Mortgage clinic: ‘If I change my house into an HMO, will my lender let me keep my low fixed-rate mortgage?’

Jada Woolf wants to turn her house into an HMO but keep her low fixed-rate mortgage (Handout)
Jada Woolf wants to turn her house into an HMO but keep her low fixed-rate mortgage (Handout)

Jada Woolf, 31, bought a six-bedroom house in Maidstone in 2018 when her then-landlord decided to sell up and she wanted to keep her home. “I stayed living there with my flatmates until they all decided to move out and I didn’t replace them, so I now live here with my partner, Ian.”

She gave up teaching last year to concentrate on her growing beauty business, Facethewoolf, and is now considering a big house move, too.

“Ian is very handy and his family has experience of buying and developing property. He is good at the home stuff so we could make our home into a nice HMO (house of multiple occupancy) and move out.”

She has been told she can get a monthly rental income of £500 to £600 per room, which would be a maximum of £3,600 a month, minus costs. She’s currently on a low fixed-rate mortgage with Nationwide that ends in June this year and would ideally like to see if she could keep the rate.

“If I can’t switch my current mortgage over to an HMO buy-to-let, what should I do and what rate can I get?”

The details

  • Property bought in 2018 for £375,000

  • Current value: £425,000 - £450,000

  • Mortgage balance: £185,000

  • Current fixed-rate interest rate: 1.34%

  • Monthly repayments, including capital repayment: £940

The advice

Tom Woodall, of Prosperity Wealth, says:

Nationwide don’t offer an HMO / buy-to-let proposition although its sister company, The Mortgage Works, does. Unfortunately, Jada would have to sacrifice her current low rate if she’s considering an HMO property.

For the lender, there is more risk with this type of proposition and this is reflected in both the increased rate as well as the more costly lender fees. Examples of two and five-year fixed rates currently on the market (which are specifically for HMO properties) are 4.74 per cent and 5.19 per cent respectively.

Based on her mortgage balance, on an interest-only basis, monthly repayments would be either £752.75 or £824.22, depending on which rate she applies for. There is also a three per cent fee with this type of mortgage. She would, however, still be making a profit based on the anticipated rental income.

Another thing to consider is the HMO licence, which is dependent on the local authority. Maidstone borough council insists that a licence is required if there are five or more people renting the property. Judging by the anticipated rent, this would be required and a condition of the mortgage. Jada must be aware of the conditions of that licence, as there are unlimited fines if she does not comply.

She should speak to an experienced broker; the criteria for HMOs are extremely complex, especially regarding landlord experience, property type and maximum loan affordability calculations. The HMO mortgage amount will be based on the anticipated rental income for the property but is impacted by the tax status of the applicant as well as the lender’s own stress rates for calculations.

Before she looks to apply for a licence, Jada needs to explore the criteria and calculations with an adviser.

Richard Campo, founder of Rose Capital Partners, says:

Most lenders will grant “consent to let”, allowing a property to be rented on a residential mortgage, providing there is good reason and you have lived in the property six months or more. This usually costs about £99 per annum.

However, in this instance, as work is needed to convert the property, this will require the lender’s consent as this could be deemed “property development”. Development comes with a risk and this is something a lender will focus on.

Indeed, the property will be worth less while the work is ongoing and no income is being achieved. As Jada is paying the mortgage currently there won’t necessarily be a problem with affordability but that isn’t everyone’s situation, and many “high-street” lenders are less inclined to agree to lend while work is continuing. She may need to move to a specialist lender in the short term, and go back to a lender that allows HMO applications once the work is done. Careful cash flow is vital and brokers will be able help keep costs down.

If Nationwide agrees to the above, great, but, if they don’t, and she pushes on, that will invalidate her buildings insurance and runs a risk of not being able to claim if something goes wrong.

You should seek independent advice from a qualified professional before acting upon any information contained in this article