This October will see the extension of mandatory Houses in Multiple Occupation (“HMO”) licensing, as the government continues to effect measures to professionalise the private rented sector and better protect tenants.
Purpose built flats where there are up to two flats in the block will be included in the scope of mandatory licensing. The three storey rule will also be removed; mandatory licensing currently applies to HMOs of at least three storeys and five occupants comprising of two or more family units.
In addition, it will see the introduction of minimum room sizes to prevent overcrowding and improve tenant safety, as well as landlords being required to demonstrate that they are a fit and proper person.
The pros and cons of the new licensing
The pros and cons of the new measures have been endlessly debated, but it is expected that up to 177,0001 more properties will be affected. Whilst the wider buy-to-let market has been under the microscope in recent times with policy changes impacting on the returns available for investors, the HMO market has remained buoyant.
A criticism of the previous HMO licensing laws was their decentralised nature coupled with individual local authorities treating the same properties differently. It is expected that the new rules will be enforced more rigorously, with landlords facing a range of sanctions including prosecution, a financial penalty up to £30,000 and rent repayment orders.
Predicting the impact on the sector of these new measures is difficult. There will likely be more properties coming on to the market as hobbyist landlords decide that the cost of altering properties is not worth it, offering an opportunity for other landlords.
For many landlords their properties will already meet the required standards. And those currently licensed that do not meet the new standards are covered under their current license, but will need the property to conform when the license needs renewing. But there will be a significant number who desperately need to modernise, and fast.
Helping landlords that need to change
At Octopus we are looking at how we can support this latter group of buy-to-let landlords who will need capital to make alterations, by leveraging our comprehensive product range and knowledge of the sector.
A landlord might need to reconfigure the property to meet minimum room sizes, or add fire doors. A short term refinance option, before moving to a more traditional longer term buy-to-let product when the property conforms, will allow a landlord to achieve this.
Portfolio landlords in particular, for whom this comes hot on the heels of last year’s PRA ruling that lenders had to assess a whole portfolio when underwriting buy-to-let applications, will be eager to minimise any impact on rental income or the value of their properties.
Typical loan sizes for the alterations required will vary, but might typically range from £20,000 to £50,000. With traditional lenders retrenching even further from the buy-to-let sector, and many alternative lenders unlikely to have the systems in place to cope with impact of the changes, it represents an opportunity for larger, more established lenders to grow their book.
Buy-to-let by Octopus
Octopus Property is targeting over £150mn of buy to let lending during the next 12 months across the UK, and HMO landlords will be a significant contributor. The licensing changes represent one of biggest shake ups for the sector, and less than two months out, we anticipate demand for competitively priced and speedy finance, to ensure landlords aren’t falling foul of the law, to rocket.
This article first appeared in Business Moneyfacts.
[1] The RLA PRIVATE RENTING EVIDENCE, ANALYSIS & RESEARCH LAB
