Want to borrow more against your HMO investment? The right valuation could be the key.
HMO valuations provide a more accurate assessment of your property’s value based on its predicted rental income, often resulting in a higher overall valuation. This is good news for you, as higher valuations typically lead to higher borrowing potential and more favourable interest rates.
But it’s important to be aware of factors that might affect your valuation, such as the size and condition of your property, possible rental yields, and the current state of the HMO mortgage market. Keep reading to learn more about HMO investment valuations and what they mean for you.
Looking for an HMO mortgage lender? Contact Simmonds Mortgage Services today for expert advice from a specialist mortgage broker.
What is an HMO valuation?
An HMO valuation is a specialist type of valuation method that assesses your House in Multiple Occupation property as a business with multiple rental incomes. It is typically more thorough and results in higher estimations than traditional property valuations, which is great if you’re looking to maximise your borrowing potential.
How is an HMO valued?
Unlike traditional brick-and-mortar valuations, which focus on the sale prices of similar properties in the same area, HMO valuations (or commercial valuations) tend to use a yield-based valuation method. This method determines your HMO property’s value based on the potential rental income it can make.
The surveyor will assess any current and potential income generated for the entire property, taking into account the local HMO property market.
It looks like this: annual gross rental income ÷ yield
They will also consider the property’s location, size, and condition, ongoing running costs and potential repairs and ensure you have the relevant operating licences.
A good credit rating and prior HMO experience will likely improve mortgage options for HMO investors.
Do I need an HMO valuation before getting a mortgage?
Most lenders don’t automatically carry out investment valuations. It’s typically on a case-by-case basis, depending on your goals and the type of HMO you’re looking to buy or re finance.
Some lenders may offer an investment valuation on HMOs with more than six bedrooms, as these properties often require Sui Generis planning and cannot easily be sold or used as family homes. However, for HMOs with less than six bedrooms (classed as ‘small HMOs’), then certain criteria may need to be met, such as six en-suite rooms, a combination of standard rooms and self-contained studios, or separate annexes.
Getting a reliable valuation is crucial, as it directly impacts how much you can borrow. Just take a look at how we helped our client get a better HMO mortgage offer after facing setbacks due to a low and inaccurate valuation that stalled their refinancing plans. With our help getting an accurate HMO valuation, we secured a formal mortgage offer that was £400,000 higher than the initial undervalued figure from the previous lender.
What factors affect HMO valuation?
Many factors play a role in determining how much your HMO property is worth, from obvious aspects such as rental income to less apparent ones like HMO licences. It’s wise to consider how each element can affect your valuation so you know what to work on to improve them.
Rental income
Your rental income is the first element valuers look at when assessing your property for a loan. Higher rental yields directly correlate to more generous valuations, increasing borrowing capacity and loan approvals. Ultimately, lenders expect the income from your property to comfortably cover mortgage payments and have money left over.
The good thing about HMOs is that having multiple tenants means more income than single household lets, which can make the property more attractive to lenders.
Location and demand
HMOs are usually targeted at students and young professionals living in cities due to affordability and demand. Picking an investment property in areas with good amenities and work (e.g., hospitals, universities, and transport links) is likely to attract higher rent.
HMO licencing and compliance
Part of your duties as an HMO landlord is to stay updated on compliance and ensure you hold the correct HMO licences. Not all local councils require professional licences, but you may need to get one if you have a property with five or more occupants from separate households or families.
Lenders will check if you have a valid HMO licence before agreeing to the loan.
Condition and size of HMO property
Like standard residential properties, the age, structural integrity, interior and exterior appearance, and overall quality of your property will affect its valuation. However, this can be tricky with HMOs, as they tend to be more susceptible to wear and tear due to the number of people living there. Over time, this can diminish rental value, which is not what you want when getting a commercial valuation.
Keeping on top of maintenance and fixing any glaring issues will help you get a fair valuation.
HMO mortgage options
If your HMO valuation is good, it can open up opportunities for larger borrowing. HMO mortgage lenders tend to have specific criteria that can affect mortgage rates and terms. These include having a minimum number of bedrooms, being located in an area with good rental demand, and having the proper licencing.
How to increase the value of your HMO investment
If you’re looking to borrow more with an HMO valuation, you first need to increase the income potential of your HMO property. This involves improving some of the factors we mentioned earlier that could affect your commercial HMO valuation.
If you have a particularly old property, you may want to consider renovating it to bring it up to modern rental standards. Or, if you have the space, you could increase the number of bedrooms (remember to check local regulations, as you may require a licence to do this). However, you might not have to make major changes to increase the HMO’s rental value; updating old fixtures, adding fresh paint, and improving amenities like internet speed and appliances can make a huge difference.
Another way to improve your HMO investments is to buy property through a limited company rather than in your personal name. This can be more financially beneficial if you have multiple investment properties.
If you’ve yet to purchase your House in Multiple Occupation (HMO) investment property, do your research. Look for a property in an area that has attractive yields, and make sure the property you want to invest in is fit for rental – meaning it meets the correct landlord regulations and has all relevant licences.
Need HMO advice? Speak to Simmonds Mortgage Services
Simmonds Mortgage Services specialises in helping property investors secure the right HMO mortgage deals to maximise their investments. With strong relationships across the HMO mortgage market, we connect you with specialist lenders who understand the unique nature of HMO valuations.
Not all lenders offer HMO mortgages, but working with Simmonds Mortgage Services, an experienced mortgage advisor, will give you a better chance at finding one. Call us today on 0118 469 3037 or book a meeting for a free chat about your specific circumstances.
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