On October 1st 2018 changes to the mandatory licensing of Houses in Multiple Occupation (HMOs) were introduced in England. There is now a revised definition of an HMO under the Housing Act 2004, which means that for licensing purposes, an HMO is any property occupied by five or more people,forming two or more separate households. This contrasts with the previous definition which also included that the property comprised three or more storeys.
The RLA has estimated that an extra 177,000 HMOs will now be subject to the new mandatory licensing in England. Licences issued under the previous definition will still be valid until the expiry date when a new licence will need to be applied for under the new rules. Landlords who find that their existing properties now require a licence should apply through the local council.
Perhaps more significantly is the introduction of minimum bedroom sizes for mandatory or additional HMO licences. The new mandatory licence conditions include notifying the local authority of any rooms with a floor area of less than 4.64 square metres; having a minimum of 6.51 square metres for sleeping accommodation for tenants over 10 years old and a minimum of 4.64 square metres sleeping for persons aged under 10.
Breaches of the rules relating to minimum room sizes could lead to a criminal conviction resulting in a significant fine or civil penalty. However,if a breach occurs the local authorities will allow a reasonable time (up to 18 months) for the problem to be rectified.
These changes will certainly have an impact on the buy-to-let market. It is likely that there will be a considerable number of landlords looking to make modifications to their HMO properties in order to comply with the new room size requirements. This may include reducing the number of rooms in a property, which could have a knock-on effect on the amount of rent that can be charged overall. Having a reduced rental income may affect a landlord’s ability to meet lender rent stress tests when applying for mortgage finance.
It is not clear how the new rules will affect buy-to-let mortgage lending, what approach lenders are taking if they identify HMOs that are in breach of mandatory licensing, and what guidelines are being provided for carrying out valuations on HMOs. As with any significant change it can take time for it to bed in.
From a broker perspective, it makes sense to check that any landlord seeking finance for an HMO is aware of the new rules and has taken the necessary steps to comply. This change to licensing may also provide an opportunity to talk to buy-to-let clients about their plans to undertake any alterations to their HMO properties in order to meet minimum room size requirements. As a result, there could bean increase in demand for short term finance to make alterations or to buy properties that need modifying before remortgaging onto a term loan.
Bridging is becoming a more popular option for short term projects and purchasing properties that are not currently mortgageable. There is a wide range of bridging lenders available in the marketplace with varying rates and different lending criteria to suit a multitude of situations. Due to increased demand, TBMC has recently reviewed the bridging loan market and will be providing an expanded lender panel to help place short term finance cases.