Investing in Houses in Multiple Occupation (HMOs) is highly attractive due to the potential for higher rental yields. However, securing mortgage finance for HMOs can quickly become problematic without proper planning consent and licensing. This guide explains precisely why lenders reject unlicensed or improperly planned HMOs and how you can avoid these common financing pitfalls.
Understanding HMOs and Their Appeal
Why Proper Planning and Licensing Matters to Lenders
Mortgage lenders perceive HMOs as higher-risk properties compared to single-family rentals. Two key areas they scrutinise closely are:
1. Planning Permission and Article 4 Directions
Many councils have introduced Article 4 Directions, removing permitted development rights and requiring explicit planning permission to convert residential properties (Class C3) into HMOs (Class C4). Without the appropriate planning consent:
- The council can force landlords to revert properties to single-family use.
- Lenders may reject mortgage applications due to the risk of enforcement action.
2. HMO Licensing
HMO licensing is mandatory nationwide for properties rented to five or more tenants forming multiple households. Additionally, some councils operate selective or additional licensing schemes that cover smaller HMOs.
Without an HMO licence:
- Landlords can face substantial fines (up to £30,000).
- Tenants can legally reclaim rent via Rent Repayment Orders.
- Lenders will categorically refuse financing as the property is effectively illegal to operate as an HMO.
Real-Life Example: How Improper Planning & Licensing Can Derail Financing
Case Study:
John purchased a property intending to convert it into a six-bedroom HMO. Confident in potential returns, John overlooked applying for both planning consent (required due to Article 4 Direction) and the mandatory HMO licence.
When applying for mortgage refinancing, the valuation flagged both issues, and the lender immediately rejected his application. John faced the costly consequence of reverting his property to a single-family home, losing rental income, and paying thousands in retrospective compliance costs.
What Do Lenders Check During an HMO Valuation?
Before agreeing to fund an HMO, lenders check thoroughly:
- Planning Permissions: Ensuring necessary consents are in place, especially within Article 4 areas.
- Licensing Documents: Confirming a valid HMO licence is held and compliant with local council conditions.
- Building Regulations Compliance: Structural changes, fire safety, and electrical installations must have proper certification.
- Room Sizes and Amenities: Compliance with local HMO licensing standards.
How to Ensure Your HMO Gets Approved by Lenders
Follow these steps to avoid rejection and secure financing smoothly:
- Check Article 4 Requirements: Before buying or converting, verify if your property needs explicit planning permission.
- Apply Early for HMO Licensing: Obtain your licence promptly, ensuring the property meets all local authority standards.
- Comply with Building Regulations: Ensure all renovation work, such as loft conversions, electrical rewiring, or boiler installations, meet regulations and have appropriate certification.
- Consult Professionals: Engage experienced architects, solicitors, and mortgage brokers specialising in HMO financing.
Key Points to Remember
- Mortgage lenders insist on proper planning permissions and HMO licences.
- Article 4 Directions significantly impact planning requirements.
- Operating without compliance risks legal action, fines, and mortgage rejections.
- Always obtain planning permission, licensing, and building regulation certification before applying for finance.
Conclusion
Failing to secure proper planning and licensing can devastate your investment plans, causing costly finance rejections and compliance issues. Understanding lender requirements and ensuring full compliance is critical to smoothly securing HMO mortgage funding.
FAQs
A: Typically, no. Without proper consent, lenders regard the property as high-risk and generally refuse financing.
A: Yes. Operating an unlicensed HMO is a criminal offence, leading to large fines and potential legal action.
A: Check your local council’s planning portal or contact your local planning authority directly.
- Condition Report – A couple of hours
- HomeBuyer Report – 90 minutes to 4 hours
- Building Survey – Around 8 hours
The survey report is usually delivered within 3-8 working days, depending on the survey type.
A: It’s possible, but retrospective approval is not guaranteed, and delays may negatively impact mortgage availability.
