Increased requests for short-term funding for HMO Refurbishments


Here at Sterling Commercial Finance Limited (SCF), we see increased requests for short-term funding to support refurbishment projects.

Several of these projects have been where a client wants to convert a property into a “house in multiple occupation” (HMO), which may be occupied by students, young professionals or individuals.

The potential benefits can be an increase in rental yield, an improvement in property value, and a reduced risk of void periods.

However, it is worth noting that these projects do come with challenges. HMOs with three or more individual tenants may need a licence and could need planning permission to convert, so you must make enquiries with your local council before starting any work. HMOs might experience higher tenant turnover and higher maintenance costs.

In one example, a client was purchasing a one-bedroomed flat in central Nottingham, close to Nottingham Trent University, with a plan to convert this into a 2×1 bedroomed property. This avoided the need for HMO licencing.

Day one purchase price                £130,000

Day one rental income                  £7,800 per annum (single AST of £620pcm)

Conversion costs                             £30,000

Resultant rental income               £16,640 per annum (£160 per room x 52 weeks)

End valuation (GDV)                       £225,000

By doing this, the client increased their yield from 6% to 10.4% (based on original value plus conversion cost).

SCF initially assisted the client in raising short-term finances to purchase the property. He already had sufficient funds to carry out the refurbishment. Upon the refurbishment, SCF sourced a refinance onto a more extended-term BTL mortgage at 75% of the £225,000 valuation, allowing him to release funds to support his next project.

In another scenario, SCF helped provide solutions for an experienced developer client who approached SCF with a project for a three-bedroomed house he currently owned in Nottingham, close to both Universities. He had obtained planning permission for the property to be converted into a six-bed HMO. This property was rented to 5 or more people, so an HMO license was mandatory. The key figures were:

Day one value                                   £250,000

Day one rental income                  £13,200 per annum (single AST of £1100pcm)

Conversion costs                             £100,000

Resultant rental income               £43,200 per annum (6 rooms x 52 weeks)

End valuation (GDV)                       £430,000

Once the works were completed, the client’s yield increased from 5.3% to 12.3% per annum (based on original value plus conversion cost).

SCF assisted him in sourcing a short-term loan based on the end value of £430,000, which also raised all the refurbishment costs.

Key terms were:

Day one loan                    £175K (70% LTV Net), which cleared the existing mortgage.

Refurb funding                 £100K (100% of costs)

Term                                     12 months

Fees                                      2% arrangement fee – no exit fee.

Interest Rates                   0.85% per month

Interest in this case was rolled up during the refurbishment

The client delivered the project within seven months. SCF could then support him by sourcing a refinance onto a longer-term mortgage at 75% LTV, which cleared the short-term finance, including the interest and fees.

The terms of any loan, and precisely the interest rate, are determined by the applicant’s strength, their property experience and the ability to repay the finance within the time frame.

If you have a similar project or are considering this type of project and what might be achievable, please get in touch with us at SCF. The key to this type of finance is finding the correct type of loan and the right lender for your specific requirements. Here at SCF, we have the experience to assist you, and we can talk you through the pros and cons before you start a conversion.

To discuss the finance for your next project, give us a call at 0115 984 9800 or email

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