The coming weeks could see an influx of financing enquiries from buy to let landlords, faced with the prospect of ensuring that any newly-qualified Houses of Multiple Occupancy (HMO), meet the required standards of the relevant local authority.

Andrew Turner, chief executive of buy to let brokerage Commercial Trust Limited, explores the pros and cons of rental property renovation and the options available for financing.

Many landlords may need to carry out property improvements over the coming weeks, if their rental property is deemed an HMO, requiring a license, under new HMO licensing rules.

At the time of writing, mandatory HMO licences are required when a property of three or more storeys, is occupied by five or more people from two or more households.

That will change in October 2018, when new rules will mean many more properties require an HMO licence, due to a change in criteria.

The changes will affect properties with five or more people from two or more households, irrespective of the number of storeys that the property comprises of.

Local authority licensing standards often cover issues like fire safety standards and landlords may find that they need to ensure their properties have sufficient fire escape facilities.

Another factor affecting HMOs will be the new minimum bedroom size rules, which could mean landlords need to increase the size of bedrooms.

Under the new bedroom size rules, floor space will have to cover a minimum of 6.51 square metres for a single occupant, or 10.22 square metres where two adults share.

Many landlords will have already made improvements to rental properties, in order to meet new Minimum Energy Efficiency Standards, which came into effect in England and Wales, on April 1st, 2018.

Landlords had to ensure that their rental properties (unless exempt), met a minimum Energy Performance Certificate (EPC) rating of E.

Landlords will not be permitted to issue any new tenancies pertaining to rental properties that fail to meet these standards.

These rules will extend to all rental homes by April 2020, irrespective of whether there is a new or existing tenancy in place, putting further potential onus on landlords to carry out work.

In March 2018, The Independent reported that the number of homeowners choosing to renovate and stay in the same house, had increased fivefold in the previous four years.

One of the advantages of renovating a rental property is to add to its appeal for prospective tenants.

A more energy efficient property, for example, is likely to attract more interested tenants if there is a perceived potential cost saving on energy bills. But improvements may also enhance the capital growth value of the property.

Earlier this year, home insurance business GoCompare reported on some forms of improvement and the amount of value these can add to a property.
The report indicated that 26% of renovations are intended to add value to the property.

Below is an outline of the average increase in property value, according to GoCompare’s Property Investment Calculator:

Boiler replacement 4%
Central heating 4%
Double glazing 4%
Knocking through walls 2%
Installing a new kitchen 2%
Garden makeover 1%
Painting and decorating 1%
New bathroom installation 1%
New flooring 0%
Solar panel installation -2%

Financing
If you are a landlord and wish to undertake property improvements – albeit to meet new EPC rules, to ensure that a property complies with HMO licensing standards, or just to enhance the value of your rental, there are plenty of products available to help secure the financing you need.

Remortgaging to raise funds might be one option available, depending on the lender and also the type of work you are carrying out. Depending on your current mortgage interest rate, this option might also enable you to switch to a lower rate deal.

However, the buy to let market has become more complex and changes to lending criteria can in some cases make it harder to obtain the required level of financing. Speak to a broker to clarify whether your circumstances will make a capital-raising remortgage feasible for property improvements.

A bridging loan, usually a relatively short-term “interest only” loan, is another alternative method of financing, but will typically require a remortgage with which to settle the debt, after the work has been carried out. Once again, this might be dependent on the type of work being carried out on the property.

Commercial Trust can help to source a remortgage for you, before helping to secure bridging finance, on the basis that any work carried out will increase the value of the property. In some circumstances, a bridging loan might be possible if you intend to sell the property after carrying out work.

A second charge loan enables you to free up equity from your property, to fund renovation work, without impacting on your existing mortgage deal.

At Commercial Trust Limited, we work with over 45 lenders providing a broad range of financing options, including: buy to let mortgages, remortgaging options, bridging loans and second charges.

If you are unsure of how to acquire the financing you need, get in touch and we can discuss which products best suit your unique circumstances.