Development finance for HMO and co-living schemes

This suits developers and investors creating HMO or co-living rooms rather than buying a finished house. The common thread is that meaningful building work stands between the current property and a licensable, lettable HMO.

Typical projects we help fund include:

• Ground-up construction of a purpose built HMO or co-living block on a site.
• Converting a commercial building, such as former offices or a pub, into a block of HMO or co-living rooms.
• Major conversion of a large house into a multi-room professional HMO, beyond a light refurbishment.
• Reconfiguring and extending an existing building to add rooms and communal space.

These schemes are almost always run by companies and professional developers, so the lending is unregulated and outside the FCA's regulated-mortgage perimeter. Where a project is tied to a property the borrower intends to live in, it can be regulated, and we refer those cases to an appropriately authorised firm. Planning, use class and licensing should be confirmed with your local authority and the right professionals. Nothing here is financial, legal, planning or tax advice.

Unlike a mortgage that lands in one lump, development finance is released in stages as the build progresses. The lender advances an initial amount, often against the land or existing building, then funds the works in tranches, releasing each drawdown as the previous stage is completed and signed off.

A monitoring surveyor usually inspects at each stage on the lender's behalf, confirming the work is done to standard before the next tranche is released. This protects the lender, because money follows completed value rather than promises, and it protects you from overdrawing ahead of progress. Interest is normally rolled up and settled at the end rather than serviced monthly, which keeps cash free during the build when the scheme produces no income.

The practical implication is that your cash flow and programme need to line up. Because drawdowns arrive in arrears of the work, you fund each stage first and are reimbursed on sign off, so a realistic build programme and a contingency for delays matter. We help you structure the facility so the drawdown schedule matches the build stages and there is headroom for the inevitable surprises, and we make sure the monitoring requirements are understood before work starts.

Two numbers drive a development facility: what the scheme costs to build and what it will be worth when finished, the gross development value or GDV. The loan is sized against both, and the tighter of the two constraints usually sets the ceiling.

Lenders typically fund a large share of total costs, often a high proportion of build costs plus a slice of land or purchase, while also capping the total loan at a percentage of GDV. For HMO and co-living schemes the GDV is usually assessed on the finished, income producing house, often on a commercial or investment basis tied to the projected rent, so a scheme that will let strongly by the room can support a higher end value than a plain bricks and mortar view would give.

Because GDV rests on the finished valuation, the strength of your appraisal and rent assumptions matters. A credible schedule of costs, a realistic build programme, evidenced room rents and a clear view of the finished valuation basis all feed into how much a lender will advance and on what terms. We work through the appraisal with you before placing it, so the numbers stand up to a lender's own quantity surveyor and valuer rather than falling over at the first review.

Development finance is short term by design, so the exit is the part a lender scrutinises most. A build facility is only as safe as the way it is repaid, and for HMO and co-living schemes there are two common routes.

• Refinance onto a term HMO mortgage: once the scheme is complete, licensed and let, you refinance the development loan onto a longer term HMO mortgage and hold the house as an income asset. This is the usual exit for developers who build to hold.
• Sale of the finished scheme: the completed block is sold, often to an investor, with the proceeds clearing the development loan. This suits developers who build to sell.

Each route has its own timing. A term refinance depends on the house being finished, licensed and producing evidenced income, because the new lender values it on that basis, so the licence and the first lettings sit on the critical path. A sale depends on the market and on finding a buyer at the appraised value. Because development interest is rolled up, the amount to redeem grows through the build, so a credible, dated exit is essential. We line up the exit at the outset, whether that is a term facility ready to refinance on completion or a realistic sales strategy, so the two stages join up cleanly.

Development finance is priced against cost and GDV rather than on a single headline mortgage rate, so the figures work differently from a term HMO loan. Pricing reflects the build risk, the experience of the developer and the strength of the exit.

As an indicative guide, the interest on an HMO or co-living development facility runs broadly around 0.75% to 1.1% per month on the drawn balance, with an arrangement fee and an exit fee on top, and interest usually rolled up rather than serviced. Loans are commonly sized up to a high share of total costs and capped at a percentage of GDV, with the tighter constraint setting the limit. On completion, the exit onto a term HMO mortgage typically sits in the region of 5.5% to 6.5% a year at up to around 70% to 75% of the finished value, subject to the rental stress test of roughly 125% to 145% interest coverage. These are indicative bands, subject to status and valuation, not offers.

As an illustration, a developer converting a redundant commercial building into a co-living block might draw a development facility in stages through the build, roll up the interest, then refinance onto a term HMO mortgage once the rooms are licensed and let, releasing the development lender. This is a hypothetical illustration only, not a promise of any particular figure or outcome. The real terms depend on the scheme, the costs, the GDV and the exit, and we place both the development facility and the term exit across the market.

Development cases turn on the detail, so the more of the appraisal you can share early, the faster and more accurately we can place the scheme with the right specialist lender.

It helps to send:

• The site or building, the planning position and the proposed number of rooms.
• A schedule of costs and the build programme, with any contractor or professional team detail.
• Your gross development value and the rent assumptions behind it.
• Your intended exit: refinance onto a term HMO mortgage, or sale of the finished scheme.
• Your development track record and the entity borrowing.

We will come back with an indicative view on how the facility could be sized and priced within the bands on this page, then work the market on your behalf. We arrange the finance and place it with specialist lenders; we do not lend ourselves. These are indicative bands rather than a quote, and the final terms depend on the scheme, the costs, the GDV and the strength of your exit. Nothing here is financial, legal, planning or tax advice.