Mortgage guide for HMO’S
Houses in multiple occupation (HMOs) include any property containing more than one residence, which is often a profitable buy to let investment.
There is quite a difference between owning one rental property and an HMO, and the mortgage terms between the two investments are also somewhat different!
If you’re considering expanding your portfolio to include an HMO, or are interested in the mortgage rates available, read on for a concise guide from the Revolution Brokers team.
What Counts as an HMO Property?
HMOs are defined as any property with three or more tenants. They can have shared bathrooms and kitchen facilities.
An HMO is an attractive option since landlords can earn multiple income streams from separate tenants in the same property.
Generally, rent includes utilities, so the landlord pays for the water, gas, electricity and services, and then charges tenants according to the number of rooms they occupy, with shared costs for communal spaces.
They can also be called multi-lets, but it’s crucial to understand when a property is classed as an HMO since licensing rules apply.
Which Properties Require HMO Licensing?
Investing in an HMO can be lucrative, but mortgaging and licensing such a property can be more complex.
Local councils manage HMO licenses, which are valid for five years and provided per property. One landlord might therefore require multiple licenses if they have a large portfolio with several HMOs.
However, the complication is that not all HMOs require licenses. The rules depend on the size of the residence and the nature of the building, and the rules of your local licensing authority.
Each council has individual HMO licensing policies, so some smaller properties might be exempt, whereas larger HMOs always require a licence.
A license usually starts from £500 but can be considerably more, and into the thousands of pounds for very large residences.
Large HMOs are those where all of the following apply:
- There are five or more tenants, consisting of over one household.
- The property has three or more storeys.
- Tenants have shared facilities, such as kitchens, bathrooms and toilets.
Properties that aren’t considered a large HMO aren’t necessarily exempt from licensing, so verifying the local rules with your council is essential.
Difference Between a Conventional Buy to Let and an HMO?
There aren’t as many lenders who offer HMO mortgages as standard buy to let mortgages, and most will require landlords to have experience in the professional rental sector before they consider extending them a facility.
Some lenders also have requirements, such as only agreeing to mortgage an HMO managed by a letting agency.
Therefore, an HMO mortgage is a niche product and not something you’re likely to find in the mainstream lending market.
Most HMO mortgages are arranged through an experienced broker, such as the Revolution team, and require evidence of:
- Landlord experience
- The management structure for HMO tenancies
- Properties details, including proposed or actual rental income
- Licensing information
- The type of tenants – such as students, housing association etc.
Regular mortgage assessments also apply, looking at the total application value, the landlord’s credit file, and affordability for the mortgage repayments.
Which UK Lenders Offer HMO Mortgages?
As we’ve discovered, the definition of an HMO and which properties require licensing vary between regions.
Most HMOs with up to five bedrooms can be mortgaged through an HMO mortgage, but a large property with multiple residences may need a commercial finance agreement instead.
If you’ve confirmed that you need an HMO license, then it’s probable that you need a specialist HMO mortgage, and a regular buy to let agreement won’t be applicable for the property in question.
Lenders will ask about your target tenants since this impacts the rental income and viability of the prospects for the property.
For example, some HMO mortgage providers don’t lend against properties for students or housing benefit tenants.
This decision depends on the perceived risk associated and how the lender values your property – again, which is up to the lender and can vary significantly!
In most cases, the crucial element is the anticipated rental income.
Others will look at the HMO as a standard property and the value of the residence if sold on the open market, which means you’d probably be able to borrow much less.
Hence the importance of using an HMO specialist broker to ensure you’re applying to the right lenders for the value you’d like to borrow.
What Rates Are Payable on HMO Mortgages?
Most HMO mortgages command a higher interest rate than a standard buy to let mortgage because there are fewer lenders in the market, and it is, therefore, less competitive.
Fees and rates also tend to be a bit higher. However, because the income from HMO rentals is also substantially higher, they remain more profitable for the most part than individual buy to let properties.
Rental income is a key part of the mortgage assessment. Provided you’re applying to the right lender, demonstrating high rental income can increase the maximum mortgage value considerably.
Just like any buy to let mortgage, you can apply for HMO mortgages with variable and tracker rates.
The typical LTV starts at 80%, so you’ll need a 20% deposit (or existing equity) as a minimum.
As with any mortgage, the higher a deposit you can offer, and the lower the required LTV, the better an interest rate we can negotiate for you.
How Can I Find an HMO Mortgage Adviser?
Before applying for an HMO mortgage, working through the rental income, property value, and associated fees is crucial.
The numbers tend to be larger than for a standalone residence, so it’s vital you know that the project will be profitable and that the rent will comfortably cover the costs of mortgaging the property.
For any advice about your HMO mortgage, please reach out to the Revolution Brokers team at 0330 304 3040 or email us directly at: [email protected]
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