HMO Development Finance

Class C4 covers a house in multiple occupation with no more than six residents. Above six, the building is a large HMO and falls outside the use classes as sui generis, so changing a property to that use needs full planning permission. Co-living schemes are usually consented as sui generis too.

Where a council has made an Article 4 direction, even a C3 house to C4 HMO change loses its permitted development route and needs a planning application. Lenders will not fund on the assumption that consent will follow. They want the decision notice, and a valuer who has read its occupancy conditions.

In England, an HMO occupied by five or more people forming two or more households needs a mandatory licence from the local council. Many councils add additional licensing for smaller HMOs, so check the scheme against your authority's rules, not just the national threshold.

Licensed HMOs must meet national minimum bedroom sizes, and many councils publish amenity standards that go further on kitchens, bathrooms and room sizes. A room that fails is a room the valuer ignores, so design to the local standard before you price the build.

• 6.51 sq m minimum for a bedroom used by one person over 10
• 10.22 sq m minimum for a bedroom used by two people over 10
• 4.64 sq m minimum for a bedroom used by one child under 10
• Rooms under 4.64 sq m cannot be used as sleeping accommodation

Most HMO conversions involve building work that must meet the building regulations: structural alterations, new bathrooms and kitchens, drainage and fire separation between rooms. Budget for building control sign-off from the start, because lenders will not release the final drawdown, and your exit lender will not refinance, without a completion certificate.

Fire safety drives a large share of HMO conversion costs. Councils assess it when they license the property, and typical requirements include fire doors, a linked alarm system and a protected escape route. Price these into the build before you offer on the property, not after the licensing officer visits.

• Building control approval for structural and drainage work
• Fire doors, alarms and a protected escape route to the council's standard
• Kitchen and bathroom numbers that match the licensed occupancy
• A completion certificate before the final drawdown and the refinance

The lender's valuer reports two figures: a bricks-and-mortar value against comparable houses, and an investment value capitalising the achievable room rents after costs. Development lenders will often fund to the investment figure, but your exit lender may not, so we check both before you commit to a site. Our guide to how HMOs are valued covers the method in depth.

Loan to cost still applies, usually capped around 80-85% for HMO conversions and new builds. If the investment value is strong but your costs are high, cost becomes the binding limit. Where the equity gap is too wide, mezzanine finance can stretch total borrowing on larger schemes.

HMO bridging finance is a short-term loan secured against the property as it stands. It pays for the purchase and, on many bridging products, some or all of the conversion works. Once the rooms are let and licensed, you repay the bridging loan by refinancing onto an HMO mortgage, or by selling the finished HMO property to an investor.

It suits deals where speed matters: auction lots, chain-free purchases, or a house a mortgage lender will not touch yet because it has no working kitchen or bathroom. Bridging loans carry a monthly interest rate and run for months rather than years, so the interest and fees add up quickly if works or letting overrun.

Where the work is structural, such as an extension, a loft conversion adding rooms or a change of use to a large sui generis HMO, development finance is usually the better form of property finance. The build money is released in stages as a monitoring surveyor signs off the work. Our bridging loans page covers the purchase-and-refurbish route in more detail.

• HMO bridging loan: purchase plus light or medium works, no major structural change, quick completion needed
• HMO development finance: new build, extensions, heavy structural work or a change of use that needs full planning permission
• Both routes: the lender wants a clear exit, usually an HMO mortgage at your room count and rent

Most HMO schemes exit by refinancing onto an HMO term mortgage once the rooms are let and licensed. That lender will apply its own rental stress test and may cap bedroom numbers, so a large sui generis or co-living building has a narrower choice of HMO mortgage products than a six-bed house. The same exit strategy applies whether you start on a bridging loan or a development loan.

If letting takes longer than the build loan allows, a short development exit facility can repay the development lender while you fill rooms and build the rent roll a term lender wants to see.