What’s going to be the impact of extended mandatory HMO licensing?

Legislation around HMO licensing is changing later this year and it’s a welcome step in the fight to squeeze rogue landlords out of an area of buy-to-let where the most vulnerable tenants are too often exploited.

As it stands currently in terms of national rules, an HMO only needs to be licensed if all of the following apply:

1. There are five or more people living there
2. They form two or more households
3. The property has three or more storeys

However, from 1st October 2018, a licence will be required if the first two conditions apply, regardless of the number of storeys.

The Residential Landlord Association (RLA) estimates that this change in the law will affect 177,000 HMOs in England alone, i.e. landlords of one or two-storey HMOs will now have to apply to their local council to secure a licence and may need to make changes to ensure they fulfil all the relevant buildings, and health and safety criteria, such as:

• • Upgrading the fire alarm system 
  • Installing wash hand basins in all bedrooms
  • Providing additional toilet facilities

At the same time, a minimum bedroom size is likely to be introduced, although this is at a draft stage and the specifics have not yet been decided upon.

Bear in mind that local authorities have the power to set their own standards for licence conditions, so if you’re a HMO landlord, consult your council housing department as soon as possible to find out a) the application process for, and cost of a licence and b) the criteria that the property will have to satisfy. You can find details via the government website .

The changes could affect you in several ways, including:

1. There will undoubtedly be a cost implication. Although the licence fee itself – which usually covers you for 5 years – is unlikely to make a huge difference to your cash flow, if you have to undertake works to make your HMO compliant, this could eat into your profits in the immediate future.

2. Depending on the work required, if you need to get planning permission and satisfy building regulations, it could take time to complete and cause some disruption to your tenants.

3. If any rooms you are currently letting fail to meet any new minimum size requirements, you may not be able to let them. This could have significant implications for the financial viability of your investment, so you might need to consider your options for either changing the type of let.

If you’re found to be in breach of the new rules, the local council could impose a civil penalty of up to £30,000 or you may be prosecuted and receive an unlimited fine. The good news is that local authorities are obliged to give you a reasonable amount of time to get your property compliant and HMOs that are already licensed are unlikely to be required to comply with new rules until the licence is renewed, but always check any change in rules with your local council and secure any decisions in writing.

Financing

This change could also impact landlords’ borrowing. HMO lending is already a specialist field, with lenders commonly basing their decisions on a commercial valuation, looking at the total rental income generated from letting on a room-by-room basis. Any landlord who is suddenly a rented room down could find they’re unable to remortgage on similar terms. And that’s likely to mean either ending up on a less than favourable rate or having to reduce the level of borrowing. The worst-case scenario is that landlords who are not well capitalised might be forced to sell.

So, given that lenders are going to be reviewing their valuation guidelines for surveyors and HMO mortgage conditions – and this hot on the heels of last year’s new portfolio lending criteria - it’s highly advisable to consult a mortgage expert right away. Please feel free to call us on 0800 085 0118 or request a callback by clicking here.