HMO licensing and how it affects lending

Mandatory licensing is the national baseline and it applies everywhere in England. Since the rules changed in 2018, a property is a mandatory licensable HMO where it is occupied by five or more people forming two or more separate households who share facilities such as a kitchen or bathroom. The old rule that a property also had to be three or more storeys was removed, so a large two-storey shared house can now be caught.

The concept of a household matters here. People from the same family count as one household, while unrelated sharers each count separately. So a house let to five unrelated professionals is two or more households of five people and needs a mandatory licence, whereas a single family of five is one household and does not.

A mandatory licence is issued by the local authority, lasts for a set period, and comes with conditions the landlord must meet. Applying is the landlord's responsibility, and letting a mandatory HMO without the licence is an offence that can lead to prosecution or a financial penalty, and can allow tenants to reclaim rent through a rent repayment order. Because the threshold catches most larger shared houses, mandatory licensing is the first thing to check on any HMO purchase. Confirm the exact position with the local authority, since interpretation can turn on the specific facts.

On top of the national mandatory scheme, councils can introduce their own local schemes, and these vary a great deal from area to area.

• Additional licensing extends HMO licensing to smaller shared houses that fall below the mandatory threshold, typically HMOs with three or four occupants forming two or more households. A council brings this in where it judges that smaller HMOs are causing problems, so a property that needs no licence in one borough may need one just over the boundary.
• Selective licensing is broader still and can apply to ordinary private rented homes, not just HMOs, in a designated area. It is used to tackle issues like poor property conditions or antisocial behaviour, and where it is in force most privately let properties in the zone need a licence regardless of how many people live there.

Because these are local designations, you have to check the specific address against the specific council's current schemes. Some councils run additional and selective schemes across large areas, others run none at all, and designations are time-limited and get renewed, replaced or dropped. Never assume the position from a neighbouring area or from how things stood a few years ago. The council's licensing pages are the place to confirm what applies today, and a quick call to the licensing team can save an expensive misunderstanding.

A licence is not just a fee and a form. It commits the landlord to running the property to a defined standard, and the council can inspect and enforce against those conditions. The detail varies between authorities, but the common threads are consistent.

• Room sizes: minimum floor areas for sleeping rooms, with national minimums for rooms used by one adult and larger minimums for rooms shared by two, so undersized rooms cannot lawfully be let as bedrooms.
• Amenities: enough kitchens, bathrooms and toilets for the number of occupants, so facilities are not overstretched as occupancy rises.
• Fire safety: appropriate alarms, detection, fire doors and escape routes, which is often the area that needs the most work in an older conversion.
• Management and the fit and proper person test: the licence holder and manager must be judged fit and proper, covering relevant convictions and past housing law breaches, and the property must be properly managed.

Meeting these standards usually means real capital works in a conversion, not just an application. That is why the cost and time of getting a property to a licensable standard belongs in your budget from the outset. A property that already holds a licence and meets the conditions is worth more, and is simpler to fund, than one that still needs the works. Standards differ by council, so always check the local requirements and take professional advice on fire safety and compliance.

Lenders draw a clear line between a property that is licensable and one that is actually licensed. A licensable HMO is one that legally needs a licence given how it is occupied. A licensed HMO is one where that licence is in place and the conditions are being met. Funders strongly prefer the second, because a valid licence signals a lawful, compliant, income-producing asset they can rely on.

For a term HMO mortgage, most lenders expect the licence to be in place, or expect a clear, near-term route to it, before they will advance on HMO terms. Indicative HMO mortgage rates run around 5.5% to 6.5%, with leverage up to roughly 70% to 75% of value and rental stress tests, or interest cover ratios, typically in the region of 125% to 145% depending on the borrower's tax position. All of this is subject to status and valuation, and it assumes the licensing position is sound.

Where the property is licensable but not yet licensed, or still needs the works to reach standard, the funding often starts as bridging finance, indicatively around 0.75% to 1.1% per month. The bridge buys time to complete works and obtain the licence, and the exit is a refinance onto the term mortgage once the HMO is lawful, licensed and let. In short, the closer a property is to being fully licensed and compliant, the better the terms and the wider the choice of lender.

Operating a licensable HMO without a licence is not a grey area, it is an offence, and the consequences reach both the landlord and any funder. A landlord can face prosecution or a substantial financial penalty, and tenants can apply for a rent repayment order to reclaim rent paid while the property was unlicensed. Councils can also issue management orders in serious cases. None of that is a background risk you want attached to an income-producing investment.

For lending, an unlicensed HMO is a problem on several fronts. The income the loan relies on is being earned unlawfully, which undermines the affordability case. The property may not meet the standards a licence would require, so its value and lettability are uncertain. And the enforcement risk sits directly against the asset the lender is secured on. Faced with that, many lenders will decline, or will lend only on the basis that the licence is obtained as a condition, sometimes within a fixed period after completion.

The practical message is to sort licensing before you rely on the income, not after. If you are buying an operating HMO, verify the licence exists, check it matches the actual occupation, and confirm there are no outstanding enforcement issues. If you are creating one, budget for the works and the licence and build the timeline into your funding. Nothing here is legal, planning, tax or financial advice, and you should confirm your obligations with the local authority and take professional advice before you commit.

Licensing and finance are easiest to manage when they are planned together, because the licence position drives which type of funding fits and on what terms. A property that is already licensed, compliant and let points naturally to a term HMO mortgage. A property that is licensable but still needs works or a licence points to a bridge first, with the mortgage as the exit once everything is in order.

The workable sequence is to establish the licensing position early, before you offer, by checking mandatory, additional and selective schemes against the specific address. Then budget honestly for any works needed to reach standard, particularly fire safety, and for the licence itself. Then match the funding to the stage: bridging to buy and bring up to standard, refinancing to a term mortgage once the HMO is lawful and licensed. Keeping the licence renewed and the conditions met protects the mortgage over the long term, since a lapse can create problems at refinance.

As brokers we structure funding around the real licensing position rather than an assumed one, and we point you to the term mortgage once the property is fully compliant. We do not give legal or licensing advice, and we always encourage you to take proper professional advice and to confirm the detail with the local authority. HMO and commercial lending to companies and portfolio investors sits outside the FCA's consumer perimeter, while any regulated borrowing, such as lending tied to a home, is referred to an authorised firm.