Converting a standard property into a House in Multiple Occupation (HMO) can significantly boost your rental income.
With yields of 8-15% compared to just 4-7% for standard buy-to-let properties, it’s easy to see why many landlords are considering this option.
But there’s a problem: financing an HMO conversion isn’t as straightforward as getting a regular mortgage.
The good news is that several finance options exist specifically for HMO conversions. From short-term bridging loans to specialist mortgages, understanding these products can make the difference between a stressful experience and a smooth transition.
With the right financing strategy, you can transform a standard house into a profitable HMO that delivers strong, consistent returns for years to come.
Characteristics of an HMO Property
An HMO (House in Multiple Occupation) features individual lockable bedrooms rented to at least three unrelated tenants who share facilities like kitchens and bathrooms.
The property must meet strict safety standards including fire doors, interlinked smoke detectors, and adequate escape routes, while providing sufficient shared amenities (typically one kitchen sink per five tenants and one bathroom per five occupants).
Minimum room sizes are legally required (6.51m² for single rooms, 10.22m² for doubles), with many successful HMOs exceeding these measurements to attract quality tenants and achieve premium rents.
HMOs are commonly found near universities, hospitals and business/commerce areas.
Suitable Properties for HMO Conversion
Ideal properties for HMO conversion include larger period houses with generous room dimensions, multiple reception rooms that can become bedrooms, and at least two bathrooms or space to add them.
Look for properties in high-demand rental locations, preferably with good transport links and adequate parking. Victorian and Edwardian terraced or semi-detached houses often work particularly well due to their spacious layouts and solid construction.
The most profitable conversions typically start with properties that require minimal structural alterations to meet HMO requirements, keeping conversion costs manageable while maximising potential bedroom count.
What is an HMO Conversion?
Converting a standard property into an HMO generally involves adding extra bathrooms, installing fire safety measures, creating additional bedrooms, and ensuring the property meets specific safety standards.
The UK classifies HMOs into two main categories:
- small HMOs (3-4 tenants)
- large HMOs (5+ tenants)
This distinction is important because large HMOs require mandatory licensing across all of England, while smaller ones may need licenses depending on local council requirements.
Why would you consider converting a standard house to an HMO?
The answer comes down to the rental yield, by renting rooms individually rather than the entire property, you can increase your total rental income by 50-60%.
A three-bedroom house that might rent for £1,000 per month to a family could generate £1,500-£1,800 when converted to a four-bedroom HMO with rooms rented separately.
Many landlords don’t realise how much work is involved in making a property compliant with HMO regulations, says property finance specialist Matthew Archer. From fire doors to minimum room sizes, these requirements directly impact your financing needs.
Understanding Your Financing Options
When it comes to funding an HMO conversion, you’ll need to match your finance option to your specific situation.
Your choices broadly fall into three categories:
Refurb bridging loans provide short-term funding to cover the purchase and renovation before you secure long-term finance. They’re quick to arrange but come with higher interest rates.
Specialist HMO mortgages are designed specifically for completed HMO properties. These work like standard buy-to-let mortgages but with criteria tailored to the HMO market.
Refurbishment mortgages combine elements of both, offering initial funds for the purchase followed by additional money for the conversion work, then switching to a standard mortgage rate once complete.
Your choice depends on factors like your experience, the extent of works needed, and whether you already own the property.
For major structural changes, a heavy refurbishment bridging loan might be needed. For lighter renovations, a refurbishment mortgage could be more cost-effective.
The option you select affects everything from your initial deposit to your monthly payments, so understanding each one is worth your time.
Let’s talk bridging loans!
Bridging Loans for HMO Conversions
A bridging loan is a short-term secured loan designed to fund a temporary financial gap.
For HMO conversions, they’re particularly useful when:
- You need to buy and renovate quickly (such as auction purchases)
- The property isn’t currently mortgageable (perhaps it lacks a bathroom or kitchen)
- You need funds for substantial renovation work
- You want to complete the conversion before refinancing to a long-term mortgage
Bridging loans are secured against the property and usually last between 6-18 months.
Most lenders offer up to 75% of the property’s value/purchase price, meaning you’ll need a 25% cash deposit. Rather than making monthly capital repayments, the interest is either paid monthly or added to the loan and paid off when you exit the bridge (known as ‘rolled-up’ interest).
Fees commonly include arrangement fees (around 2% of the loan amount), valuation fees, legal fees, and sometimes exit fees. While these costs add up, the speed and flexibility of bridging can make it worthwhile for the right project.
Read more:
Specialist HMO Mortgages
Once your HMO conversion is complete, you’ll likely want to refinance onto a specialist HMO mortgage.
These are long-term products designed specifically for properties housing multiple unrelated tenants.
HMO mortgages work in a similar way to standard buy-to-let mortgages, but with important differences:
- Interest rates are usually slightly higher than standard buy-to-let rates, reflecting the perceived additional risk.
- Lenders assess affordability based on the total rental income, but apply more stringent stress tests.
- Most require that rental income covers at least 125-145% of the mortgage interest payment when calculated at a stress rate of around 5.5%.
Lenders also look at your rental experience. Many prefer borrowers who have previous landlord experience, though some will consider first-time landlords for smaller HMOs. About half of all buy-to-let lenders now offer HMO mortgage products, providing options for different situations.
Most HMO mortgages are available at up to 75% loan-to-value, though some lenders offer up to 80% LTV with higher interest rates. This means you’ll need at least a 20-25% deposit or equity in the property.
When applying for an HMO mortgage, remember that lenders will check whether you have the correct licence in place or can obtain one, advises Matthew Archer. Without this, securing finance can be very difficult.
Refurbishment and Development Finance
For more extensive HMO conversion projects, refurbishment or development finance might be more suitable than standard bridging loans.
Refurbishment loans are designed specifically for property renovation projects.
They work by releasing funds in stages as work progresses, and some products allow you to switch to a term mortgage once the work is complete, avoiding additional arrangement fees.
Light refurbishment loans cover cosmetic improvements like new bathrooms, kitchens, or redecoration. Heavy refurbishment or development finance is needed for structural changes like extensions or converting lofts into additional bedrooms.
With these products, lenders assess both the current property value and the expected value after works are completed. They might lend up to 70% of the current value, plus a percentage of the renovation costs, capped at around 70-75% of the expected final value.
The staged funding approach means you won’t receive all the money upfront.
Instead, the lender releases funds at agreed milestones, often confirmed by a monitoring surveyor who checks the work quality. This approach reduces the lender’s risk but means you might need to cover some costs before receiving the next payment.
Read more:
Who Can Get HMO Conversion Finance?
While HMO finance is more specialist than standard mortgages, it’s accessible to more people than you might think.
Experienced landlords have the easiest path to HMO finance.
If you’ve previously owned rental properties, lenders view you as lower risk. Many HMO mortgage providers require at least 12 months of landlord experience, though this doesn’t necessarily have to be with HMOs.
First-time landlords aren’t excluded, but your options may be more limited.
Some specialist lenders will consider you for smaller HMO projects if you have a strong overall financial position. You might face slightly higher interest rates or lower loan-to-value ratios until you build a track record.
Both individuals and limited companies can access HMO finance. In fact, more landlords are choosing to borrow through SPV limited companies due to tax advantages.
Most HMO lenders cater to both structures, though the assessment criteria differ slightly.
Who Can Access Refurbishment Finance for Conversions?
Refurbishment and development finance for HMO conversions has its own set of eligibility criteria.
Lenders in this space often place greater emphasis on your renovation experience than your landlord history.
- For light refurbishment projects (cosmetic improvements without structural changes), many lenders will consider first-time developers with a solid business plan.
- However, for heavy refurbishments involving structural alterations or significant reconfiguration, most prefer to see a track record of completing similar projects.
Lenders also assess the overall viability of the conversion project itself.
They’ll examine the expected “gross development value” (GDV) – the property’s projected worth after conversion – against your proposed costs. A typical requirement is that the total costs (purchase plus works) should not exceed 75% of the GDV, giving a profit margin that reduces the lender’s risk.
If you lack development experience, partnering with an established contractor or project manager can strengthen your application. Some lenders will also consider your professional background – architects, surveyors, or construction professionals might receive more favourable consideration despite limited development history.
Minimum Requirements
In terms of personal requirements, lenders generally look for:
- Minimum age of 21 (some require 25+)
- Good(ish) credit history
- Minimum income of around £25,000-£30,000 from sources outside property
- Evidence that you understand HMO management requirements
Step-by-Step Financing Process
Securing finance for an HMO conversion follows a logical sequence, though the exact steps vary depending on your circumstances and the property involved.
Research and Planning Phase
Before approaching lenders, work out your budget, including purchase price, conversion costs, and contingency funds. Research local HMO licensing requirements and check whether Article 4 Directions might affect planning permission in your target area. This groundwork helps you understand how much you need to borrow and whether your project is likely to be approved.
Next, get property valuations.
For conversion projects, you need to know both the current value and the expected value after works. Speak with local agents who understand the HMO market to get realistic figures.
Securing Initial Finance
Once you have a clear plan, approach lenders or brokers to discuss your options.
For most conversion projects, you’ll need initial finance for the purchase and renovation, followed by long-term mortgage finance once the HMO is complete and licensed.
If using bridging finance, the application process involves:
- Initial enquiry and agreement in principle
- Full application with supporting documents
- Property valuation
- Legal work
- Funds release
Allow 2-4 weeks for this process, though some simple cases can complete faster.
Managing the Conversion Phase
During the conversion phase, manage your cashflow carefully. If using staged funding, ensure you have enough money to reach each milestone before the next payment. Keep detailed records of all works and costs.
Refinancing
Once the conversion is complete and the property has the necessary licenses, you can refinance onto a long-term HMO mortgage. This process is similar to a standard buy to let mortgage application, including:
- Property valuation (now as an HMO)
- Affordability assessment based on expected rental income
- Credit checks
- Evidence of licensing and compliance
- Full application and underwriting
Common Challenges and How to Overcome Them
HMO conversion finance comes with specific challenges that are worth preparing for.
Planning and Licensing Issues
Planning and licensing issues can upset your finance application.
Lenders want assurance that you can legally operate the property as an HMO once works are complete. Before committing to a property, check the local council’s stance on HMOs. Many areas have Article 4 Directions which remove permitted development rights, meaning you’ll need planning permission to change from a family home to an HMO.
Similarly, understand licensing requirements, as operating without a required license can result in heavy fines.
Valuation Hurdles
Lenders need to value the property as it is now and its projected value as an HMO.
Finding comparable properties can be difficult, especially in areas with few similar HMOs. To address this, work with valuers who have experience with HMOs and provide them with detailed information about local rental values and demand.
Lack of Experience
If you lack specific experience, consider partnering with someone who has HMO management experience, or hire a reputable management company.
Presenting a solid business plan showing you’ve researched the market and understand the management requirements can also help overcome lender hesitation.
Budget Control
Cost overruns during conversion work can cause serious problems if you’ve not budgeted properly. Always include a contingency fund of at least 15-20% above your estimated costs. If possible, arrange finance with some flexibility in case additional funds are needed.
One of the biggest mistakes new HMO investors make is underestimating the cost of meeting fire safety and licensing requirements, warns Matthew Archer. These aren’t optional – they’re legal requirements that must be budgeted for.
Valuation Considerations for HMO Conversions
Understanding how lenders value HMO properties can help you secure better finance terms.
Most lenders use one of two valuation methods for HMOs:
The bricks-and-mortar approach values the property based on comparable sales of similar properties in the area. This method works well for smaller HMOs that could easily revert to family homes.
The investment method looks at the rental income the property generates and applies a yield to calculate value. This approach often results in higher valuations for larger HMOs with strong rental performance.
Your property’s location significantly impacts its valuation and HMOs in university towns or cities with young professional populations tend to achieve better valuations due to consistent demand. Properties in areas with high HMO concentrations might be valued lower, especially if local authorities are restricting new licenses.
How a Broker Can Help
Arranging HMO conversion finance can be complex and time consuming, which is why many investors work with specialist brokers.
Access to Specialist Lenders
A good broker brings several advantages to your project. They have access to lenders that don’t deal directly with the public, opening up options you wouldn’t find yourself. Many of the most competitive HMO finance products are only available through approved intermediaries.
Expert Knowledge of Lender Criteria
Brokers understand lender criteria in detail. They know which lenders will consider first-time HMO landlords, which offer the highest loan-to-value ratios, and which have the most favourable terms for your specific circumstances.
This knowledge saves you time and prevents rejected applications that could harm your credit profile.
Application Management
When presenting your case to lenders, a broker knows how to structure your application to highlight strengths and address potential concerns. They’ll help prepare documentation that meets lender requirements and present your business plan effectively.
Throughout the process, a broker acts as your advocate, chasing progress with lenders and solicitors and helping resolve any issues that arise. This can be particularly valuable when coordinating bridging finance with subsequent refinancing.
Next Steps
Financing an HMO conversion might seem daunting at first, but with the right preparation and support, it’s an achievable goal with potentially rewarding outcomes. The higher yields from HMO properties can make the extra effort worthwhile, especially in the current market where standard buy-to-let returns are being squeezed.
Whether you use bridging finance, refurbishment mortgages, or another approach depends on your experience, the property itself, and your long-term investment strategy.
Ready to take the next step? Start by researching your local HMO market and speaking with a finance broker who can guide you through the options available for your situation.
To speak with a specialist broker, please call us on 020 3951 2828.
FAQ
The main finance options include bridging loans for the purchase and renovation phase, specialist HMO mortgages for long-term financing once the conversion is complete, and refurbishment mortgages that combine elements of both. For larger projects, residential development finance with staged funding may be more appropriate.
Bridging finance provides short-term funding (usually 6-18 months) to purchase and convert a property before refinancing to a long-term mortgage. Interest rates are higher than standard mortgages but can be “rolled up” and paid at the end. You’ll need a clear exit strategy, typically refinancing once the HMO is complete and licensed.
Light refurbishment finance covers cosmetic improvements like new bathrooms, kitchens or redecoration that don’t require planning permission. Heavy refurbishment finance is for structural changes like extensions, loft conversions or significant internal reconfigurations that add substantial value and may require planning permission.
Read more: Light and Heavy Refurbishment Loans Compared
Yes, most HMO lenders will lend to limited companies (SPVs) as well as individuals. Many landlords choose this route for tax advantages. The lending criteria remain similar, though the company directors will usually need to provide personal guarantees.
Read more: Bridging Loans for Limited Companies
Lenders require evidence that your property either has the necessary HMO license or will qualify for one after conversion. For large HMOs (5+ tenants), mandatory licensing applies across England. Without this assurance, lenders will be reluctant to provide finance as the property couldn’t legally be rented as an HMO.
Bridging loans can typically be arranged in 1-2 weeks, though complex cases may take longer. The subsequent refinancing to a long-term HMO mortgage usually takes 4-8 weeks. Starting the refinancing process before your bridging loan expires is crucial to avoid extension fees.
Related: Can You Extend a Bridging Loan?
Full 100% financing is rarely available for HMO conversions. However, if you already own a property with significant equity, you might be able to release equity from it to fund the deposit and conversion costs of another property. Some development finance products might fund 100% of conversion costs (but not the purchase price).
While not strictly necessary, a specialist broker can be invaluable. They have access to lenders not available to the public, understand complex criteria in detail, and know how to present your case effectively. For first-time HMO investors or complex conversions, the broker’s expertise often justifies their fee through better rates and higher approval chances.
Related: Why Use a Bridging Loan Broker?
