As a mortgage broker with over 25 years’ experience in commercial property and HMO finance, I know how hard it can be to gain the knowledge you need to build a profitable business or portfolio – we help all clients, from those starting out with their first purchase, to the established business owner looking to expand their portfolio.
In this guide, I want to help you navigate HMO regulations and legislation to find the best specialist HMO mortgage for you. Often the type of HMO you choose can have a direct impact on the funds you can access – so it is important to be fully informed before you take the next step.
What is an HMO?
An HMO (House of Multiple Occupation, also sometimes referred to as house shares) are properties that are occupied by three or more tenants who are not from a single household.
The government definition is broken into two types:
- Small HMO (at least 3 tenants) sharing facilities such as bathrooms and kitchens
- Large HMO (5 tenants or more) sharing facilities such as bathrooms and kitchens
Funding your HMO: The different types of HMO Mortgage
There are several financing routes available for landlords and investors who are not cash buyers depending on your business goals and plans for the property.
- Standard HMO Mortgage:
- Suitable for properties with a small number of unrelated tenants.
- Typically, lenders may consider properties with up to six bedrooms as standard HMOs.
- Large HMO Mortgage:
- Designed for properties with a higher number of bedrooms, usually accommodating seven or more tenants.
- Large HMOs may have additional regulations and licensing requirements.
- Refurbishment HMO Mortgage:
- Focussed around clients that are purchasing a property that is not currently suitable as an HMO.
- The lender will offer a refurbishment product and once the works are complete this will revert to an HMO mortgage.
- Student HMO Mortgage:
- Tailored for landlords who want to rent to students.
- Often involves specific considerations for the academic calendar and student rental demand.
- Professional HMO Mortgage:
- Geared towards properties occupied by working professionals.
- Typically involves higher rental income, but may also have stricter property management requirements.
- Limited Company HMO Mortgage (more info on this one below):
- Suitable for landlords who operate as limited companies rather than as individuals.
- Tax implications and eligibility criteria may differ compared to individual applications.
- Multi-Unit HMO Mortgage:
- For landlords with HMO properties consisting of multiple self-contained units (flats or apartments).
- Each unit may have its own kitchen and bathroom facilities.
- Holiday Let HMO Mortgage:
- Aimed at properties used as HMOs for short-term holiday rentals.
- Lenders may consider the seasonal nature of holiday letting.
How do HMO mortgages work? And what other finance is available?
If you are purchasing a property that will only require moderate works to convert it to an HMO or if you are purchasing a property that is already set up as an HMO then there are a variety of standard HMO mortgage products available. These typically take the same form as standard residential or BTL mortgages with lenders offering fixed rates (normally for two or five years) and variable rates. They can be arranged on a capital repayment or interest only basis.
Are HMO mortgages different to standard Buy-to-Let mortgages?
HMO mortgages are usually more expensive than standard Buy-to-Let (BTL) mortgages both in terms of the interest rate and the set-up fees. This will usually be seen in the upfront costs such as valuation fees, which will commonly be more expensive for HMOs. This is particularly relevant when there are more than six bedrooms and arrangement fees normally range between two and three percent of the loan amount you are applying for.
HMO Limited Company Mortgage
Some lenders will also lend to Limited Companies via a Special Purpose Vehicle (SPV) and the director(s) will then have to provide an additional personal guarantee(s). The majority of HMO lenders do offer limited company mortgages. A number of clients prefer to arrange the HMO financing within a limited company (SPV) due to potential tax advantages.
Bridging Loans for HMOs
If you plan to purchase a property that is not currently set up and running as an HMO, you may initially need to use a bridging loan to purchase the property. These funds are used to make any necessary alterations to comply with the regulations for HMOs.
Once the work is done and your HMO is compliant, you can exit the bridging loan and move onto a term mortgage product.
Despite their reputation as expensive finance, bridging loans are a very common and cost-effective route to acquire a property before converting it to an HMO.
A bridging loan may also be necessary if the property is not currently habitable or you need to complete the purchase quickly at auction.
The Bridging Loan Exit Strategy
An exit strategy for bridging finance is how you repay the lender. The exit strategy is important for the lender as they will require their finance to be repaid at some point and it is also important for the client because bridging finance is one of several costs that can impact the success of a project.
Completing works on the property on time is paramount as it will save money on the finance costs. Using an experienced HMO mortgage broker to assist with this aspect will not only save you time but potentially a lot of money.
Do I Need a HMO mortgage – Which properties need an HMO mortgage?
Whether you need an HMO (House in Multiple Occupation) mortgage in the UK as opposed to any other type of mortgage, depends on the type of property you own or plan to purchase and the way you intend to let it. Here are some factors that determine whether you might need an HMO mortgage:
- Number of Tenants:
- HMO mortgages are generally required for properties rented out to three or more unrelated individuals.
- If you’re renting to a single family or a small number of people who are all part of the same household, you may not need an HMO mortgage.
- Property Type:
- If your property has separate tenancy agreements for each room or unit and tenants share communal facilities like kitchens or bathrooms, it might be considered an HMO.
- Larger properties with multiple self-contained units, such as flats or apartments, may also fall under the HMO category.
- Licensing Requirements:
- Some HMOs require mandatory licensing from the local authority. Licensing criteria can vary and we would always advise to check with your local authority before embarking on a project.
- Use of Property:
- If you plan to rent out your property for short-term stays, such as holiday lettings, and it meets the criteria for an HMO, you may need to consider specific HMO regulations or licensing requirements.
- Local Authority Regulations:
- Local authorities in the UK may have different regulations regarding HMOs. Some areas have additional licensing schemes, even for smaller HMOs, so it’s important to be aware of the rules in your specific location.
- Financial Considerations:
- Some lenders may require an HMO mortgage for properties that meet the HMO criteria. This is because managing an HMO can come with additional responsibilities and risks, and lenders want to ensure the mortgage is suitable for the property’s use.
A mortgage advisor who specialises in HMO mortgages will help you to determine the most suitable financing options for your situation.
How to qualify and get an HMO mortgage as a landlord
Lending criteria varies quite widely from lender to lender which is why using an experienced broker will be invaluable. We understand the expectations lenders have when it comes to HMO mortgages, and can help you prepare your case in the best way possible.
An overview of HMO mortgage requirements and lending criteria
1. Minimum Income:
- Many lenders require an additional income, typically around £25K per annum, besides HMO rental income.
- Some lenders specify ‘earned income,’ derived from employment or self-employment, excluding unearned or passive income like rental payments from other properties.
- Consult a broker to clarify income criteria, this can prevent unnecessary applications and potential credit score impact.
2. Experience:
- First-time landlords may face challenges with HMO mortgage applications.
- Brokers can assist in identifying lenders open to inexperienced investors.
- Landlords with over 12 months of standard BTL experience have more options when diversifying into HMOs.
3. Target Tenant Market:
- Lenders inquire about the intended tenant demographic.
- Some may not lend if tenants are considered vulnerable, such as DSS tenants or asylum seekers.
- Student lets are common, but HMOs are increasingly popular among young professionals due to affordability compared to rising home prices.
4. Number of Lettable Rooms:
- Many lenders avoid HMOs with over 6 bedrooms due to additional planning consent requirements.
- Communal living space is often required; it may be a kitchen/dining area or additional common areas like a lounge.
- Local authorities may impose specific requirements based on the number of lettable rooms, especially for properties with 6 or more bedrooms, potentially affecting lender eligibility.
What mortgage rates can I expect for an HMO mortgage in the UK?
HMO mortgage rates will vary from lender to lender and we would always recommend that clients seek independent mortgage advice as choosing the wrong product can be a costly mistake. As a general rule, HMO mortgage rates are approx. 1% above that of buy to let rates (however this can vary dependant on financial climate/lending appetite).
The benefits of using a specialist HMO mortgage broker with first-hand experience
Navigating the intricacies of buy-to-let mortgage regulations, especially for HMOs, has become increasingly complex. Submitting an application to the wrong lender can lead to substantial fees without results. Engaging a whole-of-market HMO mortgage broker is a prudent step for landlords. It ensures they find a competitively priced product tailored to their needs, saving both time and money.
- Specialist HMO lenders, who may be more open to such mortgages, often require a broker to represent the customer. HMO mortgages typically involve complex fee structures, a factor a broker considers when assessing the best deal. With expertise and direct relationships with lenders, an HMO mortgage broker will identify the most suitable lender for your needs. Additionally, brokers can streamline the process by working with the lender to package the required documents, saving applicants time and effort. If you would like to speak to us about your HMO plans, or any property finance, we’re happy to answer your questions.
Visit us at https://nmfinance.co.uk/hmo or call us on 0808 2818824
