Houses of multiple occupation mortgages (HMOs)

In terms of rental yield, Houses of Multiple Occupation (HMO) are often considered more lucrative than conventional rentals or Buy To Lets, but how easy is it to finance buy to let HMO’s and what does this process entail?

What is an HMO (Houses of Multiple Occupation) Mortgage?

When more than three people rent a property, all of whom are unrelated, the definition is a House of Multiple Occupation (HMO). Although not a family, the people living in HMO’s share a bathroom, living room and kitchen facilities.

The chief advantage for landlords? They’re privy to rental income from multiple sources, which deems HMO property more lucrative than conventional ‘vanilla’ properties purchased to rent out.

Landlords can charge per individual room instead of per house or flat, which often results in heightened rental income. One point to note, utility bills are sometimes included in the room rate and must be paid by the landlord unless the property has been redeveloped or has separate land registry title deeds.

Although higher rental yields pose an attractive proposition to landlords across the country, Houses of Multiple Occupation tend to be particularly demanding to manage in terms of time investments and running costs. Because of this, a House in Multiple Occupation is preferred by landlords who have been in the property game for some time and those who own multiple households as opposed to first-time buyers.

Asides from experience, investing in the correct mortgage is key to maximising your rental income.

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What HMO Mortgage Options are There?

Around 33% of lenders provide mortgages to landlords looking to invest in HMO investment mortgage contracts. In recent years, Houses of Multiple Occupation have surged in popularity within the rental market, yet despite what you may think, this surge in competition has forced prices down rather than up!

That being said, there are numerous remortgage and purchase options available for both limited companies and personal borrowers. If you’re considering this market, now may be the time to invest in an HMO property.

You can expect a two-year fixed purchase rate in the current climate to begin at approximately 1.89% at 75% LTV. This figure increases to 2.13% for a five-year fixed mortgage amount. As with standard mortgages, the higher your deposit, the more competitive your interest rates will be, with several of today’s mortgage providers offering 75% LTV.

For more advice on the mortgage products available and to receive an instant quote, speak to our team member today. We can arrange for an instant quote to be sent directly to your email address.

Related Links

  • Bridging Loans Broker

  • Secured Loans

  • Alternative Funding For Property Buyers

  • Moving Home Advice

  • Houses of multiple occupation mortgages (HMOs)

  • Buy To Let Mortgages

  • First Time Buyer Mortgages

Types of HMO Mortgage

There are various types of HMO mortgage to consider, including HMO Development Loans (these apply to heavy construction and major build projects), HMO Refurbishment Mortgages (for small to medium refurbishment projects) and HMO Mortgages and Re-Mortgages (for multi-let and existing HMO properties). The variant you choose depends on the stage at which the HMO is at.

HMO Mortgage Borrower Types:

Not all lenders facilitate all borrowers or household types. In general, different lenders cater to different circumstances. The borrower type you are will be dependent on your personal circumstances.

HMO Mortgages for Individuals

These are similar to traditional buy to let mortgages yet require a license and can take slightly longer to initiate. You can choose to manage the property yourself or invest in the services of a letting agent.

HMO Mortgages for First Time Landlords.

If you’re new to the HMO market, you’ll require a first-time HMO Mortgage. These mortgages can be difficult to source. We can find a lender to suit your needs. Just because beginner landlords’ choice is limited, this isn’t to say the interest rate is remarkably higher.

HMO Mortgages with No Minimum Income Requirements.

These types of HMO Mortgages were at one time extremely scarce. Today, there are numerous lenders and deals to choose from. It’s important to pick an HMO lender with both the skill set and appetite to help HMO investors.

Established lenders understand how lucrative Houses in Multiple Occupation can be, which is why they tend to be more versatile in their approach, often considering the property and location over the borrower or tenant type.

HMO Mortgages for Limited Companies (LTD) and Special Purpose Vehicles (SPV).

This mortgage style has become increasingly popular in recent years, following the buy to let tax legislation updates. Section 24 of this legislation, which was announced in 2015 in the Summer Budget, prevents residential landlords from paying more tax on income.

HMO Mortgages for Limited Liability Partnerships (LLP).

Due to the tax updates issued in Section 24, HMO Mortgages for LLPs are much more apparent today than they were a few years ago. These updates have slowly but surely been executed since April 2017.

What are the Criteria for an HMO Mortgage?

Houses in Multiple Occupation are often deemed specialist rental property investments, which means they’re not included in all mortgage lenders’ criteria. Despite this, there are still many options available, providing you take the criteria specifications and buying guides into consideration. These include:

The sum of rooms

Most borrowers are under the impression HMO ‘buy to let’ lenders will only accept properties featuring a total of six bedrooms. For larger properties, a commercial mortgage must be sought out.

In actual fact, there are numerous specialist lenders happy to lend to borrowers with HMO properties featuring bedrooms in the region of 20. Best to speak with one of our experts to get more information

Tenants

When considering tenants, it’s important to ask what type of tenants are applicable in the lender’s criteria. A large number of HMOs are rented out to students, which some lenders won’t provide for.

Similarly, not all lenders will lend to those renting to households claiming benefits. Before signing anything, request advice from your mortgage broker, as certain lenders have stricter restrictions in place.

Valuations

Lender services can differ in response to the property’s value. Certain lenders opt for generic surveyor inspections, which the value of similar location properties will assist. If no HMOs are featured in the surrounding area, the valuation will be calculated according to the single household price.

The problem with the latter technique is it seldom takes into account the additional income HMOs attract if they own numerous rental properties and often restricts the sum you can borrow.

Contemporary lenders tend to be more on board with an HMO’s financial nature and will opt to base the lending amount on the sum of income the HMO will generate.

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HMO Mortgage Advice and Considerations

There are many factors to consider when applying for a buy to let mortgage. For advice, it’s wise to speak to one of our mortgage advisers . They will inform you of the amount you can expect to borrow and whether you are eligible to invest in multiple occupation HMO properties.

Do I Need a Licence for an HMO?

Although legislation around HMO licences has changed over the last five years, all HMOs still require an HMO licence, which can be obtained from your local council. This license has a five-year expiration date from the moment it is issued.

How much do HMO licences cost?

The cost of an HMO licence varies depending on location. Some councils have a set fee in place, whilst others charge per room. Fees range from a few hundred pounds to thousands of pounds. If investing in an HMO, this is an additional cost to factor in.

If you’re considering purchasing an HMO property, it’s important to check the local authorities’ rules and regulations before doing so. For advice, revert to your local government services website.

How long does it take for HMO licences to be issued?

This is dependent on how long it takes your local council to issue the licence. HMO mortgage lenders understand delays are inevitable, and in most cases, accept application proof to support the mortgage.

That being said, it’s always better to submit HMO applications as soon as possible, as not having an HMO licence can hold up the property sale. The best thing to do is buy an HMO property with a licence on it already.

In most scenarios, HMO licences are attached to several legal conditions, including:

  • Who will manage the HMO? This can either be a prearranged agent, or you can act as the landlord. Licenses will only be awarded to those considered capable of the job. Those appointed must not be in breach of landlord codes or laws, nor must they have a criminal record.
  • The property must have an up-to-date gas safety certification. This is something that needs to be supplied to your local council yearly.
  • Property suitability: the HMO must include the correct facilities and be fit to house the number of established tenants. A household considered overcrowded won’t be awarded an HMO licence.
  • Electrical and Fire Safety: necessary smoke alarms must be installed in the HMO and undergo regular maintenance. These certifications must be produced on demand.
  • Bedroom size: certain councils will stimulate regulations on bedroom size. This is an aspect that must be considered by developers converting properties into HMOs before requesting planning permission.

When applying for a licence, you will be informed of all requirements. HMO licences are non-negotiable, and the council will penalise those who rent HMOs to tenants without the correct license.

Who Can Live in an HMO?

This is dependent on the lender, but in general, anyone with the correct housing qualifications can reside in a House in Multiple Occupation. In most cases, these properties are rented out to students and young professionals instead of family. It will more than likely be a condition of an HMO mortgage that you are unlikely to be able to live in the property.

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HMO Mortgage Rates

Compared to conventional buy to let property mortgages, HMO mortgage rates are often slightly higher; however, the ROI is also higher. HMO finance rates don’t differ dramatically and are dependent on your circumstances, the value of the property, your credit rating, deposit amount and the potential rental income anticipated from the HMO.

HMO Mortgage Lenders

As well as considering HMO mortgage lenders, it’s important to consider what requirements as a borrower you must adhere to.

HMO mortgages are, after all, more complex, and as such, buyers must stick to certain criteria.

This is especially the case if you are a first-time landlords, as numerous lenders prefer to offer experienced landlords HMO mortgages. This stipulation varies between lenders. In most case, between one and two years experience is considered sufficient. The more experience you have, the more mortgage products you will have to choose from.

In certain cases, HMO mortgage lenders accepting amateur landlords will stipulate that they have to manage the property via a property agent.

Before applying for an HMO mortgage, it’s wise to have the following information to hand:

  • Property value and location
  • Number of rooms to be rented
  • Your landlord experience (inc. HMO experience)
  • If the property requires an HMO licence
  • Details of whether you will use a management agent or managing the HMO yourself
  • Anticipated rental income
  • How many people/tenants you will be housing
  • Are there several AST agreements or one in place
  • Mortgage amount and repayments
  • Type of rate required (fixed or tracker)
  • Credit score
  • If you are lending via a limited company or in a personal name

Can I get a Limited Company HMO Mortgage?

Yes, you can. One of the advantages of setting up an SPV limited company is that you can begin investing through this company trading name the following day.

Can I get a Secured Loan on an HMO Property?

Secured loans can be used on HMO properties, whether this is a single property or a portfolio of HMOs.

HMO Mortgage Broker: We Can Help With Mortgages for All Kinds of HMOs:

  • Professional, student, or DSS tenants
  • Multiple self-contained units on one title
  • Larger HMOs without a license in place at completion
  • In personal name or Limited Company
  • Up to 85% LTV
  • Unlicensed HMOs / ‘multi lets – smaller house shares.
  • Larger licensed HMOs of any size
  • Shared or individual tenancy agreements

FAQs

How quickly can you offer terms?

This depends on the property type, your lending criteria, personal circumstances and how quickly you can obtain an HMO licence. Mortgage brokers will be able to give you a rough idea of timescales, fees and the services to expect.

Do I have to be a homeowner to apply?

No, you don’t. Providing you have a good credit rating, a healthy deposit and experience as a landlord of ‘buy to let’ property services, such as a house share or students accommodation, you can apply for ‘buy to let’ mortgages. Different lenders have different criteria so always best to check with one of our experts as this criteria changes from time to time.

Can an overseas applicant apply?

Overseas applicants, whether UK residents or not, can legally invest in HMO properties. Although the rates can be slightly less favourable, this is dependent on the loan amount, the amount of deposit you have to hand and whether you fit the lending criteria.

Can I borrow through an SPV (Special Purpose Vehicle) or limited company?

SPVs are put in place to ensure tax efficiency for landlords maintaining multiple HMOs, including those who have entire portfolios of rental properties.

In the property industry, the term SPV is a limited company with a restricted trading name set up solely for purchases that are intended to be rentals.

Are there any upfront fees?

This depends on the lender you choose as to whether there is a valuation fee or booking fee or not. All fees will be outlined in your initial HMO mortgage illustration.

Can I get an HMO mortgage if I have adverse credit?

Yes, you can. If your credit rating is extremely poor, you won’t be privy to the best deals, which means both the lender fees and interest rates will be higher.

Is it harder to obtain HMO mortgages?

It can be tricky if you’re a first-time landlord, as certain mortgage requirements stipulate buyers have landlord experience.

How long does it take to get an HMO mortgage?

HMO applications for mortgages vary between lenders. The majority take the same period as a standard mortgage, providing you meet all the credentials and have all paperwork, including licenses to hand.

In most cases, an HMO mortgage offer will be approved within four weeks and completion within twelve weeks.

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