HMO mortgage rates and lender crieria - Commercial Trust

HMO mortgages for UK landlords

HMO mortgages may have higher initial rates and costs than traditional buy to let investments. The potential advantage of HMO buy to let is that gross rental yields from HMO properties can be 2-3 percentage points higher.

Compare HMO mortgage rates

The HMO mortgage calculator updates twice a day with HMO mortgages from banks, building societies and niche lenders.

The products are representative of the UK marketplace. Compare interest only with repayment mortgages using the filters. 

To compare HMO mortgage deals click on “search" at the bottom of the table.

YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE. 

HMO buy to let mortgage criteria

Every HMO buy to let mortgage lender will have their own specific set of criteria; the summary below is a general guide.

  1. Loan amount: many lenders stipulate a minimum of £25,000, however it is possible to borrow less than this. The maximum loan amount is £15m.
  2. Maximum loan to value: up to 85% LTV
  3. Self-contained units: no maximum with some lenders
  4. Individual rooms: no limit on the number with some lenders
  5. Multiple kitchens: may be considered
  6. Tenancy agreements: individual rooms, or joint and severally liable tenancy agreements are eligible, dependent on the lender
  7. Tenants receiving benefits: may be considered with some lenders
  8. Affordability tests: may include rental for each room or flat
  9. HMO mortgages are a specialist form of lending, not all lenders offer HMO mortgages
  10. Due to the specialist nature of an HMO license, the rates are typically higher than for standard buy to lets
  11. Experience is an important element for many lenders. There are very few lenders who lend to first-time landlords looking to finance an HMO.

All of the above is subject to each HMO mortgage lender’s own criteria.

The pro's and con's of HMO's

Houses/Homes in Multiple Occupation (HMO’s) present a great opportunity for landlords because properties of this type commonly offer a higher than average rental yield compared with standard buy to lets.

HMO’s can require more work to maintain and there can be more red tape than for other types of buy to let. Familiarise yourself with your responsibilities and ensure you are prepared to undertake the work involved before you invest.

You should also consider the opinion of a valuer, who represents the lender and will report back on whether or not there is a business case for an HMO property.

This will take into account the local area and property types. The valuer will ask if there is market demand for an HMO property? Is the market saturated? This will be fed back to the lender who will make a decision on buy to let lending.

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What is an HMO property?

An HMO (House of Multiple Occupation) is a house or flat, let to 3 or more unrelated people, who share facilities (e.g. lounge, kitchen). You might also know this style of property as a ‘house-share’.

What is a Multi-Unit property?

Multi-Unit Blocks are properties with multiple self-contained units of accommodation on one freehold title, without having individual titles for each unit.

  • What does Freehold mean?

If you own the “Freehold” for a property this means that you own both the building and the land it sits on. You are the owner, case regardless of whether you have a mortgage. A mortgage simply means that you have given your lender the ability to take ownership away from you, if you do not repay the loan.

  • What does Leasehold mean?

If you own a property on a leasehold basis, this means that you own the building and the property for the term of the lease held between you and the freeholder. Lenders commonly want a lease of in excess of 70 years and to extend 25-30 years beyond the end of the mortgage term.

A Multi-Unit Block can be anything from a semi-detached house split into two self-contained flats, or a new purpose built block of 20 self-contained flats.

How is an HMO different from a Multi-Unit Block?

HMO and Multi-Unit Block properties are both owned (either outright or with a mortgage) by the land-owner. They both offer accommodation to different tenant units.

But, a Multi-Unit Block has no shared living facilities. Each unit will have a front door, behind which are kitchen facilities, a bathroom and living space (whether that is separate lounge, dining and bedroom space, or a bedsit, where one space combines bedroom, lounge and kitchen facilities).

If a Multi-Unit Block does not share utilities, the units could, hypothetically, be split into leasehold titles and sold separately. You couldn’t, however, sell a bedroom in an HMO under a separate title, as it would lack all the facilities required.

HMOs versus Multi-Unit Blocks, in the eyes of lenders

HMOs and Multi-Unit Blocks are specialist property types. Lending for each reflects the similar way they are occupied by multiple tenant units. If a lender offers HMO mortgages, they commonly also lend on Multi-Unit Blocks.

One important consideration is the process of valuing a Multi-Unit Block, which is different to an HMO.

Where a lender sends a valuer to assess this type property, they commonly want to understand the value of the whole property and the value of each unit, if it were let under separate leasehold titles.

A valuation essentially demonstrates that if the property had to be sold, it would make the money to cover the outstanding mortgage amount. Where this assessment is on a Multi-Unit Block, the lender may want to be sure that – were the property to be sold as separate leasehold properties – each unit still fits with its criteria.

If one unit falls outside of the lender’s criteria, under this hypothetical scenario, the whole mortgage application may be declined.

Similarly, some Multi-Unit Blocks share utilities (e.g. water supply), which would prevent the units from being split, without renovation. This could also affect a mortgage application with some lenders.

The opposite doesn’t apply to an HMO, because the tenants share facilities.

Why HMO property may offer higher rental yields

When you invest in an HMO property, the rental income from multiple rooms (as opposed to renting the property out as a single dwelling) often results in higher aggregate income.

This is why letting a property as an HMO may be more profitable than to a single family unit.

Below is an example of how higher rental yield can be achieved by letting a property as an HMO.

  • A landlord owns a four-bedroom house. The landlord could rent the property to one family unit for £1,200pm.

  • However, if the landlord rented out each of the four bedrooms to different people, with a monthly rent of £400 per room per month (assuming this is realistic for the property), this would mean a total of £1,600. This is an increase in overall rental income of £400 each month on the property.

It may also be possible to convert reception rooms into bedrooms (which a family may not choose to do) and therefore increase the potential rental income even further.

Investing in an HMO

There are other factors you should keep in mind when contemplating owning an HMO.

Buy-to-let versus HMO mortgages

There are a couple of differences between standard buy-to-let and HMO mortgages, most notably in availability, HMO mortgage rates, and lender fees.

As HMO’s have multiple occupants, they are deemed a higher risk to loan money against than a normal buy-to-let. This is because HMO tenants tend to have a more transitional and/or seasonal (e.g. students) lifestyle, which can mean higher levels of tenant turnover and voids, should one or more of the tenants move out without immediately being replaced.

A single family unit in a standard buy-to-let will tend to be more settled with longer-term plans to reside in the property.

Secondly, due to the aforementioned risk with lending to an HMO and the specialist nature of the mortgage, the lender’s fees are often higher on HMO-specific products.

HMO licensing

The rules around HMO licensing changed on October 1st, 2018. Check whether your HMO property will require a licence from the relevant local authority.

Do I need an HMO licence?

You must have a licence if you’re renting out a large HMO. Your property is defined as a large HMO if all of the following apply:

  1. It is rented to 5 or more people who form more than 1 household
  2. It is at least 3 storeys high
  3. Tenants share toilet, bathroom or kitchen facilities.

Even if your property is smaller and rented to fewer people, you may still need a licence depending on the area the property is located in.

If you are unsure, check with your local council.

Applying for an HMO licence

The UK government's website offers a postcode-based search in order to identify which council issues licences for your property, and where you can access further information regarding HMO's and their licensing:

Failure to apply for a licence when one is required can carry a fine of up to £20,000 plus costs.

It is worth noting that:

  • You will need a separate licence for each HMO you run
  • Councils may have long timeframes (months) for processing a licence, so plan ahead
  • There are conditions associated with an HMO licence, including (but not limited to):
    • The property must have adequate space and facilities for the residing tenants
    • The manager of the HMO (you or the agent) must be ‘fit and proper’ e.g. no criminal record or breaches of landlord laws or codes of practice
    • Gas certificates must be updated annually and sent to the licensing council
    • Smoke alarms must be installed and maintained
    • Safety certificates for all electrical appliances must be available on request
    • If you fail to meet the conditions on a licence without a reasonable excuse you are committing a criminal offence and could face a fine of up to £5,000.

Questions on HMO classification in England

The property is:

  • Occupied by asylum seekers, migrant or seasonal workers
  • A refuge for victims of domestic violence
  • Higher or further education student accommodation

Do these tenant types fall outside HMO classification? No, they do not 

The property is:

  • Occupied by the resident landlord and a maximum of two tenants who are not part of the landlord’s household
  • Occupied by a maximum of two people 

Do these circumstances fall outside HMO classification? Yes, they do.

Source: Gov.uk “Licensing of houses in multiple occupation in England: a guide for landlords and managers”