HMOs (Houses in Multiple Occupation) have become increasingly popular over the last few years due to the higher yields available than with a conventional buy-to-let investment.
The result is that more lenders, both specialists and mainstream providers, are adding HMO mortgages to their repertoires.
Still, while financing might be more widely available, selecting the optimal product remains crucial to maximise those all-important returns.
It is also wise to put some thought into your business structure before applying for a longer-term HMO mortgage, given the variances in landlord tax efficiencies that may come into play – and the pros and cons of opting for a commercial HMO product.
If you would like more general information about HMO mortgages, please visit our Expert Property Advice guide, which explains What is an HMO Property.
The Primary Differences Between Buy-to-Let and HMO Mortgage Products
Many Think Plutus clients come to us with prior experience in buy-to-let portfolio management or own existing rental assets and are looking for advantageous HMO mortgage terms.
Although the rental agreements and tenancy structure for an HMO may differ from those in a standalone buy-to-let residence, the concept of the lending product is relatively similar.
We recommend familiarising yourself with the contrasts between products to ensure you have a solid knowledge base and make informed decisions about which are most suitable.
The main differences between a regular buy-to-let mortgage and a property mortgage designed for HMOs include:
- The ability to incorporate multiple tenancies into one mortgage arrangement (and factor those income streams into your affordability assessment).
- Marginally longer processing times for HMO mortgage applications due to the complexities of licencing and other property checks a lender will need to conduct. You should anticipate around two to four weeks of processing time as a minimum, whereas a straightforward buy-to-let mortgage can complete faster if everything is ready to go.
You will find that HMO mortgage lenders require an absolute minimum 15% to 20% deposit but may, in special circumstances, consider a higher Loan to Value, although they will require additional security.
HMO mortgages are available on interest-only and repayment bases, and the minimum term is typically two years.
We invite you to access our HMO Mortgage Calculator for an indication of estimated mortgage costs depending on the amount borrowed, term length and repayment basis.
If in any doubt, Think Plutus can walk you through the process and ensure you are up to speed with the options available and which lenders are best suited to your property investment plans.
Private HMO Mortgages vs Commercial HMO Financing
Perhaps as fundamental as the arrangement costs and interest rates associated with your HMO mortgage, the next consideration is whether to apply as an incorporated business or as a private landlord.
This topic is lengthy, with a range of factors to build into your planning, but there may be scenarios where we suggest one structure or the other.
An example is where an investment property does not fall within the generic criteria applicable to an HMO mortgage, often because the building is considered non-standard or there is a commercial element to the acquisition.
We may also discuss commercial HMO mortgages if you would like to look at refinancing a portfolio, including an HMO property – in which case a portfolio refinancing agreement may be better funded on a commercial basis.
Whether you have a mixed portfolio, are unsure of the benefits and pitfalls of a commercial HMO trading structure, or would like to compare products like-for-like, we are always happy to provide tailored guidance.
Inevitably, commercial HMO mortgages usually carry slightly higher charges, but that does not mean that the interest rates will necessarily be substantially greater.
Larger HMO mortgages (normally to the value of £1 million+) may attract a favourable rate that is far more profitable than a series of separate mortgage agreements.
Standard Eligibility Terms on HMO Lending
HMO mortgage eligibility criteria vary between lenders. There are always scenarios where negotiation is required. Nor will the same terms apply to every applicant, depending on many variables!
As an idea, most HMO lenders will look for the following within an initial application to decide whether to proceed:
- Property letting experience – you might be able to secure an HMO mortgage without extensive years in property lettings, but the rates are unlikely to be competitive.
- Professional property management – most HMO mortgage providers prefer to lend against investment assets with a lettings management agency or an established firm, as appropriate oversight is essential to comply with HMO regulations.
- Specific dimensions and layout – as you likely know, you may be required to hold an HMO licence (depending on the property and local authority). A lender will wish to review the number of lettable units, licencing requirements and AST agreements for each tenant.
- The nature of your tenants – if you are looking to finance a new HMO mortgage, you may be looking to change the types of tenants, but either way, this detail may have an impact. For example, some lenders are more likely to approve an application for a property marketed to professionals, whereas others are comfortable financing student accommodation.
Property value is also an important metric, although the weighted importance will depend a little on whether you are applying as an individual owner or a property ownership company.
Valuations can work on either an assessed rental income basis or a physical (commercial) valuation.
The Benefits of Working With a Whole-of-Market HMO Mortgage Broker
The higher the value of a property investment and the greater the finances involved, the more important your choice of mortgage product becomes.
It is also necessary to review your expectations and aspirations rather than jumping for a deal that looks good on paper (and might be anything but!).
For example, an initial discussion with Think Plutus would include:
- How long do you expect to retain the HMO? Would you prefer a mortgage with a flexible early repayment charge or accept steep early settlement clauses for slightly lower interest rates?
- Whether you plan to change the property layout? Will it remain an HMO for the foreseeable, or is it worth holding off for a short while if you have renovation or conversion works in the pipeline?
- Have you verified your progress through the licencing system? Do you know whether the property requires an HMO licence? Have you applied, been approved, or have you yet to look into this?
- How secure are your forecast rental returns? Do you have the assurance of an HMO in a high-demand area with a buoyant rental market, or would it be preferable to look at longer mortgage terms to build in a contingency cushion?
Think Plutus is a whole-of-market, private mortgage broker – and that means exactly what it says.
Whole-of-market means that we are not affiliated with any bank, lender, building society or specialist mortgage provider. We can recommend products that may not be the obvious choice (but that we believe are the best solution for your business objectives!).
Independence is vital because any mortgage advice without that qualification is, in effect, a sales pitch selecting between a limited range of products rather than truly personalised guidance to ensure you make decisions within your best interests.
Knowledge is also key because lenders in the emerging HMO mortgage market have very different criteria and policies, so it pays dividends to understand those lending requirements and expedite lending approval.
Our role is to crunch the numbers, get to know your ideal outcome, and assess the right products, including those exclusively available through trusted brokerage networks.
Please get in touch at your convenience for an informal chat about HMO mortgages, where we will answer any questions you might have about the topics we have explored here.