Poll
Second charge market faces great opportunity to fund HMOs
Recent tax changes introduced on buy-to-let properties, coupled with stricter underwriting standards on buy-to-let mortgages, have resulted in landlords looking at changing their portfolios.
Roma Finance recently reported that it was seeing more buy-to-let landlords converting their properties into HMOs to increase their rental income to deal with the tax increases.
Rob Derry, managing director of Brunel Mortgages, also noticed the trend, adding: “Many landlords are realising that the returns from an HMO far outstrip those of a single dwelling.”
However, Scott Thorpe, director at Access 4 Finance, said he had yet to see any clients move into the HMO market.
“As the money aspect is far greater, this kind of thing should be left to more experienced landlords.
“Non-experienced landlords should give this a wide berth and run for the hills.”
‘Whether second charge lenders embrace the HMO sector is a moot point’
Many landlords are now using bridging loans for HMO conversions
Roma Finance reported that many landlords were turning to bridging loans to convert buy-to-lets into HMO properties.
However, Sebastian Riemann of Libra Financial Planning, felt that there was a huge opportunity for the second charge industry to help fund those looking to move into the HMO market.
“The second charge market does have a great opportunity to bring some new innovative products to the table on the back of this shift in focus, something the Financial Conduct Authority has been crying out for since Mortgage Market Review was introduced.
“There is a huge potential to move away from commercial lending and given the higher pricing in these, the potential is for a very healthy profit margin.
“These types of investments aren’t for everyone, but those who take advantage are able to explore a lucrative market.”
Martin Stewart, director of London Money Loans, felt that if advisers, master brokers and lenders wanted to grow the second charge mortgage market, then it needed product innovation.
“Whether second charge lenders embrace the HMO sector is a moot point.
“When we started London Money Loans, the intention was to try to wake up the sleeping giants of the broker community.
“However, with hindsight, we now see that it is the industry itself which is the sleeping giant and collectively we all need to slap its face to get it up, moving and, above all else, competing.”
‘I can’t see any lender really wanting to go full throttle into this marketplace’
Will more lenders offer second charge mortgages for HMO conversions?
Rob felt that more lenders would offer second charge mortgage ranges which suited HMO conversions, but added that it was a limited market.
“It’s limited by the local authorities and the granting of [HMO] licences and planning permissions.”
Scott also felt that the HMO market had many pitfalls, including regulation and rogue landlords.
“I can’t see any lender really wanting to go full throttle into this marketplace.
“There are some lenders that will do it, but lend on a very low LTV and with a very clean client.
“This is definitely a risk-reward option, which will ultimately have rates to reflect that risk.
“A new entrant to the space would have to get comfortable, which would mean a slow lend for a year until they can see how the book performs.”
Scott did, however, expect to see landlords using second charges to help to raise funds to invest or to lower their LTVs on their portfolios.
Sebastian concluded that the change to HMO would be a gradual process and added: “Coupled with a limited amount of available products, the growth has been steady at best thus far.
“The increased focus on this sector should lead to increased competition, however, and more choice for landlords.”
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