Pros and cons of HMO regulation

In last week\'s Mortgage Strategy (August 14), it was reported that parents are being warned to do their homework on prospective buy-to-let investments for their children going to university. This is undeniably true but it also should apply to brokers, especially with regard to the recently introduced houses in multiple occupation rules. With the legislation more than a month old, it is worth making sure you are up-to-speed on its implications.

Licences for each HMO will be specific to the landlord as well as the property. When reviewing a portfolio of buy-to-let properties or contemplating buying a new property, landlords must now factor in the HMO effect. Because the licence vets both the property and the landlord, if an HMO is sold to another investor the licence will not be transferable, involving additional costs for the new landlord.

The basic rule defining HMOs is that if a property has three or more storeys and is occupied by at least five occupants from two or more families it requires a licence. But local authorities can also require other HMOs to have licences and the early indications are that there will be inconsistency in the way local authorities interpret this.

Under the rules, local authorities have been given almost carte blanche by the government to charge whatever they like for the licences although technically this is only meant to cover the cost of operating the licensing system. Initial indications are that fees will vary enormously from authority to authority, with a range of 100 to 1,100 reported so far.

This huge variation in the cost of licences between local authorities means location is now even more important when considering the purchase of buy-to-let properties. Like most lenders’ exit fees, there appears to be little apart from the fear of regulatory action to stop local authorities increasing these fees on a whim.

As a result of this regulation some investors will avoid buying HMOs. This will force up rental yields as less of this type of property becomes available for rent. When the reduced supply of properties drives yields up far enough to cover the extra costs, investors will return to HMOs. In some cases landlords may find it relatively easy to charge higher rents because of improvements they have been forced to make to get licences.

Apart from the wide variation in the fees they plan to charge, the extent to which local authorities are up-to-speed on this legislation also varies significantly. Landlords can now be subject to a fine of up to 20,000 if they own an HMO and don’t have a licence. But I suspect most local authorities will start by warning landlords without licences to get one and provided they do so, will take no further action. I don’t expect many fines to be levied before the end of this year and even when they do start to be levied I expect most to be well below the maximum.

Most lenders won’t lend on HMOs but many will find that some properties they have lent on have become HMOs under the new regulations. But under the legislation the average quality of HMOs should rise over time, so there are pros as well as cons for lenders.

Drew Wotherspoon, head of communications, John Charcol