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HMO Mortgages

Like with regular buy to let mortgages, many people see a HMO (House in Multiple Occupation) property as a worthwhile investment which can often increase rental yields in comparison to a standard BTL.  This is because often there will be multiple unrelated tenants, meaning landlords can charge per room or section of the property. However, just because the rental yield can be higher, this does not necessarily mean that the value of the property will increase accordingly. Lenders tend to look at the bricks and mortar value of the property instead of the rent it can generate as rent is not always guaranteed. This is particularly the case with HMOs, as there can often be a changeover period between one tenant leaving and another moving into the property.

What is a HMO?

The definition of a HMO property differs according to every local council’s own criteria, so this can vary depending on where in the country you are purchasing. Lenders also have differing criteria on what they consider to be a HMO, as do the Royal Institution of Chartered Surveyors (RICS). The three differing descriptions are certainly worth noting if you are unsure whether the property you are purchasing can be considered to be a HMO.

Typically, a HMO will be a property let to 3 or more people from one household, often with shared facilities such as a kitchen or bathroom. The tenants can be on separate tenancy agreements, or sometimes in the case of students for example they will be on a shared one.

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What do I need for a HMO Mortgage?

A key thing that landlords will need before taking out a mortgage on a HMO, will be a HMO licence. This can be obtained through the local council and will be needed for each property purchased, as opposed to one licence being applicable to one landlord. As with the description of a HMO, each local council will have their own criteria and terms and conditions for providing HMO licences. Applications for a licence can be rejected if the property in question is not deemed suitable to be a HMO, or if the landlord has breached landlord laws in the past. Likewise, it is an offence to rent an HMO without having the relevant licence in place.

Similarly to a standard buy to let mortgage, most lenders require a minimum of 25% of the property value to be put down as a deposit by the applicant, as this protects their interest in the property. Some lenders will also be unwilling to lend to a first-time landlord, and often require at least a couple of years’ experience with managing properties, or for a managing agent to be used. It’s therefore worthwhile considering the added costs which may be applicable in comparison to standard buy to let mortgages, such as the requirement for a managing agent, higher utility bills (if bills are to be included), furnishing the property and providing a cleaner if needed.

Buy to let vs HMO

A buy to let property generally will accommodate a person or family whereas an HMO is for multiple occupancy with individuals who are not related.

Let to buy would require a single rental payment due weekly or monthly. The tenants will also be required to pay the utility bills.

An HMO is also considered more profitable that a buy to let. For example, a buy to let requires a single rental payment, let’s say £800 p/m which would be an annual rental income of £9600, which in its own right, is a great extra source of income.

An HMO charges per room so it’s multiple individuals paying a set fee every month for the room. For example, room price is £500 each, for 4 rooms in the property rented to 4 individuals, this would total an annual rental income of £24,000. Which in respect to a buy to let, is a lot more attractive, you also need to consider that with HMOs you will be required to pay utility bills and other fees involved with the property.

Should I get a HMO mortgage?

As with any property purchase, there are risks involved with buying a HMO property, arguably even more so than with a standard buy to let. Costs can also be larger, as interest rates are often higher than a standard rental property. However, the opportunity for financial gain can often be larger as there will be a number of tenants paying rent separately, thus increasing rental yield overall. If you’re unsure whether a HMO mortgage is right for you, if you don’t know whether your property would be considered a HMO, or if you simply want some HMO mortgage advice on starting out as a HMO landlord, get in touch with our specialist lending team today for expert guidance on HMO properties.