A Landlord’s Guide To HMO Mortgage
Homeownership continues to be a significant challenge even in progressive countries like the United Kingdom. Insufficient accommodation for the rising population has caused prices to soar, as the inventory fails to meet the demand.
For most individuals and households, an HMO or house of multiple occupancy offers a solution. The increasingly high demand for HMOs makes it a potentially lucrative business for real estate investors. Potential landlords who don’t have enough capital may turn to specific lenders to buy a rental property.
If this prospect resonates with you, here are the basics of an HMO mortgage.
What Is An HMO Mortgage?
If you’re planning to acquire a rental property that you’re planning to lease as an HMO, you’d have to get this specific mortgage and not the usual buy-to-let loan product, as the latter is meant for tenants who belong to the same family. Note that a lender may take legal action against landlords who purchased a buy-to-let rental property but are leasing it as an HMO.
Additionally, if you already have an existing HMO loan but are looking for better financing conditions and terms, discuss an HMO remortgage option with your lender. Otherwise, look for institutions that offer such a product to ease the financial burden.
Are There Differences Between HMO And Buy-To-Let Mortgage?
Generally speaking, it’s easier to apply for and get mortgage approval for a buy-to-let mortgage than for an HMO mortgage. The former is also more widely available than its counterpart.
Financial institutions often ask for a borrower’s landlord experience either for buy-to-let or HMO properties. If you don’t have at least six months of experience, you might have to jump more hoops or not get approved. Similarly, HMO mortgage loans may carry higher interest rates than buy-to-let financing options, as the market is relatively small and less competitive.
However, by exercising due diligence, you can find a few HMO mortgage lenders with less stringent borrowing rules and lower interest rates. In addition, there are mortgage brokers who specialize in finding and negotiating with HMO lenders.
How Much Money Can An HMO Mortgage Borrower Get?
There’s no short answer to this question, as lending institutions look at multiple factors in evaluating a borrower. As an aside, the concept isn’t so much different from landlords who must check whether their non-UK resident tenants have the right to rent before accepting them.
As with other loan types, an applicant must have a good credit history. For first-time buyers, there might be fewer lending options alongside more stringent rules and a lower loan-to-value (LTV) ratio.
The LTV rates vary from one lender to another, but a typical HMO mortgage is pegged anywhere from 60 to 75%. Some may offer as high as 85%, which means that a borrower’s down payment or deposit will only comprise 15% of the property’s appraised value. Again, this rate depends on the lender’s appraisal and various criteria.
What Are The Other Essential Considerations?
Potential landlords must look at the overall costs and terms of an HMO mortgage. For this, they have to look past the LTV and consider the following:
- The HMO loan terms can last from two to 25 years.
- Interest rates may vary from two to five per cent per year.
- The HMO mortgage interest rates are paid monthly in advance.
- Some lenders may charge exit fees, so check with your bank.
- Some lenders set a minimum personal income of GBP£ 25,000 per annum for HMO mortgage applicants.
- A few lenders need to check the HMO property amenities as part of the approval process.
- Some lending institutions’ income coverage requirement rates are 125% and 160%. Your HMO rental income must be over GBP£ 1,250 if your mortgage is set at GBP£ 1,000.
Additionally, it may take a few weeks to a few months to get your HMO mortgage approved, depending on your situation.
What Should I Prepare As An HMO Borrower?
Besides experience as a landlord, financial institutions may require borrowers to submit additional documents to prove the following criteria:
- Papers from a letting agency (as applicable)
- Specific details about the HMO property, including location, number of rooms, and Council license
- Assured shorthold tenancy agreement (AST)
- Royal Institution of Chartered Surveyors (RICS) valuation
- Rental payment receipts or other related documents
- Proposed rental income, if not yet operating
- Profile information of tenants
The list above isn’t exhaustive, and lenders might ask you for more information and documents. In most instances, your credit records and income documents may be required to evaluate your financial capacity.
A housing crisis exists even in developed countries like the UK. As one of the cheapest ways to obtain a home, the demand for HMO letting has soared over the past few years. This allows potential real estate investors to boost their capital and become HMO landlords.
Getting approved for an HMO mortgage is challenging but not impossible. By taking heed of the points above, potential borrowers can gain confidence in deciding about HMO mortgage applications.
- Jackson, H. 08 July 2022. Landlords: Do you need an HMO mortgage?. www.bridgingloandirectory.co.uk/. https://bridgingloandirectory.co.uk/guides/landlords-do-you-need-an-hmo-mortgage/. Accessed 22 Jul 2022
- Alexander, M. 05 Jun 2022. HMO Mortgage Guide. www.expertmortgageadviser.co.uk. https://www.expertmortgageadvisor.co.uk/buy-to-let-mortgages/hmo-mortgage/. Accessed 22 Jul 2022
The British Landlords Association is a national landlords association for residential & commercial landlords. Join us today; membership for the year is only £69.95
Our Top Read Blogs: