For new and existing HMO landlords wanting to mortgage or remortgage.
Recent changes to the House of Multiple Occupancy legislation are complex and require the help of specialist mortgage experts who can source the most suitable mortgage solution from the right lender.
Typically, lenders are looking for a bigger deposit or if you are remortgaging a lower loan to value too.
Our specialist team can discuss those changes and how they may affect you.
Homes are being let as HMO properties more now than ever before. We’ve also noticed an increase from landlords applying for HMO mortgages, but do you really need an HMO mortgage, or will a traditional buy to let mortgage suffice?
A House in Multiple Occupation (HMO) can be more lucrative when compared to traditional buy to let properties. Rental demand is high throughout the UK and with interest rates still relatively low, landlords are always being educated on how to maximise rental yields. Having the right mortgage is pivotal in ensuring the profits made from rental income are maximised.
What is an HMO?
An HMO is an abbreviation for House in Multiple Occupation. What this means is a house that is occupied by multiple residents or multiple tenants. The term ‘multi-let’ is also often used. Rather than rent a property to a single household, an HMO can allow landlords to rent the property to multiple people, or multiple households.
Landlords can then charge per room, per flat or per section of the property, usually resulting in an increased rental income. It’s common for HMO landlords to pay the utility bills for the property unless the property was converted into flats and had separate title deeds via the land registry.
Will I need an HMO licence?
Although HMO properties tend to generate higher yields, they’re more complex in setting up. Depending on the nature of the HMO, landlords may require an HMO licence. Local councils provide HMO licences and are valid for five years if approved. HMO licences are provided for each property and not for each landlord. For instance, a landlord with 3 HMO properties will need a licence for each property, should each HMO require a licence.
Not every HMO will require a licence, as it depends on the size and nature of the setup. In addition, each local council will have their own terms and conditions for HMO licensing. Larger setups often require licences whereas smaller setups may be exempt.
Large HMO properties in the UK are defined as below, only if all 3 points apply:
The HMO is rented to five or more people who form more than one household.
The property is at least three storeys high.
Tenants share facilities such as toilets, bathrooms or kitchens.
If an HMO doesn’t meet all three of the above points, that doesn’t mean to say you won’t need an HMO licence. Smaller HMOs may also need a licence and it really does depend on the council local to the property. Fees for licensing will also be dependent on which council you’re applying with, as well as the duration in which it takes to process an application.
What if my HMO licence isn’t approved?
Councils won’t approve HMO licences to every landlord or every HMO. Applications can be rejected. Councils need to evaluate conditions such as whether or not the property is suitable to be an HMO and can facilitate the proposed number of tenants.
Councils will also assess landlords themselves to ensure they haven’t previously breached landlord laws.
If your application for an HMO licence is rejected, then you can appeal to the Residential Property Tribunal.
Alternatively, your local council may reject the application until specific elements of the property are up to a certain standard. Once your HMO meets the required standard, the council may grant you an HMO licence.
If your HMO requires a licence, then do not attempt to rent an HMO without having one. This is a serious offence and can result in an unlimited fine. For cases where landlords haven’t complied with housing standards, a prison sentence is also a possibility.
HMO vs Traditional buy to let
A traditional buy to let property would typically accommodate one person or a family. In rental terms, one rent would be due from the household, on a weekly or monthly basis. The household would also pay the utility bills. These can often be referred to as ‘single-lets’.
Let’s take a look at why an HMO is considered more profitable than a traditional buy to let:
Traditional buy to let
4 bedroom semi-detached house with 2 reception rooms
Rented to a family, consisting of a husband, wife and 2 children
Monthly rental income = £600
Annual rental income = £7,200
HMO buy to let
4 bedroom semi-detached house with 2 reception rooms
1 reception room converted to a bedroom
Rented to 5 single working professionals
Monthly rental income per tenant = £300
Monthly rental income = £1,500
Annual rental income = £18,000
Using the above example, it’s clear to see why more landlords are considering HMO properties. The difference in gross rental income can be quite staggering.
HMO income and expense
Not every HMO will generate almost 3x the rental income of a standard buy to let. It’s also important to consider that utility bills are usually paid by landlords. That said, with the above example, even with a £2k-3k annual utility bill, there’s still a lot more rental profit being generated. Running costs for an HMO are often higher and typically require more time and effort. For instance, each room will require locks and the health and safety guidelines for an HMO is a lot more comprehensive when compared to a standard buy to let. The setup costs for an HMO can, therefore, be a lot higher than a standard buy to let.
There are also void periods to consider. A traditional buy to let may have fewer void periods, whereas an HMO tends to have more void periods. An HMO may also result in higher maintenance bills for landlords when compared to traditional buy to let models. This is because of shared communal areas such as bathrooms, kitchens and lounges (where applicable). Shared areas typically ‘get left’, as nobody wants to clear another person’s mess. Landlords may have to clean themselves or hire cleaners to maintain the upkeep of the property.
HMOs are often provided fully furnished. This is also an extra cost to consider. Traditional buy to let properties are often rented unfurnished. HMOs are popular for individual tenants, they offer affordability and the ease of renting a fully furnished room, with all bills included. This is especially true for students, contractors or overseas employees who are on work visas. The practicality of ‘moving straight in’ with little cost, makes HMOs desirable.
HMOs tend to be limited to certain locations. For instance, HMOs are targeted to certain tenants, such as students or single professionals. The location of an HMO is therefore often limited to city centre locations or locations with great access/bus routes and amenities. It would surely be pointless having an HMO in a rural location in the middle of nowhere.
Traditional rental properties aren’t limited in terms of location. Letting agents that we work with across the country, have rented properties in almost every location possible. Whether rural, country, city, they’ve been rented!
HMOs can be difficult to manage in comparison with traditional buy to let models. As facilities are usually shared within an HMO, tenants can sometimes fall out. As well as being a landlord, you may find yourself being a mediator between tenants who don’t see eye to eye.
A traditional buy to let model would typically encapsulate a family or at least people that have ‘chosen’ to live together. Any disagreements are usually resolved within the household without having to involve the landlord.
As a result, landlords will generally have an HMO type, such as student property or HMO designed solely for working professionals. Having mixed tenants such as students and working professionals may not be a good idea.
HMO mortgage criteria
The majority of HMO mortgage lenders will require landlords to have experience in letting property. There are only a handful of lenders that may consider new landlords with no experience, however, the rates offered may be higher than average. Some lenders may also have a preference on who manages the HMO, such as a letting agency as opposed to managing it on your own.
Despite their popularity, HMO mortgages are still considered a niche mortgage type. The mortgage application is very comprehensive when compared to a standard buy to let mortgage. For this reason, HMO mortgages tend to be offered through qualified mortgage brokers and not direct to landlords.
Lenders may request information on some or all of the below:
Experience of being a landlord
Personal or limited company mortgage
Location of the HMO
The number of lettable rooms
Management type (landlord or letting agency)
Does the HMO have/need a license?
Does each room have its own AST agreement?
Rental income (proposed or actual)
Types of tenants (students, professionals, housing association)
In addition to the above, lenders will also make standard mortgage assessments, such as affordability, the amount you wish to borrow and your credit score.
HMO mortgage lenders
Getting the right HMO mortgage for your property is key. An HMO mortgage with high rates or fees can soon start eating away at those great yields. If you intend to rent the property as an HMO, then you will need an HMO mortgage. If you have a standard buy to let mortgage but wish to change to an HMO model, then inform your lender first to see if this permissible.
Each lender has varied criteria and the best deals are typically secured through mortgage brokers. The nature of your HMO will also either eliminate or add lenders to the options you can choose from. Some lenders only lend up to a maximum number of rooms for instance, so it’s important to know the criteria of your lender before applying. An HMO mortgage specialist can guide you on this. Whether or not an HMO requires a licence or not can also make a difference.
Lenders for licensed HMOs
The majority of HMO lenders consider anything up to five bedrooms. Anything bigger may require commercial finance. If your HMO requires a licence, then you’ll more than likely need an HMO mortgage as a standard buy to let mortgage would not suffice.
The type of tenant you’re aiming to rent to can impact the lenders available to you. Some lenders for instance, may decline you if you’re aiming to accommodate students or housing benefit tenants. This is simply because of the risk involved.
Having a licensed HMO can have benefits in terms of how a lender will value the property. Lenders may consider the proposed rental income when assessing the value. This is particularly advantageous for when you’ve converted a property and are aiming to withdraw some equity. Not every lender will value an HMO based on the rental income and will base the valuation on the HMO being a standard home. This can restrict the amount available to borrow, which defeats the purpose of having an HMO mortgage.
Lenders for non-licensed HMOs
If your HMO doesn’t require a licence, it may be deemed too small for an HMO mortgage. Lenders may therefore only consider giving you a standard buy to let mortgage. There may be lenders who would consider you for an HMO mortgage, however without understanding the nature of your HMO it’s impossible to provide you with a tailored answer. You can make an enquiry at any time or simply ask our specialists a question.
HMO mortgage rates
HMO mortgage rates tend to be higher than standard buy to let mortgage products. This is because the HMO mortgage market is less competitive. Lenders that are prepared to lend will charge slightly higher fees and rates for the privilege. That being said, the income from an HMO should be more than enough to cover a mortgage, utility bills and maintenance. In addition, an HMO mortgage will usually take the rental income into consideration, drastically improving the maximum mortgage amount available.
HMO mortgages can be offered on variable and tracker rates. LTV rates usually start at 80% LTV, with more attractive rates being offered with higher deposits and lower LTV ratios.
HMO mortgage specialists
To make an HMO profitable, number crunching is a must. Our advisors specialise in HMO mortgages and can help you to maximise your rental income by assessing your overall proposal. Making your HMO as profitable as possible starts with securing a great deal.
The majority of lenders that offer preferential rates, often do so via mortgage brokers.
Approaching lenders in the hope of securing a mortgage is never advised, as you won’t have a comprehensive understanding of lender criteria as a specialist would.
A specialist can ensure the right lender is approached with a strong application to be offered the best rates available. You can make an enquiry at any time or simply ask our experts your mortgage questions to get started.