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HMO Finance

Bond Finance has acquired a significant level of expertise in arranging finance for these types of properties as the sector as developed from amateur buy-to-let landlords converting their properties to multi-lets informally, to professionals dealing with the increasing burden of national and local formal regulations.

With increasing regulation has come a change in perception that HMO properties no longer offer sub-standard accommodation and can now be shown to offer a respectable form of property investment

Bond Finance is approached by increasing numbers of HMO professional landlords, who can demonstrate compliance with HMO regulations and experience and require expert guidance to help them select the best mortgage product from the vast range of options now available to them.

What is an HMO?

The definition of an HMO is where two or more unrelated people live in the same home where facilities are shared.

Lenders tend to define an HMO where 3 or more unrelated people live in the same home, with shared facilities.


Licencing and planning


These are two completely different matters. Since October 31st 2018 all properties occupied by 5 or more unrelated people with shared facilities require an HMO licence. These are known as Mandatory HMOs.

The Royal Institute of Chartered Surveyors (RICS) publishes guidelines for its members based on the national HMO rules. However, local authorities also publish their own interpretation of the national rules, which supersede the RICS guidelines.

A further complication arises when a local authority introduces Additional Licencing. This is a discretionary scheme that captures all small HMOs that are not captured by Mandatory Licencing and can mean that a licence is required, even if the property is occupied by less than 5 people.

We strongly recommend that our clients familiarise themselves with the local guidelines, because these can be tougher, or indeed more flexible, than the RICS guidelines and it is important that we make a lender’s valuer aware of this so that an accurate valuation is produced.

Please see the RICS guidelines here.


A residential property occupied by a single person or family is classified as having C3 use.

Once you have 3 or more unrelated people (but they can be friends) and up to 6 people, even if they rent on a single AST, the property is classified as C4 use.

Since the introduction of Permitted Development rights (PD) in 1995 C3 and C4 use are interchangeable, meaning that a planning application is not required to switch between the two. However, PD rights are removed by an Article 4 Direction or if the property is located in a conservation area.

Once you have 7 or more people the planning use is called sui generis.

All sui generis HMOs require planning permission.

Please note that the number of people, not the number of bedrooms determines the status of a property.


What does all of this mean in terms of the lender’s valuation of an HMO?

Where you convert a property from C3 to C4 use and there are no restrictions to do this, most valuers see that there is little or no premium added, since anyone could do the same thing to the house next door. Extra bathrooms may be added, for example, or the living room may have been divided into two bedrooms, but few valuers are of the opinion that this adds more value than the house next door. At best, a value may give a value of cost of purchase plus costs and maybe a small premium, because you have done the work. However, valuers are of the opinion that if you try to command a significant premium, because the rent is now so much higher than if the property had been let to a single family, a potential buyer would simply buy the house next door and do the work themselves

The fact is that just because an HMO commands a greater rental income, it does not become more valuable.

To obtain an uplift in the value of an HMO, because of its higher rent a valuer has to ascribe some sort of scarcity value to the property. The clearest occasion when this happens is when an area is subject to an Article 4 restriction. For the most part Article 4 is imposed to restrict the number of HMOs in an area. If you have created a small HMO in an area that subsequently becomes controlled by Article 4, your property automatically becomes more valuable, because it becomes more difficult and maybe impossible for anyone to create any more HMOs. This gives your property scarcity value and means that the higher rent that your property gets adds value beyond the house next door that is not an HMO

Tip: consider buying tired old HMOs in an Article 4 area and develop them in to modern high quality properties.

Tip: find out if a council is thinking about or has announced that it will impose an Article 4 direction in a particular area and buy there!

Tip: consider the local infrastructure. Buy close to good transport links, with access to businesses that are likely to employ people who would want to live in your HMO

Tip: there are an increasing number of lettings agents that devote pages on their website to HMO renters and landlords. Speak to them and find out what the demand is for

Tip: get to know local agents. They will have retiring landlord, with tired stock that they are looking to off-load without necessarily seeking the best price. Of you buy several properties at once, you may be able to negotiate a discount. We can arrange finance based on value rather than purchase price, if you intend refurbishing them. This will make your own cash input stretch further

Tip: even if there are no particular restrictions in an area, but you have established that it is suitable for creating HMOs (say near to a hospital), develop the property such that it no longer has the same characteristics as nearby houses. For example, in an area of predominantly 3 bedroom houses, develop the loft and build an extension to turn it into a high quality 6 bed HMO. In this case you are more likely to get cost of purchase, plus build costs, plus a more substantial premium to reflect the skill required for this development.

Sui generis HMOs are a different ballgame. They all require planning consent and require consent to convert back to C3 use. You can expect to get investment valuations based on the rent.


Be careful to buy in a relevant area. Do your research. Valuers are happy to comment that an HMO has been created in an inappropriate area, where there is little demand. At worst, they will deduct the costs of converting a property back to a single family home.

Do not overdevelop. Consider your tenant profile and make sure that you spend accordingly. Whilst a valuer may make flattering comments about the high quality of a property, they may not give it sufficient value to cover your costs.


In the recent past high street buy-to-let retail lenders did not serve the HMO market well. There was still the belief that HMOs offered low quality accommodation with a poor rent payment history. For a period of years a few of the specialist lenders quietly owned the HMO finance space. Most however, restricted lending to C4 properties, valuing on a bricks and mortar basis only with only one kitchen. There has been a dramatic change in appetite over the last few years and competition is now fierce.

Bond Finance arranges funding for 30-40 HMOs a months and is familiar with the lending policies of all lenders that operate in this space.

If you are looking for finance for smaller HMOs, mainly C4, we use the specialist buy to let lenders. Once your portfolio gets to a certain size, or if you are creating larger, sui generis HMOs, we access finance from specialist commercial lenders.

For a fully compliant HMO there will be a lender for you.


Common enquiries are

 -   now unable to approach existing lenders to apply for funding to buy a new HMO, because they do not offer that kind of finance. Bond Finance is an independent broker and sources finance form the complete range of retail HMO products as well as all commercial lenders

-    now unable to approach existing lenders to release equity from existing HMO portfolio to buy new properties – Bond Finance can arrange interest only finance to release equity based on the rental income rather than just the bricks and mortar value of the building

-     wish to buy a property that will be converted to an HMO and finance required based on the post-works value of the property, with an HMO licence in place. Bond Finance can put together a finance package that provides funding to buy the property, carry out the works and then exit on to term funding. This is cheaper than using a bridge loan from one lender to buy the property and then looking for post-works finance from another lender

-    own bank will offer finance, but on a repayment basis, which also limits loan size. Bond Finance can arrange interest only loans

-    current portfolio size now too large for existing lenders. Bond Finance will step you up to commercial lenders, which have a much larger lending appetite

-    student lets allowed, but limited to four students and only a single AST allowed. Bond Finance has lenders that has no such restrictions

-    struggling to find a lender that will allow LHA tenants. This is a very specialist area and Bond Finance has lenders to suit

-    existing C3 buy to let portfolio has legacy finance on very attractive rates, but with a very low LTV. Bond Finance can help you utilise this “unused” equity to assist with the acquisition and development of properties to HMOs, without disturbing the existing mortgages and effectively enabling you to build an HMO portfolio without needing any new cash

Bond Finance is able to arrange finance in all of these situations and we welcome challenging enquiries.

Example 1

A client owned an HMO with a bricks and mortar valuation of £300k. His expectation was that the maximum remortgage we could obtain was 75% of £300k = £225k, even though the rental income was £36k pa.

We approached a commercial lender to instruct a commercial valuation, taking into account the works that were done to make the property HMO compliant and the rent. The valuation came back at £380k so we were able to obtain 75% of £380k = 285k. ( effectively 95% of the bricks and mortar valuation). This allowed the client to release cash to assist in the purchase of another property.

Example 2

An existing client wanted to buy a large house in Reading for £400k. It could be converted to an 8 bed HMO. Fully let it would generate a rental income of £4,800pm. The valuer gave the property a current value of £400k and a commercial valuation once converted and the HMO licence approved of a £540k.

We arranged a loan of 75% of £540k. £300K was initially advanced to enable the purchase and the balance was released following a post-works re-inspection of the property.


Valuation Guidelines for HMO's

HMO1 – Bricks and Mortar

A residential property that is simply being rented on a multiple tenancy basis. Minimal works have been carried out to make it suitable to be occupied as an HMO. Change of use planning was not required. If the property has been extended, then this would add value to the same extent as a property that was being occupied by a single tenant or as a main residence. It should be expected that the property would be given a “bricks and mortar” valuation. Here, the use changes the property from C3 to C4, but there is no uplift in value as a consequence of this.

HMO2 – C4

A residential property that is not located in an area subject to an Article 4 Direction and therefore its change of use from C3 to C4 is not subject to planning approval. However substantial changes to the fabric of the building have been made in order create the HMO. If the changes were carried out within Permitted Development, then the property is likely to be given a bricks and mortar valuation plus a slight premium to reflect the higher rents the property can now achieve as an HMO, as long as the valuer is of the opinion that these levels are sustainable. If a planning application was required in order to carry out the works, then the premium may be slightly enhanced. When considering the level of premium, the valuer is likely to have regard to similar unconverted properties in the area and how likely investors would buy a ready-made HMO at a premium over buying a neighbouring property and doing the conversion themselves A pure yield-based valuation would not be expected.

HMO3 – Article 4

A residential property located in an area subject to an Article 4 Direction. This removes the right to change the occupancy of properties from C3 Single dwellings to C4 HMOs under Permitted development. The primary motivation for Councils to invoke Article 4 Directions is to restrict the number of properties being converted from C3 to C4 use. Any C4 properties in this situation can expect to command a considerable premium over their C3 equivalent. The valuer is likely to give a yield-based valuation, although they may test this against similar C3 properties, to see how far the yield-based valuation takes them from the inherent bricks and mortar value of the property. 

HMO4 – Sui Genris

A property, which required specified sui generis planning in order for it to be occupied as an HMO for more than 6 people. This property may now only be used as an HMO and therefore a yield-based investment should be expected.

Contact us now for a free, no obligation discussion of your requirements


Below is some helpful commentary from Mike Frisby

Mike is an experienced property professional, who, with our help, managed to add 100 more rooms to his portfolio during the course of 2016.


1 - HMO definitions & planning types

I have always invested in HMO's but really started focusing on this strategy with a vengeance at the beginning of 2015, as I really came to understand how to unlock the keys to MULTIPLE HMO's with commercial finance.  Having seen the market chop & change so drastically as it has over the last few years, I started to see a huge demand for high end room lets in the Greater Portsmouth area.  The demand was & is still significant and professional room rates are at an all time high in Portsmouth. Also, as a lot of you will know a bulk of my portfolio was geared towards social housing but with the rates stagnating, I decided that I needed to look at other avenues to further boost cash flow in the business.

Having worked very closely with my broker, I quickly discovered that I could convert houses into HMO's with little money left in the deal after re-finance. 

Portsmouth is also an area which is governed by Article 4 meaning that you have to get planning permission to change the use of the property from C3 residential to C4 (HMO planning use).

Having a vast amount of knowledge of the area, I have been able to purchase properties and look at planning gain in order to substantially increase their values (more about this to follow).

So for now, just the basics (as I have a varied bunch of valued blog followers) - HMO definitions & planning info noted below.  You will see I have added the definition of an HMO according to how Shawbrook Bank will value it based on Commercial Finance - we work in boxes 3 & 4!


2 - Sourcing the right property

It seems very self-explanatory but make sure you buy in an area of demand, ensure you have good local employment and good transport links. I have learnt from my mistakes, I took a punt on a few houses when I first started investing in HMO's that aren't in a typical room let area & although they do get filled it's never that quick and cash-flow is the name of the game (rooms sitting empty for months on end really hurts). Do your research, look at demand on spare room.

When looking for properties source through agents, I cannot express enough the gains of having a good agent on your side. We have got to the stage now where some of the agents we work with don't even bother doing viewings with us anymore, they just give us the keys to the property (often before it goes to market) so that we can go and assess the potential.

Another avenue is to source directly through HMO letters, don't forget the power of 'leafleting'. 

Check the HMO register, there may be retiring landlords looking to sell off their portfolio.  I was able to pick up a 22 bed HMO from a landlord who could no longer look after the running of such a large investment.

Join an HMO Facebook group, this is a perfect way for sourcing deals and the forums are fantastic for advice.

Once you've chosen an area, make sure you download the HMO regs from the council's website - every area has very different criteria.

When assessing the property, try and see what can be done via PD and how many en-suites you can get into each room.  My MO for higher rental figures & demand is definitely an en-suite.  This is why most of my latest HMO's will have an en-suite in almost every room. People will pay top £ in order to not have to share washing facilities - FACT! Please do bear in mind though that you will need building regs when installing a new en-suite so make sure you take that into account...

On building regs & refurbishment - the following work will most likely require approval:

-     The erection or extension of a building

-     An alteration involving work which will temporarily or permanently affect the ongoing compliance of the building, service or fitting with the requirements relating to structure, fire, or access to and use of buildings

-     Installing replacement windows using a builder or window company which is not FENSA registered

-     The installation or extension of a service or fitting which is controlled under the regulations

-     The insertion of insulation into a cavity wall

-     The underpinning of the foundations of a building

-     When you want to change the building's fundamental use

-     Renovation of a thermal element

-     Change of a building's energy status


3 - Renting out your HMO/tenant target

* Advertisement/ Professional photography- you only have a small window to make your property stand out from the rest. We find that having professional photographs taken will enhance the advert & sell it before you even start viewings - this is a proven formula that we follow and it works. 

* You can see the difference between a kitchen in one of our 8 bed HMO's that has been taken ourselves and then by a professional photographer - pay the money, it's worth it.  It cost us £65 to photograph this entire HMO.

Professionals or Students - decide whether you want a group of Students or professional tenants. If you want students, rent out the house as a whole, to a group on one tenancy with a lead tenant rather than individually. This way if one tenant doesn't pay the rent, the others are jointly and severely liable to make up the funds.

Never mix students and professionals, as they lead two different lifestyles and it can cause conflict in the house.


4 - Viewings & dressings


Book your viewings strategically, show them all available rooms. Sometimes tenants will tell you they have one budget, but then miraculously find more money when they see a bigger/better room. That being said if you have a smaller room in your HMO that's struggling to rent but also have a slightly bigger & nicer room to let in the same house, if you've showed them the smaller room and they seem to like it - don't show them anything else (the bigger room will always let out faster).  Make a good impression as viewers have friends who will spread the word!


Always try to achieve higher rents! Don’t be unrealistic, but have a look on the market and see what other rooms are going for and how your rooms compare. Tenants will pay for quality. If your property it done to a higher standard, you can push for more rent.


As with professional photography, you only have a small window to advertise. Dressing a property will not only make it stand out from the rest on the websites, but when you take tenants round there for viewings, it looks more homely and they can visualise how all of their belongings will look and also get a better idea of size.


5 - Project build times & project management

Today I wanted to expand a bit about Project build times & project management.  I think a lot of people under-estimate the work and time-frame involved in completing a project and therefore I want you to think about a few of these tips/points.

-     If you're looking at a planning gain. You will need 10 - 12 weeks from the point of completion before you start work, factor that into your holding costs.

-     Don't forget the contingency, so many people think they'll add a small percentage of around 5% but believe me this closer to 12%

-     Ask your builder to sign a contract, where you clearly have staged payments for jobs completed.  PLEASE vet your builder, if you have someone who is much cheaper but has no insurance, registered address etc. this can cause problems (do your homework).  Make sure your builder is aware of the required building regulations as this is important.  Add penalties if jobs run over (on a good faith basis though as building is weather dependent). 

If you're doing multiple properties, get a refurb blue print.  I would stick to the same kitchens, paint, flooring, carpeting etc. as it makes it so much easier from a maintenance perspective to source replacements at a later stage.


6 - Plan

PLAN, PLAN, PLAN! Fail to prepare, prepare to fail 

-      Prepare a schedule of works for the builders for when they visit the property to quote. It is essential at the beginning of the process that the builder is aware of exactly what you want.

-      Be realistic with your builders and take advice from them. Rome wasn’t built in a day

-      Plan out your rooms before starting the works, where the beds, bedside tables, wardrobes will be going, this will help with planning your electrics, plug sockets etc.

-      If you are putting en-suites into rooms, be aware of waste. Check which way the floor joists run, find out where the soil pipes are, find the easiest route to the soil pipes from the en-suites.

-      Have experts doing what they are good at, you will save yourself time and stress from having planning consultants and architects doing what they are good at - pay the extra for the correct team.

Property Investing can be a frustrating game but if you ride it out and listen to the experts, network, educate Yourself, follow processes - the gains can be absolutely brilliant.

I added 100 room to my existing portfolio in the first six months of 2016 alone, set Yourself the same target - reach for the stars!

Kind regards

Mike Frisby


headshot of Mike Frisby, Property Investor and Developer, Mentor, Speaker



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