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BTL Watch: Forewarned is forearmed on HMO changes

In case you were unaware, mandatory licensing of Houses of Multiple Occupation is being extended to include property occupied by five or more people forming two or more separate households regardless of the number of storeys . Previously this rule applied to properties with three or more storeys.

As usual, there are caveats to the rule – mostly regarding self-contained flats and converted buildings – so do take time to read the full order.

Don’t assume your landlord clients know about this change; it’s very easy for these things to slip under the radar despite prolific promotion. From 1 October 2018, the RLA estimates that an additional 177,000 HMOs will become subject to mandatory licensing in England alone. The new law may affect the financing of HMOs.

Still in a draft Statutory Instrument but no less expected to be made into law and come into effect at the same, is the introduction of new minimum bedroom sizes within HMOs. Breaches of the rules could lead to a conviction of a criminal offence, which in turn, could result in an unlimited fine or civil penalty of up to £30,000.

Furthermore, local authorities can also set minimum sleeping room sizes above the legal minimum.

These changes will impact the buy-to-let market. Lenders, valuers, borrowers and brokers will be affected, so it’s imperative that all parties get up to speed now with the new rules and their possible implications. Forewarned is forearmed as they say, but what are the implications?

Loss of rental income
Rooms which fall foul of the new minimums cannot be let; however, HMOs which are already licensed will only have to comply when the licence is renewed and, local authorities are obliged to allow landlords reasonable time to meet the requirement – up to 18 months before prosecuting.

HMOs which are currently subject to selective licensing will be passported onto mandatory licences.

It is not yet clear whether lenders will offer landlords a similar rectification period. However, it is likely that a fair few landlords will be looking to make alterations to their properties in order to comply with the requirements. This is an opportunity now for brokers to ask clients if they need help raising capital to carry out these alterations.

Reduced borrowing
Landlords who end up being a letting room or more down could find that they are unable to remortgage on a like for like basis if the HMO was valued on a commercial investment basis. This means they will either be stuck on the lender’s reversion rate or they will have to reduce their borrowing in order to achieve the finance.

Further, since October 2017, lenders have been obliged by the PRA to assess a landlord’s entire portfolio when underwriting buy to let applications. Currently it’s not clear how lenders plan to accommodate the new HMO laws or what will happen if they discover HMOs which fall foul of the rules. At best, it is likely they will exclude rental income derived from non-compliant properties when stress testing the portfolio.

Upheaval to the valuation process
It’s standard practice for lenders to issue valuation guidelines to their surveyors. Come October, many of the current guidelines will be out of date, particularly the ones issued by lenders which value properties on a single dwelling basis, i.e. bricks and mortar.

These lenders should be issuing new guidelines now so that their surveyors can prepare. There is much to do in terms of training, roll-out and ensuring indemnities are fit for purpose. All this could lead to delays in carrying out valuations and may push up the price too. It’s unlikely that surveyors will absorb the additional costs, rather, they will pass on the cost to the landlord.

Lenders who are not thinking about this now may have no choice but to stop lending on HMOs from October until they have the right systems in place. Clearly this will have a knock-on effect for surveyors, landlords and brokers.

Fortunately, some of the specialist lenders, (i.e. Keystone, Paragon and Landbay) already issue specific guidelines for valuing HMOs. They employ expert surveyors which have the knowledge and capability to assess HMOs on a commercial investment basis. These experts, such as Allied Surveyors, regularly draw upon a wider than usual geographical area to gather evidence to compare rents, yields and property prices. They evaluate size of property, suitability of the building, number of occupants, running costs, Council Tax and compliance with rules and regulations (i.e. planning permissions, building regulations, EPC rating, type of licensing scheme).

They also consider whether the HMO should be valued on an investment basis or whether a bricks and mortar valuation is more appropriate, as is often the case with smaller HMOs.

It’s a very comprehensive process which includes measuring the size of each bedroom to ensure that they all comply with the local authority’s minimum requirements, (and from October the new legal minimum).

Fewer lenders lending on HMOs

But it won’t be all plain sailing for the more specialist lenders and surveyors. If a valuation report reveals that an HMO should be licensed but isn’t, or has rooms which no longer meet the minimum requirements, will the lender be obliged to inform the local authority?

And will local authorities grant licences on properties which have rooms below the minimum size? Will they trust landlords not to rent them out anyway? And if a licence is granted will lenders still be prepared to lend knowing there are rooms that cannot be let within a particular property? There are lots of questions which remain unanswered.

Yet again, brokers and landlords are awaiting action and announcements from lenders. This time, surveyors are waiting too. Inertia and silence could lead to a bumpy ride in a market that is still trying to get to grips with a whole raft of other tax and regulatory changes. Brokers need to keep an ear to the ground if they are to help their clients avoid disappointment and delay this autumn.

David Whittaker is chief executive of Mortgages for Business 

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