factor that determines how much can be borrowed.
Depending on the lender, there are other factors related to the borrow, not the property, that they might want to get to the bottom of before agreeing to the loan:
- The borrowers experience at executing projects like these; particularly important in the case of HMOs or HMO development projects that go beyond a simple refurb.
- How the HMO bridging loan will be paid back; with either remortgage or sale.
- How the borrower will be able to achieve an exit on the HMO bridging loan before the term of the loan runs out.
- If the borrower has any other assets; these are assets the lender would be able to go after if the borrower defaults and selling the property isn’t enough to clear the debt.
- What income the borrower has; this is mostly relevant if the borrower plans to make interest payments monthly, rather than at the start or end.
The emphasis that lenders put on these “non-property factors” will depend on their attitude to risk and the type of lending they like to do. Some HMO bridging lenders don’t care, others do, it’s about finding the right one for you. We recommend using a specialist HMO finance broker for this, it may seem like an additional cost but, more often than not, it is worth the money.
4 – HMO BRIDGING LOAN FEES & STRUCTURE
FEES;the interest rate is just one component of the cost of HMO bridging: loans also come with fees, which need to be clearly understood.
Valuation Fee –the fee for the survey or valuation carried out by
Lenders Arrangement, Facility or Entry Fee –the fee charged by the lender for arranging the loan, typically 2% of the gross amount, added to the loan.
Lenders Legal Fees – the legal fee of the lender payable typically payable by the borrower.
Borrowers Legal Fees – the legal fees of the Borrower payable by the borrower.
Exit Fee –the fee payable for exiting the loan, typically 1% of the gross loan, paid on redemption of the loan.
Broker Fee – the fee payable to the broker for putting together and negotiating the loan. HMO bridging brokers are invaluable for helping match the borrow to correct lender. The typical fee is between 1 and 2 % of the loan depending on the loan size.
Lenders with the lowest fees tend to have to lowest risk appetite, and the lowest loan to value. Unsurprisingly, lenders with the highest fees tend to have the highest risk appetite and the highest loan to value.
STRUCTURE; all fees associated with an HMO bridging loan will normally be deducted from the gross advance before it’s paid over to you.
A borrower agrees to borrow £70,000
The arrangement fee if £1,400
Lenders legal fees are £600
The net loan advanced to the borrower will be £68,000
The only other exception is exit fees, which are added at the end when the loan is repaid.
This interest, however, is a different story and varies from one HMO bridging lender to the next.
Interest Repayment Methods
The lender may give a choice of which method the borrower prefers or might insist on a certain method being used. In most cases, the HMO bridging lenders, and in fact all types of bridging lender, prefer to roll the interest up at the start.
There are 3 ways to pay the interest on an HMO bridging loan, and each method has its own pros and cons:
- Rolled up at the start.
- The lender withholds the interest, meaning it’s deducted from the gross loan advance (along with the fees) at the start.
- Rolled up at the end.
- The borrower can roll up the interest, meaning they pay it in one lump sum at the end of the loan.
- Paid monthly in advance or arrears.
- You can service the interest, meaning you make an interest payment every month (just like with an HMO mortgage).
There’s no one single “best” way to treat the interest – if you’re given the choice, the right option will depend on your circumstances and what you want to achieve.
5 – HOW TO GET AN HMO BRIDGING LOAN
The process of obtaining an HMO bridging loan is very similar to that of obtaining an HMO mortgage, although it can be significantly faster due to the fact that no personal income, eligibility or credit checks are required.
- The borrower chooses and agrees on a bridging product, terms and interest rate.
- The borrower pays the valuation or survey fee, between £750 and £2000.
- The RICS valuation/survey is carried out.
- Assuming the valuation comes back in line with expectations,
- The borrower puts money on account with the lenders’ solicitors (circa £1000), to cover the costs in case they withdraw from the transaction.
- The lenders’ solicitor issues the loan contract and then completes all other required legal work, including, but not limited to, requesting and reviewing local searches and completing a title check from the land registry.
- All being well, the lender’s solicitor will then approve the loan to be released.
- The exchange then takes place.
- The loan gets drawn down and issued.
- Lastly, completion and it’s done.
This can all be done very quickly. It’s possible to complete an HMO bridging transaction in just a few days, but normally it happens in around 2 to 3 weeks. That’s about half (or less) the average time of obtaining an HMO mortgage.
Things that can affect the speed of the transaction.
- Valuer availability; how long it takes the valuer to go out and survey the property,
- How long it takes the valuer to complete and send his report.
- How fast the solicitor works to send across the information the lender requests, and to respond to enquiries.
- The speed of outstanding information the lender requires, like local searches and the title check.
- How quickly the lender and the lender’s solicitor work.
6 – WHAT TO CONSIDER WHEN TAKING OUT AN HMO BRIDGING LOAN
There’s a lot to think about when considering HMO bridging finance. These three points are a good start.
- Costs Benefit Analysis
- Q: Is there enough benefit or profit in the project to justify the costs of using HMO bridging?
If the answer is yes then go for it. If not, then reconsider the options.
- Exit Strategy
- Q: Do you have at least one confirmed exit strategy?
Having multiple exists including sell, refinance at a higher value, means your ability to exit the HMO bridging product is increased and the lower the risk. Getting stuck on a bridging product is something a borrower wants to avoid at all costs. It will eat into profits and also likely cause stress.
- Best Rate or Best Terms
- Q: What’s more important: the best terms or the best rates?
The lowest overall cost of bridging is available in circumstances where the loan to value is low, variables are minimised, personal circumstances and track record are clean and credible. There are lots of excellent HMO bridging lenders and plenty of products available – so in any given situation a borrower can decide what’s important, and pick a lender accordingly.
As mention at the start, people are confused and scared about HMO bridging loans.
Hopefully, we’ve reduced confusion and fear surrounding HMO bridging. As long as purchasers understand what they’re doing, pick a great HMO bridging product and are confident with an exit strategy, it’s an incredibly powerful tool.
For more information or to find an HMO mortgage bridging finance specialist then check out our directory including the best HMO specific finance brokers on the market.