HMO Mortgage Valuations

Not all HMO mortgage lenders offer an investment valuation, and those that do offer one of two distinct types: a hybrid valuation or a commercial investment valuation, known as Market Value 1 (MV1). Which valuation method a House in Multiple Occupation (HMO) receives is set by lender criteria on borrower experience, property configuration, and property size. It is not chosen by the borrower.

The valuation method determines the figure the loan is advanced against, which makes it the single most consequential variable on an HMO mortgage. This guide explains the three methods lenders use, the eligibility criteria for each, and the planning and licensing position each requires.

The three HMO valuation methods

HMO mortgage lenders use one of three valuation methods: a commercial investment valuation (MV1), a hybrid valuation, or a residential valuation. Each suits a different property type and borrower profile.

Commercial investment valuation (MV1)

A commercial investment valuation, usually on the Market Value 1 (MV1) basis, values an HMO on yield: the property's value assessed against the revenue it produces. Commercial mortgage lenders typically instruct this method, and it is usually the most generous of the three.

An MV1 valuation suits a property considerably adapted for HMO use, which typically means:

• En-suites to each room, or most rooms
• Adequate communal living space
• A configuration not easily converted back to a family home

The property should have at least 5 bedrooms to be considered for an MV1 valuation. Properties seeking further uplifts against residential or hybrid methods are usually 6 to 7 bedrooms and above.

Planning and licensing for an MV1 valuation. For HMOs of 7 rooms and above, planning permission is required regardless of whether the property sits inside or outside an Article 4 area. HMOs of 6 rooms or fewer may not require planning permission if the property is outside Article 4, or if it became an HMO before the Article 4 direction came into force.

Borrowers relying on that exemption should hold a Certificate of Lawful Use from the local council, evidencing that the property has operated as an HMO since before the direction took effect. A borrower who is eligible but does not hold the certificate will need to apply through the planning portal, supported by evidence of the property's HMO use for the required period, such as tenancy agreements and affidavits from the vendor, operators, and tenants.

Panel valuers. Valuers on commercial lenders' panels are usually local valuation firms on the VAS panel or the Appraisers panel.

Experience. Most commercial lenders require 12 months of landlord experience for an HMO mortgage with an MV1 valuation. Some will consider a borrower with no landlord experience, and on the cases we arrange the personal income they look for depends on the size of the HMO: on an HMO of 6 units or fewer there is usually no minimum personal income, while on a large HMO of 7 units or more lenders typically look for personal income of at least £50,000, because even the more flexible lenders ask for more experience above 6 units. Each lender sets its own criteria.

Hybrid valuation

A hybrid valuation combines comparable evidence with recognition of the property's investment value as a co-living rental, but it is not a full MV1 valuation, and it is produced on a Vacant Possession (VP) basis. The uplift a hybrid valuation carries reflects a premium for the property's adapted design, rather than the rental income the property produces.

Specialist buy-to-let lenders usually provide hybrid valuations, and these lenders advise the method is most effective where the property is:

• Located in an area with a large student presence
• Located in a major town or city
• In an area with good HMO demand
• Not easily converted back to a family home, usually meaning multiple en-suites and a co-living design

Planning and licensing for a hybrid valuation. The property will usually need planning permission for HMO use, or a valid exemption. Available where the property is outside Article 4, or has been an HMO since before the Article 4 direction came into effect. A buyer of an existing HMO should obtain planning confirmation as a decision notice, or a Certificate of Lawful Use, to evidence lawful use to the lender.

Panel valuers. Hybrid valuations are usually instructed by larger specialist buy-to-let lenders using national valuation companies rather than local valuers, though some lenders panel local firms.

Experience. Experience is not usually required for an HMO of fewer than 6 rooms with a hybrid valuation, though some lenders offering this product require 12 months of landlord experience.

Residential valuation

A residential valuation is the standard comparable method used on single-unit buy-to-lets: the valuer averages the most suitable comparable sales. The comparables used are typically like-for-like properties, within a quarter of a mile, sold rather than advertised, and assessed on a bricks and mortar basis.

A residential valuation is applied to HMO mortgage applications by lenders that do not specialise in HMOs, or that cannot instruct a hybrid method because of the property's configuration. Regardless of the planning position, a property that is easily converted back to a family home, or that lacks considerable co-living adaptation such as en-suites. Will suit a comparable residential valuation rather than an investment method.

Products using a residential valuation are usually much cheaper, but can create a lending shortfall where a larger HMO is financed against a bricks and mortar figure.

Experience. Experience is not usually required for an HMO of fewer than 6 rooms on a residential valuation, though some lenders offering this product require 12 months of landlord experience.

What is Article 4?

Article 4 is a direction within UK planning legislation that lets a local authority withdraw permitted development rights in a specific area, so that converting a dwelling into a House in Multiple Occupation requires planning permission.

Under normal permitted development rights, converting a property into a small HMO, where three or more unrelated individuals share facilities. Does not need a planning application. An Article 4 direction removes that right in the designated area, allowing the local authority to manage the concentration of HMOs, the demand on infrastructure, and the balance of the local housing market.

How an Article 4 direction is made. A local authority must run a public consultation and give a minimum of 12 months' notice before the direction takes effect, unless an immediate direction is justified by specific concerns.

Where Article 4 applies. Many cities and towns with high student populations or rapidly changing housing markets have implemented Article 4 directions, including parts of London, Manchester, and Birmingham.

Why Article 4 matters to HMO mortgage borrowers. Operating an HMO without the required permission risks enforcement action, and it also risks the refinance: a cash buyer who converts a property in an Article 4 area without permission can find the property unmortgageable at remortgage. Knowing the planning position before purchase, and holding the decision notice or Certificate of Lawful Use. Is what protects the exit.

Are HMO valuations regulated?

Yes. Valuations instructed by mortgage lenders are carried out by valuers registered with the Royal Institution of Chartered Surveyors (RICS). RICS is the professional body that sets standards for the valuation, management, and development of land, property, and construction, and chartered surveyors are bound by its guidelines and ethical codes.

Mortgage Lane is unable to give valuation advice, and this page should be used as a guide only. Borrowers seeking these valuation types should take advice from a qualified, insured, and regulated valuation company.

HMO Mortgage Valuations: frequently asked questions