HMO Mortgages

HMO Mortgages What is a House of Multiple Occupancy (HMO)?

An HMO property is defined as a property where there are at least three people of two or more households sharing a kitchen, bathroom or toilet facilities. A ‘household’ could be a single person, a co-habiting couple or people from the same family living together.

HMOs are commonly rented by students and young professionals who may not be able to afford an entire property on their own or aren’t ready to live with a partner.

While renting a single room is more affordable for tenants, the total rent from all the rooms combined is often higher than what a landlord could charge for a single-family rental. This allows landlords to generate a higher rental income from an HMO.

However, with these higher potential rewards come increased risks. HMOs tend to have a higher tenant turnover compared to traditional buy-to-lets, and each additional tenant introduces uncertainty (e.g., will they pay the rent? Will they cause damage? Will disputes arise?). For this reason, a specialist HMO mortgage is required.

How are HMOs mortgages different from normal Buy to Let Mortgages?

A buy-to-let, or single-let property, typically refers to a house rented to a single-family unit. In contrast, an HMO property is rented to multiple tenants (usually three or more), such as students, and requires a specialised HMO mortgage.

It’s common for experienced landlords to explore HMO mortgages because of the potentially higher returns. However, not all buy-to-let lenders provide these types of mortgages, and those that do may offer different interest rates compared to standard buy-to-let mortgages.

How do HMO mortgages work?

HMO mortgages are designed specifically for purchasing an HMO, with the property serving as collateral for the loan. The affordability of an HMO mortgage is determined by your rental income.

These mortgages are offered by specialist lenders, often on an interest-only basis, and may come with conditions like a minimum property value, early repayment charges, and arrangement fees.

It’s essential to use an HMO mortgage when financing an HMO. Using a standard buy-to-let mortgage could violate your loan terms, potentially leading your lender to demand full repayment. It is strongly recommended that you consult with a mortgage adviser prior to investing in an HMO, to understand you get the right type of mortgage in place.

Who can get an HMO Mortgage?

Many HMO mortgages come with restrictions, as some lenders only accept applications from individuals who have been landlords for at least two years or have prior experience managing HMOs.

Lenders may also impose additional requirements. As a first-time landlord, obtaining an HMO mortgage can be challenging, and it’s often necessary to begin by renting a property to a single household.

Once you’ve gained experience in property letting, you may be ready to transition to managing HMOs. You can either convert an existing property into an HMO or purchase a new one, but in either case, you’ll need a specialist HMO mortgage.

If you already own a property with a standard buy-to-let mortgage, you’ll need to contact your lender to explore remortgaging to an HMO-specific product.

How much deposit do I need for an HMO Mortgage?

Most lenders require a deposit of at least a 25%, although the amount of deposit needed is often determined by the anticipated rental income. This is due to the fact that lenders each have their own stress test calculations to ensure that you could still afford the mortgage if interest rates were to rise or if you were to have any rental voids. Lenders typically require rental coverage of 125% to 140% of the mortgage payment, based on either the pay rate or a stressed rate.

Lenders typically base these figures on the income from renting the property to a single household, rather than multiple tenants. This means the mortgage must be easily affordable from your perspective, with significant financial buffers.

There are some lenders who will allow you to borrow up to 80% LTV. As with most mortgages, higher LTV ratios usually come with higher interest rates, so lower LTV HMO mortgages often offer the most competitive rates.

Some lenders offering 80% LTV may require a low EPC rating, while others might prioritise applicants with experience managing HMOs. This is common among both HMO and buy-to-let mortgage lenders, meaning your EPC rating could affect your financing costs.

To secure the best HMO mortgage rates, consider making a larger deposit to reduce the LTV. The lowest rates are usually available with LTVs between 50% and 65%.

A mortgage broker can help assess how much of an HMO mortgage you can qualify for in the eyes of your lender.

How will my HMO be valued?

A common myth is that converting a property into an HMO automatically increases its value due to rental yield, but this isn’t entirely accurate. For a standard residential house converted to an HMO, most specialist HMO mortgage lenders will base the loan-to-value (LTV) ratio on the bricks and mortar value.

The two main types of HMO (house in multiple occupation) valuations are: 1. Bricks and Mortar Valuation: This is the standard valuation method for most HMO properties, focusing solely on the physical building and assuming it is vacant. 2. Commercial Valuation or Investment Valuation: This approach assesses the overall value of the investment or business, rather than just the structure itself.

To achieve an investment or yield-based valuation, you typically need a minimum of six letting rooms in HMO properties.

How do I get the best rates available on an HMO mortgage?

HMO mortgages tend to be more expensive and harder to obtain than standard buy-to-let loans. This makes securing a competitive rate especially important, as the interest you pay will directly impact your rental income.

Here at The Mortgage Masters we are fully independent meaning we have access to a broader range of lenders, including smaller ones with specialised products. We can guide you through the process to help you find the best deal.

What fees will I pay on an HMO mortgage?

When considering costs for an HMO mortgage, it is important to factor in potential fees. The most common costs associated with HMO mortgages include arrangement fees, application fees, valuation fees, and legal fees. Fees can vary significantly between lenders, with some offering free valuations and legal fees.

Which are the best HMO lenders?

Due to the increased popularity of HMO mortgages, more and more lenders are coming into the HMO market but they can by typically categorised in three ways:

1. High Street Lenders/Standard Buy-to-Let Mortgage Lenders: These lenders typically offer the best HMO mortgage rates but have strict criteria. They usually allow a maximum of four rooms and impose tight regulations regarding leases, actual rental income, and the applicant’s experience. These lenders are often well-known in the buy-to-let mortgage sector. 2. Specialist HMO Mortgage Lenders: These lenders are more open to complex applications and larger HMO properties. Some niche lenders have dedicated divisions for HMO financing while primarily operating as standard buy-to-let lenders. Although you might pay slightly higher rates, you’ll benefit from more flexible criteria. 3. Commercial Mortgage Lenders: This type of lender is ideal for those with complex HMOs, less experience, or unique situations that don’t fit traditional lenders. While the rates are typically higher than those from the other two categories, they offer the most flexible lending criteria.

Can I get an HMO as a First-Time Buyer?

You can get an HMO mortgage as a First -Time buyer but you will end up paying premium rates for the privilege. For this reason, it is normally sensible to enter HMOs when you have at least one other property to your name.

Should I invest in my personal name or through an SPV?

HMO mortgages are available to investors who choose to invest in both personal name or through an SPV. It is advisable that you speak with your accountant and a property tax specialist prior to investing to ensure that you choose the right strategy for your circumstances.

Is getting an HMO mortgage as easy as getting a BTL mortgage?

Yes. HMO Mortgages are very common and the process of obtaining one is just as easy as obtaining a normal single let BTL mortgage.

Can I get an HMO mortgage with bad credit?

Yes. HMO mortgages for people with adverse credit although they may be more difficult to acquire. Here at The Mortgage Masters, we have access to specialist lenders who are happy to accept applications from those with a less than perfect credit score.

Your home may be repossessed if you do not keep up with your mortgage.