Understanding the impact specialist property has on a borrower’s finance options

Very often, the focus of these pieces is on the impact of borrowers’ circumstances on their ability to get a mortgage. But the property, the very security that underpins the loan, can really affect what finance options are available to them. We look at three key property types and what elements impact a decision to lend and why good advice is likely to be very important in securing the best finance. 

The UK has the oldest housing stock in Europe, and most likely in the world. This is mostly because of the legacy of the industrial revolution-era dwellings that still serve as the foundation of our modern metropolitan and urban centres. These homes are still highly prized, but maintaining them in a safe, hygienic, and future-ready manner presents issues and this is set to get worse as the stock ages. In the UK, Northern Ireland has the newest housing stock and is less likely to have safety and health risks than Wales, which has the oldest and poorest housing stock. 

Property comes in all shapes and sizes. Staying on top of the changes and changing your advice business to meet the gaps in evolving markets is a challenge, but one every broker will appreciate needs to be met. It is sound business sense for advisers to know the property limitations and opportunities that can result in the right type of loan for their borrowers. 

In this article, you will read about three key types of specialist property.

HMO and buy-to-let

According to Zoopla  the number of homes available for rent is rising, but there are still 25% less rental properties available in 2024 compared to 2019. Tax changes post October may result in more landlords exiting the market, but these changes could also create new landlords, especially with the prospect of more new property on the horizon. There is good reason to believe property remains a good investment. Rents are expected to rise 3-4% over 2024, with the supply/demand imbalance set to remain into 2025, supporting a continued growth in rents. High demand and a low supply of properties continues to keep rents high.

Buy-to-let has undergone significant change in the last ten years. George Osborne’s tax changes, the subsequent growth of limited buy-to-let companies, and the introduction of portfolio lending standards have been complemented by sweeping regulatory reform in the shape of EPC requirements for rental property, the imminent arrival of the Renters’ Reform Act and Commonhold and Leasehold Reform. 

HMOs, of course, differ from buy-to-lets in some important ways. In general, at least three tenants live there, forming more than one household and the toilet, bathroom or kitchen facilities are shared. An HMO must have a licence if it is occupied by five or more people, though a council can also include other types of HMOs for licensing. The council must carry out a Housing Health and Safety Rating System (HHSRS) risk assessment on an HMO within five years of receiving a licence application. If the inspector finds any unacceptable risks during the assessment, the property must be remedied. 

Ultimately, HMO mortgages work in a very similar way to buy-to-let mortgages, often being taken on an interest-only basis on a fixed or variable interest rate. Affordability on an HMO mortgage, like a buy-to-let loan, is calculated based on the rental income of the security. HMO mortgages are sometimes subject to a minimum HMO property value, early repayment charges and other product arrangement fees. The maximum loan-to-value (LTV) on an HMO mortgage is generally 80%. 
  
Most HMO mortgage lenders base the maximum loan size on rental coverage or a debt service coverage ratio and will be based on either the pay rate or a stressed rate. In most cases, as with buy-to-let, the rental income yields with HMOs is strong.

An important factor to consider is the fees involved in arranging HMO mortgages. Often the lower the rate, the higher the lender arrangement fee. Some specialist HMO mortgage lenders don’t charge arrangement fees whilst some may charge a flat fee, or a percentage of the loan. Like buy-to-let, some HMO mortgage lenders insist on a high EPC rating, meaning the EPC ratings can impact finance costs.

New build

Labour’s promise to get Britain building means the new build market may well be about to undergo a revolution. Nevertheless, trying to secure a mortgage on an off-plan home can be more complicated than one that’s been built. New build homes are typically more expensive than older properties  and those wanting to purchase off-plan, might experience delays if the construction work gets held up. Developers also are likely to ask for a reservation fee to secure any plot for an off-plan home. That fee is at risk if a buyer then pulls out of the purchase. Mortgage criteria is stricter for new builds. Lenders very often see these mortgages as riskier, due to the possibility that the value of the property may fall in its early years and if this does happen then the lender has less security for the loan it’s provided.

Mortgage offers will probably only last for six months and if the buyer is purchasing off plan and the development takes longer, buyers may need to re-apply for the loan (or negotiate a longer validity period in the first place). If their financial circumstances have changed during this period, that may impact the ability to secure a deal.

Equally, if the market value of the property increases or falls during the building phase, buyers still must pay the agreed original purchase price when it’s completed. Therefore, a fall in value can be catastrophic. The lender might withdraw its offer or only agree a lower amount, leaving a financial shortfall and a legally binding commitment to buy or compensate the developer. 

Non-traditional construction

Our aging property stock includes many older properties. In total, there are around one and a half million non-standard construction homes in the UK. Typically, a non-standard construction property is a building that has been built from materials that aren’t considered ‘standard’. Standard is brick or stone walls, with a roof made from slate or tile. Therefore, a non-standard construction is more often as not anything different to that description.

Non-standard construction houses are more widespread than one might at first imagine, especially in areas where local materials have historically been used or are more readily available.

Equally, over and above the materials, non-standard buildings have often been built using old-fashioned construction processes. Many local authorities in the 1950s and 1960s used materials such as concrete or steel frames or concrete panels. Finally, geography too may dictate the volume of non-traditional housing. Higher density is common in areas with a lot of post-war development, such as prefabricated houses in the UK built after the Second World War.

Every lender has different criteria for the types of property they’re willing to lend on. Certain home designs, like those with thatched roofs, require costly, ongoing maintenance until eventually the entire roof must be replaced. Similar to this, unique properties like residences with glass walls or listed buildings need expensive building supplies and specialized tradesmen for repairs or restorations. Lenders will consider the homeowner's capacity to make loan repayments in light of these inevitable expenses.

If a homeowner fails to keep up with maintenance, it can mean the property’s value falls. Lenders may be concerned about the structural integrity of a non-standard construction property and the risk of future problems, and it may prove more difficult to get buildings insurance policies on such homes. This type of insurance may be a pre-requisite of a mortgage. 

This list is not exhaustive but illustrates just how the security involved in mortgage finance impacts the ability of borrowers to get the right deal, and their broker’s expertise and ability to correctly advise can be greatly enhanced by understanding these elements of the deal.