Bridging Loan for HMOs | Hilton Smythe

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Bridging Loan for HMOs

If you’re thinking about property financing, here’s a rundown of how bridging loans for HMOs work and what we can offer.

HMOs have seen tremendous growth as a response to the UK housing crisis recently. For example, HMOs in Manchester alone have experienced 26% growth in five years. But how do you get the financing to take advantage of this trend?

Bridging loans are amongst the most popular financing options for purchasing, refurbishment, and maintenance because of their speed and flexibility. If you’re thinking about property financing, here’s a rundown of how bridging loans for HMOs work.

HMO bridging finance is a term for a short-term bridging loan designed for landlords and investors to bridge a funding gap.

They can be used for purchasing HMOs or refurbishing existing properties before selling or refinancing into a long-term financing option.

With 4.5 million households in the UK relying on the HMO model, acquiring this financing can help businesses grow and scale quickly. Here are some of the facets of HMO bridging loans:

·  Loan Amounts – Bridging loans can range from as little as £20,000 to north of £25 million, depending on the lender.

·  Completion Time – Lenders can approve these loans in a matter of days, with limited checks.

·  Loanto-Value (LTV) – You can finance up to 70% of a property’s market value, typically. Some lenders may even have higher LTVs.

·  Loan Terms – Average loan terms range from three to 24 months, giving you short-term flexibility.

·  Fees – No entry or exit fees are required.

·  Credit Score – Your credit score is less important because bridging loans are secured against the property you’re borrowing against.

Bridging loans for HMOs aren’t right for everyone, but they are another financial tool that can be beneficial for short-term projects. This is why, in Q1 2023 alone, bridging loan transactions reached £278.8 million, making them one of the fastest-growing financial products in the UK.

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HMO bridging loans are aimed at property investors and landlords.

Whether you’re a first-timer or an established industry name, you’re eligible for these loans. Likewise, they’re offered to both private individuals and limited companies.

Lenders focus on the opportunity in front of them, not your borrowing history, emphasising the property’s value, your plans and whether you have a feasible exit strategy (selling or refinancing).

Like with any loan, whether you qualify will depend on the lender.

Bridging loans for HMOs offers several benefits you won’t find if you are applying for a traditional mortgage or relying on a business loan. Some of the advantages bridging finance has over other financial products include:

1. Speed – No form of financing is as fast as a bridging loan. Unlike mortgage applications, which could take months, bridging loans can be approved in days. This lets you take advantage of the UK’s volatile property market and benefit from prime opportunities like auction properties.

2. Flexibility – Bridging finance can be used for various purposes, including conversions, refurbishments and outright purchases. In some cases, bridging loans may be required when developing properties considered uninhabitable because most traditional lenders won’t touch them.

3. Accessibility – HMO bridging loans rely on the property’s value and an exit strategy. Unlike traditional loans, you don’t need proof of income or a great credit history. These loans are secured against the property, making these other aspects less important.

4. ShortTerm Loans – Acquiring long-term liabilities presents obvious challenges. Bridging loans don’t tie you down for years to come. From an investment standpoint, a short-term commitment enables you to plan your finances more effectively without taking on long-term obligations.

Bridging loans aren’t perfect and won’t always make sense. Before applying for any form of financing, assessing the potential risks is vital. Here are just some of the risks unique to bridging loans:

·  Higher Interest Rates – The short-term nature of bridging loans means higher interest rates because this is how these lenders ultimately make their money. Always factor in the cost of borrowing before applying for these loans.

·  Quick Turnaround – Since you can’t hold these loans for long, you must rely on executing your exit strategy quickly, or you could get into trouble. However, there’s also the option of opting for a re-bridging loan if you run into problems.

·  Exit Strategy Dependence – Selling or refinancing are the two most common exit strategies. However, what if the market crashes? What if you get rejected for a mortgage? If things don’t come off, you could find yourself losing money.

·  Valuation Risks – Getting your property valuation wrong transforms the dynamics of your loan. For example, an incorrect valuation could result in a lower LTV ratio, leaving you with less funding than expected.

What does applying for a bridging loan for an HMO actually look like in today’s market?

The process is well-defined and shouldn’t take more than a few days. Every lender has different criteria, but most follow similar steps. Here’s how it works. 

Step one – Define

Begin by defining your objectives. These goals should be for both the loan and for the HMO property itself. Setting down your aims influences everything from managing your cash flow to preparing your exit strategy and, ultimately, which loan product you’ll choose.

Step two – Choose your lender

The next step is choosing a lender that matches up with your goals. Consult with a financial advisor or even a bridging loan broker to help with this. Some aspects to consider for each lender include:

·  Interest rates

·  Loan terms

·  LTV ratios

·  Additional fees

Step three – Get a Decision in Principle (DIP)

DIPs are essential for executing your exit strategy and assessing whether you’re eligible for a loan in the first place. DIPs involve assessing your financial capacity to ensure a loan makes sense numbers-wise. Showing you have a DIP in advance is also advantageous for property negotiations.

Step four – Gather your documentation

The next step is to lodge a formal application. You’ll be asked to provide various pieces of documentation, including:

·  Personal identification

·  HMO property details

·  Exit strategy

·  Financial records

Note that not providing complete documentation is the leading reason why bridging loan applications are delayed. Gathering everything you need in advance will speed up the process as much as possible.

Step five – Completion

Your role in the process ends, and the ball moves into the lender’s court. Prospective lenders will arrange a property valuation to confirm its market value. If satisfied, they’ll embark upon the various legal formalities to build your loan agreement.

Read through your loan agreement and ensure that you’re satisfied. Once you’ve signed it, you’re committed to your loan, and your funds will be released so that you can get on with your HMO plans.

Financial planning is what makes a successful HMO property project. At Hilton Smythe, we’re there to support businesses in their long-term financial planning needs to help maximise their chances of success with bridging loans. To learn more about how we can help, speak to the team today.

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