Lender says letting out as licenced HMO breaches terms and conditions?

Lender says letting out as licenced HMO breaches terms and conditions?

14:58 PM, 11th October 2021, About 6 days ago 19

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I am a residential landlord of a small portfolio of buy-to-let properties in London. I purchased my most recent property in March 2018, and took out a 5-year fixed-rate mortgage with a lender to enable me to do so. I rent it out to 4 tenants, either professionals or mature students.

In October 2018, the local council for where the property is located, introduced an additional HMO licensing scheme, stipulating that if a property has 2 or 3 tenants and shared bathroom and kitchen facilities, it is deemed to be an HMO.

I was not made aware of this change to the law until a letting agent informed me around this time last year when seeking his services to rent out another one of my properties during the difficult Covid-19 period.

As a result, I have applied for additional HMO licences for all properties in my portfolio in keeping with the law and these applications are still being processed. When making an application, one is required to inform the mortgage provider and any other ‘interested party’. I, therefore, informed the mortgage lender for my most recent property purchase (stated above).

Not long after making the application, I received a call from their mortgage services team, saying that I cannot let out the property as an HMO as it breaches the terms and conditions of their mortgage offer, which was sent to me in February 2018. I would need to let out my property either to a family, or I presume, 2 or fewer tenants.

I checked the terms and conditions of the mortgage offer and they do indeed state that: “a condition of the advance is that the mortgaged property is not a House in Multiple Occupation (HMO) and will not be used as an HMO at any time in the future…letting it as an HMO will constitute a breach of the mortgage conditions and serious event under E2.1 of the mortgage conditions”.

However, at the time of the mortgage offer (February 2018), a HMO only related to a mandatory HMO, which is renting out to 5 or more tenants. As I was going to rent out to 4 tenants, the property was not a HMO. The additional HMO licensing scheme was introduced well after I accepted the mortgage offer and purchased the property.

There is nothing in the terms and conditions here about letting out the property as an additional HMO. I think it is grossly unfair of the mortgage lender to insist that I have to stop letting out the property to 4 tenants and can only rent it out to a family or maximum of 2 tenants.

The property was clearly not a HMO when taking out the mortgage advance as stated. To be forced to rent out the 4-bed flat to a family or a maximum of 2 tenants will grossly reduce my rent, and simply make it not feasible for me to stay in business as a property landlord. Surely this is unreasonable behaviour by the mortgage lender.

I wonder if I have a case to appeal?

Why would they insist I only let out the property to a family or 2 tenants maximum, when doing so will entail such a substantial reduction to my rent, and significantly increase my chances of defaulting on the mortgage! I have always made my mortgage payments on time.

I am sure I can’t be the only one, and that many other landlords out there must have been affected by the additional HMO licensing scheme and its conflict with mortgage lender conditions, as many landlords let out to 3 or more tenants.

I feel I am being penalised for simply being a law-abiding and conscientious landlord who has complied with the ever more legislation against landlords, including the additional HMO licensing scheme.

I earnestly seek advice and guidance.

Mr S


by Ian Narbeth

16:35 PM, 13th October 2021, About 4 days ago

Reply to the comment left by land law at 12/10/2021 - 11:09It is not a good idea to ignore the lender's contact. They may call in the loan and sell if not repaid promptly. Best option is to try to refinance with the same lender. It may cost slightly more than a BTL mortgage but that is the price of having an HMO. If you explain the circumstances they may be sympathetic.
If your lender does not do HMO lending then you should ask for time to refinance. There are a number of other lenders out there and currently (Oct 2021) there are some decent sub 4% deals on a 2 to 5 year fixed contract.
Do not ignore the lender and hope they will go away.

by land law

17:10 PM, 13th October 2021, About 4 days ago

Reply to the comment left by Ian Narbeth at 13/10/2021 - 16:35
Sorry if I was unclear. I did not mean to ignore the contact from lender. I meant find out what they want by reason of the contact.

Sometimes, the lender does not itself know what it wants to do if you are in breach. In other words, their contact does not imply a disaster or problem

by David Judd

9:41 AM, 14th October 2021, About 3 days ago

I had the same issue, however mine was let to 4 people under 1 contract, not individual contracts which is actually what an HMO is. My mortgage lender agreed and I was able to keep my existing mortgage.

by Ian Narbeth

10:09 AM, 14th October 2021, About 3 days ago

Reply to the comment left by David Judd at 14/10/2021 - 09:41
David, it does not matter if they are on one AST - it is whether they are related or living as partners together that determines HMO status. You were lucky your lender misunderstood. I trust you obtained a licence if necessary.

by John Dace

10:02 AM, 16th October 2021, About 23 hours ago

Is anyone else reading this thinking- ‘what a load of unnecessary rubbish’?
How did we get to the state where all this sort of rubbish is normal. The whole country is bogged down with too much of this sort of stuff in all businesses. Lenders / councils / government / courts - all with their own agendas piling on the pain for all of us just doing something simple (or should be).
Isnt it half the reason why this country is in such a mess?

by land law

10:53 AM, 16th October 2021, About 22 hours ago

Reply to the comment left by John Dace at 16/10/2021 - 10:02
If “their own agendas” means

- lenders protecting their security
- courts making sure tenants (and landlords) behave reasonably and fairly
- councils making sure that premises are safe and fit

Yes, that is exactly what they are doing

by Graham Bowcock

11:06 AM, 16th October 2021, About 22 hours ago

Whether licensing applies or not you have an HMO and should have known it. It's the same issue for the tenancy - doesn't matter is all on one agreement or not. The issue is number of unrelated people in the property.

Ideally the lender's valuer should have identified it when doing the valuation, but it seems they may not have done so the lender has found out after the event.

The lender is entitled to understand their security; if they choose not to lend in certain markets then that's their prerogative and they price accordingly.

by John Dace

12:47 PM, 16th October 2021, About 20 hours ago

Reply to the comment left by land law at 16/10/2021 - 10:53
My point is that all those can be achieved far more simply. And the system we have now doesn’t necessarily achieve that,(especially courts and councils). Its great business for all the desk based authorities and legal people but an unecesary burden for us and actually a huge barrier to getting people into homes so on balance not good for tenants.

by rod.townson@yahoo.com

18:38 PM, 16th October 2021, About 14 hours ago

So, we all now understand that an HMO is where you have 3 or more tenants in a property who are not all related.
Just to state the obvious, a mandatory HMO is where you have 5 or more tenants who are not all related.
Lenders often do not understand the definition of an HMO and generally regard them as higher risk, hence higher rates.
Some regard separate tenancies as higher risk as there is no joint and several liability (but then you should draw up a new a joint agreement - and protect any deposit in the relevant tenant names - each time a tenant is replaced).
Even councils don't always get it - demanding joint tenancies for students to claim council tax relief.
As has been said, ignorance is no excuse.
Join a landlord association and do their accreditation training.
Take a look at ihowz.uk

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