A House in Multiple Occupation (HMO) is a rental asset, similar to a conventional buy-to-let, but with several differences that impact mortgage financing and property management.

If you are conversant in HMO mortgages and looking for independent advice on the most suitable products for your portfolio, please skip to our HMO Mortgages page for more specific information.

This guide introduces HMOs with useful terminology, explanations and guidance to demonstrate how an HMO varies from a buy-to-let and why that matters to rental landlords.

What is an HMO Property?

The basic definition is that an HMO is one property that houses multiple tenants who are not related – any shared housing, student accommodation, or professional living space may fall into this category.

In the booming private rental market, HMOs are frequently in high demand, as an owner can achieve far greater rental yields from more tenants without multiplying their property ownership costs.

However, as we will cover, it is not quite that simple because several responsibilities and regulations apply to HMO landlords that do not apply elsewhere.

If you are looking for insights into Landlord Legal Responsibilities, our separate guide will run through the standards and requirements – but please note that these are for regular buy-to-let residences, not HMOs.

How Do I Determine Whether a Rental Property is an HMO?

You can use a few criteria to evaluate whether a property is classified as an HMO and, therefore, whether licencing rules apply.

Common features include:

  • Multiple occupants who are not part of the same household (family members living together do not constitute separate tenants).
  • Tenants who reside in the property as their primary home or only home.
  • Accommodation is offered to let solely as a residential building – any property with a commercial aspect will normally require a commercial HMO mortgage or an alternative lending product.
  • Property that is let out for rental payments – not gifted or offered free of charge.

These features may seem obvious when considering a standard house share, but understanding the definitions is important.

For example, if you have a buy-to-let property with four apartments but a shared entrance and common areas, is that asset eligible for a buy-to-let mortgage, or is it an HMO?

Some properties, perhaps a block of flats, should be carefully assessed because local authorities take HMO health and safety standards extremely seriously. Failure to comply with licencing regulations is a prosecutable offence.

Things get more involved when we try to define a large HMO – at which point local authority licencing comes into play.

According to the Government Guidance, a property falls into this class if there are three or more tenants (forming over one household) and they share bathroom or kitchen facilities.

Why Do Licencing Rules Impact an HMO Mortgage Application?

Not every HMO requires a licence, but those that do will need the owner to provide details of their application status before they can secure mortgage financing.

The difficulty is that local authorities have varying attitudes to HMOs – some go by the book and require licences only for properties in their jurisdiction that fit exactly the general governmental criteria.

Other local authorities impose stricter rules, such as requiring larger minimum bedroom sizes or enforcing licencing rules on rental properties that would not, in another location, be considered an HMO at all.

For a mortgage lender, this distinction is significant because the basis of any mortgage is that the property used as loan security could (in the worst-case scenario!) be repossessed to recoup the debt owed.

Because of the extra work involved in valuing an HMO, verifying the licencing position and assessing the lender’s assumed risk, mortgage charges tend to be a little higher than for a buy-to-let.

However, that is not a given because HMO mortgages are becoming a higher demand product generating greater competition between mortgage lenders focusing on the professional rental landlord sector.

How Do Mortgage Lenders Value an HMO Property?

First – why are we talking about HMO valuations?

Think Plutus works with a diverse range of buy-to-let clients, from portfolio landlords to commercial rental businesses – and even if you are more than familiar with a buy-to-let valuation process, this does not work the same way for every HMO.

Therefore, you need to do some research and calculations before putting all your eggs in an HMO basket.

An assumption might lead to disappointment if your selected lender concludes that a potential investment property is worth less than you think.

Lenders may use one of two valuation approaches to arrive at an HMO valuation:

  • Bricks and mortar valuations are most common, and they will look at the market value for the property (without considering the forecast rental income). That means working out the size of the property, condition, and similar sales in the local area.
  • Commercial HMO valuations apply where the mortgage applicant is a business or they need a commercial mortgage because part of the building is commercial – such as a house share with a shop underneath.

Although you might be on steady ground with a buy-to-let and think that your mortgage offer will be based on the monthly rental cover or the annual value of the rental income collected, this would not often apply for an HMO.

Why is it Worth Using an HMO Mortgage Broker?

Even within the confines of this brief guide, we have stumbled across several points where it is not easy to specify how a lender will assess a property, whether licencing rules apply, or how much you might be able to borrow.

That uncertainty can make it extremely difficult for landlords – even highly experienced rental property specialists – to approach an HMO mortgage with confidence that they have all the essential information to make informed decisions.

Applying for any buy-to-let mortgage is not a solution either; HMO mortgages are designed for this less common property type, and failure to disclose the true nature of the rental arrangement would constitute a breach of contract.

We have included here some links to further reading, which may be useful, but we cannot stress enough that the profitability and success of an HMO investment relies at least in part on the terms, costs and rates of your HMO mortgage.

Please get in touch if you would like any additional support or to run through an HMO investment opportunity for independent advice about the best way forward.

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