HMO Mortgage Valuations
With valuations on a House of Multiple Occupancy (HMO) it is key to remember that not all lenders will offer an investment valuation. Those lenders that do offer an investment valuation, may offer a hybrid valuation or a commercial Investment valuation (Market Value – MV1). All lenders will have required criteria for borrowers to hit in relation to experience or property configuration and size to achieve these valuation methods against products that are available. Below we will explain what criteria borrowers will need to hit to be eligible and the different valuation methods that are available for HMO mortgages.
Valuation Types | House of Multiple Occupancy Mortgages
See three different valuation method types that lenders use on HMO mortgage applications. They all have differences between them, explained below, which can mean that some valuations are more beneficial depending on the type of HMO being offered as security, or for the type of borrower. Below we will explain criteria for eligibility, legislation and details of the assessment made by a valuer on those valuation methods
Commercial Mortgage Lenders, will usually instruct a Commercial Investment valuation, usually will expect a Market Value 1 (MV1) valuation method that will value the property on a yield basis, considering the valuation of the property against the revenue the property will produce. This is usually the most generous valuation methodology that is suitable for properties that have been considerably adapted to be a HMO, which might include:
- Ensuites to each room or most
- Adequate living space
- Not easily converted back to a family home
As well as the above, the property should be at least 5 bedrooms, but for most properties looking to achieve further uplifts on this valuation type, compared to residential or hybrid valuation methods are usually 6-7 bedrooms and above.
Planning and licencing
For rooms of 7 and above, planning will be required regardless of whether the property sits inside or outside article 4.
For HMOs with 6 rooms or less may not require planning permission to be eligible for this valuation method if they are either outside of article 4 or if the property was made a HMO before the article 4 legislation came in.
Borrowers that are exempt should have a certificate of lawful use, which can be provided by your local council that would need to evidence that the property has indeed been a HMO since before the legislation came into force. Borrowers that are eligible but don’t hold a certificate of lawful use will need to apply on the planning portal and provide evidence to support the property being used as a HMO for the required period and may use the following documents to support their application:
- Tenancy agreements
- Afa David agreements from vendor, operators and tenants
Panel valuers
Valuers that are usually on these panels are usually local valuation firms that are on the VAS panel or the Appraisers panel.
Experience required
For most commercial lenders, experience is required on a HMO Mortgage and should be 12 months landlord experience. However, there are some lenders that will make an exception to this where the borrower has strong personal income which should be at least £35,000
Residential valuations are standard valuations that are primarily used on single unit buy to lets, which includes comparable valuation methodology.
Usually valuers average the most suitable 3 comparable, that are:
- Like for like
- Within a quarter mile
- Sold and not advertised
- Bricks and mortar
This is usually used on HMO mortgage applications, with some lenders that either don’t specialise in HMOs, or lenders that cant instruct a hybrid valuation method due to the properties configuration.
Regardless of planning permission, if a property is easily converted back to a family home, or is not adapted considerably to compliment a co-living layout with adequate services such as ensuites, will be more suited towards a comparable, residential valuation.
Products with this valuation method are usually a lot cheaper, but can of course create a lending shortfall if larger HMOs use products with this valuation methodology.
Experience
Experience is not usually required for HMOs with less than 6 rooms with a residential valuation method, however, some lenders offing this product may require 12 months landlord experience.
Hybrid valuations are usually provided by specialist Buy to Let lenders. We have been advised by these lenders that these are most effective where the property is:
- Located in an area with a large student presence
- Located in a major town or city
- With good HMO demand
- Not easily converted back to a family home
Properties not easily converted back to a family home will usually consist of a lot of ensuites within the property making it more suited to a co-living design.
Hybrid valuations for houses of multiple occupancy mortgages will use comparable evidence and also look at the investment value the property has within the adaptability of the property making it best suited to a co-living rental, which is usually a premium for the design, rather than the rental income being produced. It is important to note that these valuations might be hybrid and therefore including a specialist assessment but they are not full Market Value 1 (MV1) valuations, therefore valued on a Vacant Possession (VP) basis.
Panel valuers
Hybrid valuations are usually instructed with larger lenders that provide specialist buy to let mortgages and often use national valuation companies, rather than local valuers, but in some instances certain lenders may also use local valuers panelled out.
Planning and licencing
Properties eligible for Hybrid valuations usually will need to have planning, or to be exempt which is possible if the property is outside article 4, or has been a HMO since before the article 4 legislation came into effect.
Applicants buying properties that are existing HMOs must be sure to obtain planning confirmation as a decision notice for the property to be a HMO, or to provide a certificate of lawful use to provide to your lender to evidence the property is subject to lawful use.
Experience
Experience is not usually required for HMOs with less than 6 rooms with a hybrid valuation method. However, some lenders offing this product may require 12 months landlord experience.
What is article 4?
Article 4 is a directive within UK planning legislation that allows local authorities to withdraw permitted development rights for properties intended to be converted to a House of Multiple Occupation, in specific areas. This means that property owners in these areas must apply for planning permission for certain changes or developments that would otherwise be automatically permitted under national regulations.
Article 4 directions are typically used to control changes of use, such as converting a single dwelling house into a House of Multiple Occupation (HMO). This ensures that local authorities can manage the impact of such developments on the community, demand infrastructure, and the housing market.
Under Article 4, converting a property into an HMO (where three or more unrelated individuals share facilities) requires planning permission, even if it would usually fall under permitted development. This is especially relevant in areas with high concentrations of HMOs, where local councils aim to maintain a balanced mix of housing types.
Local authorities must go through a specific process to implement an Article 4 direction. This includes public consultations and providing a minimum of 12 months’ notice before the direction comes into effect, unless an immediate direction is justified due to specific concerns.
Property owners and developers need to be aware of Article 4 directions in their area as it affects the potential for property development and changes of use. Failure to obtain the necessary planning permission can result in enforcement action and legal issues.
Many cities and towns with high student populations or areas experiencing rapid housing changes have implemented Article 4 directions to control the saturation of HMOs. Examples include parts of London, Manchester, and Birmingham where there are a lot of HMOs in certain areas.
For borrowers looking to acquire a House in Multiple Occupancy Mortgage, this is significantly important, especially for those who are buying cash and looking to re-mortgage, knowledge of this legislation and what is required by mortgage lenders can avoid borrowers from struggling to re-mortgage.
QUESTIONS ON HMO MORTGAGE VALUATIONS
Yes, but it won’t necessarily be any higher than a residential valuation. Considering that and the fact that commercial valuations are instructed with commercial lenders, these products can be more expensive than standard Buy to Let lenders and therefore might not be the best solution for a small HMO.
No, although your mortgage options will have less variety and you might also need a minimum income of 35,000 to be eligible for a commercial MV1 valuation. Without the income, there are still options to provide a mortgage without experience on an 8 bed house of multiple occupancy – but this will also be with a hybrid or bricks and mortar, residential valuation.
Yes, however, although these mortgage products are usually a lot cheaper, the valuation method may not be appropriate. For purchases, if your vendor is selling on a commercial valuation, it is key to obtain the same valuation on your mortgage product. Depending on how well you negotiate a hybrid valuation may be suitable, but it is not the most generous and will be less likely to achieve the desired valuation compared to a Commercial (MV1) valuation.
Yes, as long as the valuer is registered with RICS and this is the case with valuers that are instructed by Mortgage Lenders.
The Royal Institution of Chartered Surveyors (RICS)
RICS is a professional body that sets standards for the valuation, management, development of land, property, and construction. RICS members (chartered surveyors) are bound by its strict guidelines and ethical codes.
We are unable to give valuation advice at Mortgage Lane, so this page should only be used as a guide. We recommend borrowers looking for these valuation types to seek advice from a qualified, insured and regulated valuation company.