According to Zoopla estimates, during the Covid pandemic, four in 10 homeowners have altered their homes to better suit their needs, resulting in the loss of almost nine million bedrooms.

The repurposing of properties is something that we have seen for some time within the Private Rented Sector with typically more seasoned investors reconfiguring larger houses to enable them to be let to multiple independent tenants. Recently, when analysing our own book, we’ve identified an increase in investment in these types of properties.

While this could be in part attributed to our product offering being simplified, with discounts based on energy efficiency rather that property type, industry data shows that the shift is being seen across the sector. In December 2021, the value of mortgages written for HMO purchase was more than twice as much lent at the same time a year earlier and almost double the total written in December 2019, before the market was impacted by the pandemic.

This is likely to be driven by a number of factors, one of which is increased demand for affordable homes.

Paragon research shows that tenant demand has been steadily growing since midway through 2020 and hit an all-time high in Q3 2021, remaining elevated since. In the height of the pandemic when social distancing was a new and mandated measure, there were questions on whether the inevitable mixing with other tenants would put some people off opting for homes in HMO and MUB. This didn’t appear to be the case and it actually may have worked the other way, with some preferring the communal nature at a time when lockdowns left many feeling alone and isolated. 

Fast forward to today and tenants have less to spend on rent due to the current increases in the cost of living. With HMO and MUB often being a more affordable option compared to letting an entire flat or house, we can see how landlords could be responding to higher demand from tenants. 

It is important to recognise, however, that the affordability of HMO and MUB, it is not always a necessity, for some tenants it is a choice. This is because HMO and MUB offer tenants the opportunity to live in areas where they may not be able to afford to buy – examples exist up and down the UK, the sought-after suburbs of cities like Birmingham, Liverpool and Manchester are home to some beautiful Victorian properties that are converted to house multiple tenants in homes benefitting from en-suite bathrooms, high-speed broadband and home working space.

While some argue that the mix and transient nature of tenants who call these types of property home are not conducive to creating communities, I feel it is important to note that by being let, many of these properties are providing homes for multiple people, at a time when we have a clear shortage.   

The current shortage of stock available to purchase is one of the market’s most prominent characteristics so I suspect this is having some influence on the types of properties that landlords are buying.

Again, looking at Paragon data, 2021 completion figures show that those with HMOs in their portfolios tend to have greater experience and larger portfolios, indicators of professional landlords.

HMO and MUB are considered more demanding to manage and are subjected to additional legislation. They also cost more to operate - research shows that landlords with HMOs spend an average of 24% of their income on maintenance, compared to 20% for non-HMOs.

With limited supply of what would be considered more standard properties, family homes in particular, it may be that we’re seeing more smaller scale investors turning to HMO and MUB, traditionally the reserve of more experienced landlords.

Despite the increased management cost, these types of properties with the capacity to house multiple tenancies can offer superior yield generation compared to single units - landlords with HMO typically achieve yields of 7.5%, followed by flats in multi-unit blocks at 7.0%. whereas detached and semi-detached properties offer average yields of 6.1%. 

Housing multiple tenancies also means that HMO and MUB benefit from the impact of any void periods being minimised - if one home is left empty, the rent paid by the remaining tenants will likely mean that there are no resulting missed mortgage payments.

This offers lenders greater security, but this model is not without risk. HMO and MUB are generally untested in a high interest rate environment or in circumstances where properties value dip - in the event of a serious economic downturn, if possession becomes necessary, the purchase price as well as additional time and money required to manage these types of properties means that they could be difficult for lenders to sell on and recoup all of the money lent on the property.

This means that for all of the positive aspects of HMO and MUB, lenders must carefully assess exposure to these types of properties, ensuring that they have the skills, experience and data to mitigate and manage the risk.

Richard Rowntree
Managing Director for Mortgages

This article was published in Mortgage Introducer