HMO Mortgage Broker
Today, homes are being let as HMO properties more often than we’ve ever seen before. A House in Multiple Occupation (HMO) can yield a greater rental income than a traditional buy-to-let property. Rental demand is high all over the UK and, while interest rates remain low, landlords are always looking for ways to maximise the rental yield of their properties. One of the key decisions to achieve this is having the right mortgage.
There has been a marked increase in landlords applying for HMO mortgages, but is it really necessary to do this or will a traditional buy-to-let mortgage be enough?
What is an HMO?
As noted, HMO is an acronym for House in Multiple Occupation. This means that a house is lived in by multiple tenants each paying rent for their share of the property. Another term for this type of arrangement is ‘multi-let’. As a landlord, an HMO allows you to rent your property to multiple tenants rather than renting the entire property to a single tenant.
This enables you to charge rent on a per-room, per-flat or per-section of the property basis. The result of this is usually a greater rental income. It’s not uncommon for HMO landlords to pay the property’s utility bills, unless the property has been converted into flats with separate title deeds on the land registry.
Read more in our HMO Property guide
Will I need an HMO licence?
Though the rental yields in an HMO property tend to be higher, the process of setting them up is more complex. In some cases, landlords may be required to get an HMO licence.
Local councils issue HMO licences, which are valid for a period of 5 years if approved. HMO licences are provided for individual properties rather than landlords. This means that if a landlord has 3 HMO properties that require an HMO licence, they will need to acquire a separate licence for each of the properties.
That said, not every HMO requires a licence. It all depends on the size and nature of the setup. Furthermore, different local authorities will have different terms and conditions for HMO licensing. Generally speaking, larger setups usually require a licence while smaller properties are often exempt.
A large HMO property in the UK is defined as the following – all 3 points must apply:
- The HMO is rented to 5+ people forming more than 1 household.
- The property in question is at least 3 storeys high.
- The tenants share facilities like bathrooms, toilets and kitchens.
If an HMO does not meet all 3 of those criteria, there is still a possibility that you will need an HMO licence. Some smaller HMOs are still subject to licensing – it really does depend on the relevant local authority. The fees associated with licensing also depend on the council in question, as well as the length of time it takes to process your application.
HMOs can be more complex and challenging to manage compared to traditional buy-to-let arrangements. With facilities in an HMO usually being shared, tenants can sometimes clash and have arguments. This means that, in addition to being a landlord, you may find yourself having to act as a mediator between tenants who are having a dispute.
A traditional buy-to-let model typically encapsulates a family or at least people who have made the choice to live together. Thus, disagreements are usually resolved by the household without the landlord having to be involved.
For this reason, landlords tend to set up an HMO as either a student household or an HMO for working professionals – never a mix of the two. Mixing students with working professionals is a recipe for disaster.
HMO mortgage criteria
The majority of HMO mortgage lenders will need landlords to demonstrate experience in letting property. The pool of lenders who will consider new landlords with zero experience is very small and, for those that will, the rates offered will probably be higher than average. Some lenders also have a preference for who manages the HMO – they may prefer a letting agency to take control than for you to do it yourself.
Despite the popularity of HMO setups, HMO mortgages are considered a niche mortgage type. The application process is more complex and comprehensive than for a standard buy-to-let mortgage. In most cases, you will need to apply through a qualified mortgage broker like Think Plutus, as HMO mortgages are not usually offered direct to landlords.
Lenders are likely to require information on some or all of the following:
- Experience as a landlord
- Whether the mortgage is personal or through a limited company
- The location of the proposed HMO
- The number of lettable rooms
- How the property will be managed (landlord or letting agency)
- Does the HMO require a licence?
- Does each room have its own AST agreement?
- Rental income
- Types of tenant (professionals, students, housing association)
These requirements will be in addition to all the standard mortgage assessments. These include affordability, the amount you need to borrow and a look at your credit history.
HMO mortgage lenders
It is crucial to get the right HMO mortgage for your property. If you take an HMO mortgage with unnecessarily high rates and fees then you won’t be making the most of the rental yields. If you intend to rent a property as an HMO, then an HMO mortgage is what you need. If you already have a traditional buy-to-let mortgage but want to make the switch to an HMO model, consult your lender first to find out if they will grant permission.
Different HMO mortgage lenders have different criteria so the best way to secure the right deal is to go through a whole of market mortgage broker. The nature of your HMO will rule out some lenders from your options and a broker can advise on this. Some lenders put a cap on the number of rooms they are willing to lend on so it’s important to know if you meet a lender’s criteria before you apply. An HMO mortgage adviser can offer guidance on this. Another factor that can make a difference is whether or not the HMO requires a licence.
Lenders for licensed HMOs
Most HMO lenders will consider an application on anything up to 6 bedrooms. If your plans are bigger than this, you may need to seek commercial finance. If your HMO requires a licence, you are more likely to need an HMO mortgage as a standard buy-to-let won’t be enough.
The type of tenants you plan to rent to can also have an impact on which lenders are available. Some lenders will not consider your application if you plan to rent to students or housing association tenants. This is because those tenants are seen as higher-risk.
There can be benefits to having a licensed HMO – it can improve the way a lender values the property. Lenders are likely to consider the proposed rental income when they assess a property’s value. If you have converted a property and plan to withdraw some equity, this can be a significant advantage. Not all lenders value HMO properties on the basis of rental income – many will base their valuation on the property’s value as a standard home. This can limit the amount they offer to lend, defeating the purpose of seeking an HMO mortgage.
Lenders for non-licensed HMOs
If your HMO does not require a licence, many lenders will assess it as being too small for an HMO mortgage. I this case, they may only consider you for a standard buy-to-let mortgage. There may be some lenders who would still consider an HMO mortgage application, but we cannot give you a specific answer without understanding the nature of your HMO. You can contact Think Plutus any time and get some guidance from our expert advisers.
HMO mortgage rates
The rates associated with HMO mortgages tend to be higher than with standard buy-to-let products. This is because there is less competition in the HMO mortgage market. Lenders that offer HMO mortgages will charge slightly higher rates and fees for the privilege of acquiring this niche mortgage type. Having said that, the income from an HMO should be plenty to cover the mortgage, utility bills and maintenance with profit left over. What’s more, an HMO mortgage usually takes the proposed rental income into consideration, meaning the maximum mortgage amount you can access much higher.
HMO mortgages can be provided on variable and tracker rates. LTV rates typically start at 80% LTV, and you will usually get more attractive rates if you can offer a higher deposit.
Check out: HMO Mortgage Calculator
Specialist HMO mortgage broker
To make the most of a HMO you will need to crunch the numbers. The advisers at Think Plutus specialise in HMO mortgages and can help you achieve maximum rental income by making an assessment of your plans. The first step to maximising your HMO profitability is to secure a great mortgage deal. The majority of mortgage deals with preferential rates are offered exclusively via mortgage brokers.
It is not recommended to approach a lender directly hoping to secure a HMO mortgage. You will not have the same comprehensive understanding of that lender’s criteria as a whole of market HMO mortgage broker. A mortgage broker can ensure you approach the right lender with a strong application in order to access the best possible rates. You can contact Think Plutus at any time to get the process started and we’ll help you on your way to making your HMO plans a reality.