Houses in Multiple Occupation (HMOs) are among the most profitable property investments, offering higher rental yields than standard Buy-to-Let properties. However, when buying an HMO at auction, securing the right finance can be challenging.
Lenders have stricter requirements for multi-let properties, and auction purchases demand fast completion within 28 days.
In this guide, we’ll cover:
- How HMO auction finance works
- Bridging loans vs. Buy-to-Let mortgages for HMOs
- What lenders require for HMO finance
- Common challenges and how to overcome them
What Is HMO Auction Finance?
Why Is HMO Auction Finance Different?
- Lenders require additional checks (e.g., planning, licensing, rental demand).
- Auction purchases must complete fast – often within 28 days.
- Some HMOs need refurbishment before they are mortgageable.
- Article 4 planning restrictions may apply (more on this later).
The Best Finance Options for HMO Auction Purchases
1. Bridging Loans for HMOs (Best for Quick Completions & Refurbishments)
A bridging loan is the go-to finance solution for HMO purchases at auction. These short-term loans offer fast funding while giving investors time to refurbish and refinance.
Benefits of Bridging Loans for HMOs:
- Fast approval & completion (7–14 days) – Ideal for auction deadlines.
- Flexible lending criteria – Works for unlicensed HMOs or those needing refurbishment.
- Interest-only repayments – Lower costs during the loan term.
- Exit strategy via mortgage refinancing or resale.
Example:
An investor wins a 4-bed HMO at auction for £250,000. The property lacks an HMO licence and requires minor refurbishments. A <a href=”https://auctionfinanceuk.com/news-insights/bridging/85-net-ltv-bridging-loan-auction-purchase/”>bridging loan of 75% LTV</a> (£187,500) is used to complete within 28 days. After obtaining the licence and upgrading the property, the investor refinances onto an HMO mortgage at a lower interest rate.
2. HMO Buy-to-Let Mortgages (Best for Ready-to-Rent Properties)
For auction properties that are already licensed and mortgageable, an HMO Buy-to-Let mortgage may be an option. However, standard Buy-to-Let mortgages aren’t suitable for HMOs, so investors must apply for a specialist product.
Benefits of HMO Buy-to-Let Mortgages:
- Lower interest rates than bridging loans.
- Long-term finance solution with fixed-rate options.
- Suitable for rental-ready HMOs with licences & planning approvals.
Example:
A landlord buys a 6-bed licensed HMO at auction for £350,000. The property is fully compliant, and they secure a 75% LTV HMO mortgage with a specialist lender, financing £262,500.
What Do Lenders Require for HMO Auction Finance?
HMO finance has stricter requirements than standard Buy-to-Let. Lenders assess:
- Article 4 planning restrictions: Some areas require special permissions to operate HMOs.
- HMO Licensing: Required for properties with 5+ tenants.
- Rental Income Coverage: HMO lenders often require rental income to cover 165%+ of the mortgage payments.
- Property Condition: Some lenders won’t finance properties without kitchens, bathrooms, or fire safety measures.
Common Challenges & Solutions
Challenge: Property needs an HMO licence but is currently unlicensed.
Solution: Use a bridging loan, apply for the licence, then refinance onto an HMO mortgage.
Challenge: Located in an Article 4 area, requiring planning approval.
Solution: Check planning requirements before bidding; ensure the property has C4 or Sui Generis use class.
Challenge: Property is unmortgageable due to poor condition.
Solution: Use bridging finance, refurbish, then refinance.
Article 4 & Planning: What You Need to Know Before Bidding on an HMO at Auction
Some councils restrict the conversion of single-let properties into HMOs using Article 4 Directions. This means you must apply for planning permission before converting a house into an HMO.
How to Check Article 4 Restrictions Before an Auction
✔ Look at the local council’s website for Article 4 maps.
✔ Check if the auction legal pack states C3 (single dwelling) or C4 (HMO) planning use.
✔ Speak to an HMO planning consultant before bidding.
Buying in an Article 4 area without checking could mean you can’t operate the property as an HMO!
Case Study: How an Investor Used Auction Finance to Secure an HMO
- Investor: Sarah, an experienced landlord.
- Property: 5-bed house in Manchester.
- Auction Purchase Price: £270,000.
- HMO Status: No licence, but had C4 planning use.
- Finance Used: 75% bridging loan (£202,500).
- Refurbishment: £15,000 for fire doors, kitchen upgrades, and licence application.
- Exit Strategy: Refinanced onto an HMO mortgage after 6 months.
Outcome: Monthly rental income increased by 30% vs. a standard Buy-to-Let, generating higher cash flow.
FAQs
Ans: Yes, but only if the property is licensed, mortgageable, and meets lender criteria. Otherwise, use a bridging loan first.
Ans: Bridging lenders typically offer 75% LTV, meaning you need 25% deposit + fees.
Ans: No. Properties already in C4 use or with existing licences don’t need new permissions. However, Sui Generis HMOs (7+ tenants) always require planning approval.
Ans: Bridging loans can be approved in 48 hours and completed in 7-14 days.
Ans: Yes, but you must apply for a licence before renting it out.
