What is an HMO mortgage?
Letting out a multi-room Buy to Let property to a group of unrelated persons (for example, utilizing a house as student accommodation) can cause plenty of issues with local authorities and mortgage lenders, and you’ll need to be well-versed in HMO (house of multiple occupancies) legislation. However, you may find that different local authorities use their own laws about what constitutes an HMO, what a landlord’s responsibilities are, and whether or not it needs to be legally licensed.
How do I get an HMO mortgage?
HMOs are more complex than normal buy-to-lets, as you can see from the facts above, and this is reflected in mortgage lenders’ willingness for this sort of business. HMO mortgages are not available from all lenders, and those that do may charge you more than the typical buy-to-let rate. However, this is not always the case, and you may be pleasantly pleased if you carefully navigate the possibilities.
What is a HMO Licence?
Until October 2018, an HMO property that rented to five or more persons from more than one home, was at least three storeys high, and had shared facilities required a special obligatory licence. According to some estimates, the new legislation have abolished the need that an HMO be at least three storeys high, resulting in an additional 177,000 landlords needing licences for their buildings. An HMO licence is now required for any large flat or house share of five or more persons.
To obtain an HMO licence, a landlord must demonstrate that the lodging they are providing fits certain precise criteria relating to the size of’sleeping accommodation’ in a rented house. The rules are as follows, depending on how many people will be in the room:
- one child under the age of 10 years – minimum 4.64 square metres
- one person over 10 years of age – minimum 6.51 square metres
- two people over 10 years of age – minimum of 10.22 square metres
HMO landlords must also submit an updated gas safety certificate to the council every year, ensuring that smoke alarms are installed and maintained, and provide safety certificates for any electrical items when required. Landlords must also follow the local government’s storage and garbage disposal regulations.
Landlords who fail to follow these standards face fines of up to £20,000. Landlords should be given up to 18 months to fix any problems that are stopping them from obtaining a licence.
In addition to the new necessary HMO licencing, landlords with these types of properties may discover that their local authority has its own licencing system with additional HMO regulations. Around 60 local authorities in England have such programmes in place, and they can ask HMO landlords to meet certain standards, such as improving the condition of common amenities.
Investing in HMOs has apparent benefits and drawbacks. If you’re thinking of changing a house into an HMO, you’ll need to check the local planning regulations first, and, as you can see from the above, you’ll need to verify both mandatory and local licence stipulations. You’ll also need to account for higher refurbishing and marketing costs, as tenant turnover is likely to cost you money in terms of damage and the cost of finding new tenants. However, the variety of revenue streams offered by HMOs is undoubtedly appealing to many, and profits are likely to be higher.
How are HMOs different from regular buy to let?
A standard buy-to-let property would normally house one or two people. The household would make a single rental payment on a weekly or monthly basis. The utility bills would be paid by the home as well. These are frequently referred to as’single-lets.’
Consider why an HMO is more profitable than a standard buy-to-let:
Traditional 4 bedroom semi-detached property with 2 reception rooms for buy to let.
A family with a husband, wife, and two children was rented the property.
£700 in rental revenue per month
£8400 in rental revenue per year
HMO buy to let
4 bedroom semi-detached house with 2 reception rooms
1 reception room converted to a bedroom
Rented to 5 single working professionals
Monthly rental income per tenant = £400
Monthly rental income = £2000
Annual rental income = £24,000
Using the above example, it’s clear to see why more landlords are considering HMO properties. The difference in gross rental income can be quite staggering
Whether you are new to the business or have a long track record of renting a portfolio of homes, the duties of being a landlord will be at the forefront of your mind as a Buy to Let owner. When you’re letting out a property to others, you need to stay up to date on the rules and regulations that will effect you, just like any other business. This is especially true in the case of a House of Multiple Occupation (HMO), which can affect your mortgage application.
HMOs were initially established as an unique category of property leasing in the Housing Act 2004 – and the Housing (Scotland) Act 2006 – and were intended to provide protections and safeguards for tenants living in multi-unit buildings. Residents in these types of housing have historically been at greater risk of injury, either as a result of the landlord’s lack of maintenance and/or safety precautions, or as a result of the conduct of other tenants. By requiring landlords of certain types of buildings to apply for a licence, these housing acts made it easier for local governments to ensure that they were following certain critical standards, such as fire safety rules.
It’s worth noting, however, that not all HMOs require landlord licencing. An HMO is a residence where two or more ‘households’ share public areas such as a kitchen, bathroom, or toilet — a ‘household’ can be a family, couple, or single person with lodging in a single unit of the property in this context. Typically, each household in a property will have its own contract with the landlord, however a group of students may share a collective agreement with the landlord, even though each would sign individually, and the law would still consider them four separate households.
Shared houses, hostels, and shared worker housing are examples of HMOs, which are also known as’multi-lets’ or’multi-unit properties.’
Individual lenders will always have their own set of requirements for processing HMO mortgage applications, but the essential principles will be the same as they are for conventional Buy to Let mortgages. However, there are a few key distinctions in the criteria that specialist lenders use when approving HMO mortgages, as follows:
Mortgage lenders who deal with HMO applications are frequently wary of lending to first-time Buy to Let buyers. Typically, you must have at least 12 months of experience owning and managing a Buy to Let property.
Occupancy — Although some lenders will allow more than eight units in a multi-occupancy property, most lenders will impose a maximum limit of eight units.
Lenders will issue mortgages to individuals or portfolio landlords in their own names or through a limited company.
Loan sizes — Because the rental income from a multi-let property is typically higher than that of a single-let home, a larger mortgage loan will almost always be available.
Property valuation – In most cases, the minimum HMO property value is £100,000, though this will climb in London, and certain lenders may not require a minimum value.
Loan-to-Worth (LTV) — Most lenders will only lend up to 75% of the property’s value, while some may go higher. This might also be affected by the loan size.
The housing statutes mentioned before require landlords of bigger Houses of More Occupancy (HMOs) to get a licence from the local authorities, as multiple tenants pose a higher risk. It’s required for properties with three stories or more and two or more households with five or more occupants. To receive a licence, you must be a ‘fit and proper person,’ and the authorities will examine your previous experience as a landlord while examining your application.
Local governments can impose their own supplementary standards and additional licencing criteria, which may require various forms of HMOs to be licenced, in addition to the government’s basic obligatory requirements. Local governments may impose these additional licencing requirements if statistics reveal that a specific type of property, or HMOs in a specific geographic area, pose a higher statistical risk of hazard or fire.
It’s crucial to check with your local government to see if you need a licence for your sort of property and what other restrictions may apply. aOperating an HMO without a licence is punishable by a fine of £20,000 in England and Wales and £50,000 in Scotland.
HMOs are designed to give housing units to two or more ‘households’ under the same roof, and are distinguished by the use of shared areas – usually the kitchen, bathroom, toilet, or even just a stairwell. Although there is no statutory restriction on how many people can live in an HMO, some lenders will impose one based on their own criteria when contemplating a mortgage. In general, lenders will accept a maximum of five usable rooms, while certain lenders may be willing to take more, and a select few may provide mortgage packages with no upper restriction at all, though these are not widely available.
If you need a mortgage to buy an HMO, the lender’s terms will dictate the maximum number of people you can rent rooms to, as well as the type of people who will live there. You’ll also need to be aware of your legal obligations and responsibilities, such as acquiring a licence for the property if it’s three storeys or more and adhering to health and safety regulations in areas like:
- Gas, fire, and electricity are all options.
- Garbage removal
- Cooking, cleaning, and laundry facilities are available.
Before entering into any legal arrangement, you should take these legal responsibilities carefully and get appropriate legal counsel if necessary.
Lenders rely a large part of their choice on how much you can borrow, so you’re more likely to obtain a better mortgage loan offer on an HMO than on a traditional Buy to Let. Lenders, on the other hand, view these homes as a higher risk, thus HMO mortgage interest rates are often higher than those for a normal Buy to Let loan.
There is a technique to deal with this. Across the board, the greater the deposit or level of equity you can provide, independent of the type of mortgage (i.e. residential or Buy to Let), the better the interest rate the lender will provide. You’re lowering the lender’s perceived risk by lowering their exposure.
The amount of expenses involved with the mortgage arrangement might also influence the rates. Although this is not always the case with all lenders or HMO mortgages, if you pay a higher cost for the product, you will normally get a lower interest rate. However, keep in mind that a lower interest rate product may not be the greatest offer in your situation, and it’s up to you to weigh all of the fees and conditions to ensure that it will benefit you in the long run.
The fees can also differ depending on whether the product or plan is fixed-rate or tracker. Fixed-rate mortgages are generally more expensive than tracker or discount variable-rate mortgages. Also, the longer the fixed-rate duration, the higher the interest rate will be — for example, a 5-year fixed mortgage will cost more than a 2-year agreement.
The sheer amount of conceivable variations in rates, types of product, lenders’ requirements, property attributes, personal situations, and regulations could leave you feeling befuddled. To get clarification, it’s always a good idea to speak with an experienced specialist — drop us a call at The Mortgage Centres, and our team will make sure you get the greatest deal for your case.
HMO mortgages are a somewhat esoteric product within the mortgage market, so it’ll come as no surprise that you won’t be able to pick up a multi-let plan from your local high street lender. There are a number of specialised lenders who cater to the needs of HMO landlords in Buy to Let, and each will have its own set of criteria for determining whether properties fall into the HMO category and whether they will lend on them. It’s not unheard of for lenders to decline an application on the basis of the number of storeys or rooms in a property.
Specialist mortgage lenders’ lending limitations, deposit requirements, and opinions on your track record as a Buy to Let landlord will all differ. Finding a lender with competitive rates and terms to suit your circumstances may be a maze, but at The Mortgage Centres, we have a dedicated team of brokers who are experts in this field and will be able to walk you through every step of the process to ensure you receive the best deal possible.
Limited Company Buy to Lets (LCBTLs) and Houses of Multiple Occupancy (HMOs) have seen tremendous expansion in the mortgage market in recent years, fueled by changes in tax allowances and a slew of new rules aimed at landlords. The demand for both continues to grow, and we frequently receive inquiries wondering if a Ltd Company HMO Mortgage is available.
Even while many lenders have restrictions on who they will lend to, what type of property they will lend on, and how much they would lend, this is still a growing area in the Buy to Let market, and you can secure an HMO mortgage for a limited business. This type of mortgage is more difficult to come by than a regular Buy to Let mortgage, but with more lenders prepared to issue limited company Buy to Lets and HMO loans, it stands to reason that they would be willing to combine the two.
At The Mortgage Centres, we work with a variety of mortgage products and applications. We’ll be able to show you the best lenders for the type of HMO mortgage you’re searching for after we understand your unique position and wants.
You may need to raise extra financing secured against an HMO that you own at some point in the future for whatever reason. This could be used to:
- House improvements
- Debt consolidation
- To help with a deposit on another property
- or many other reasons
Your first step should be to speak with your present mortgage provider about raising your borrowing capacity, or to remortgage the house. In other circumstances, however, this is not possible or acceptable, and a secured loan may be the best alternative.
Secured loans are available for HMOs in the same way that they are for traditional buy-to-let properties. Landlords frequently choose them as a type of borrowing since they can often provide a higher degree of borrowing than a regular mortgage and will maximise the amount they can borrow.
However, keep a watchful eye on the expenses. Secured loan rates and fees are typically higher than regular mortgage rates and fees, so you should properly investigate the conditions and understand both the dangers and potential benefits before taking out the loan. Please give us a call at The Mortgage Centres to set up a no-obligation consultation with one of our HMO mortgage experts.
Houses of Multiple Occupancy (HMOs) can appear to be a successful investment, and for many Buy-to-Let investors, they are. Making your house an HMO rather than a single-let family home has the potential to considerably improve your rental revenue, making it one of the fastest-growing segments of the rental market. HMOs, on the other hand, come with additional obstacles and a slew of rules and regulations to follow.
Obtaining the necessary mortgage financing to acquire the house is sometimes the first difficulty. While applying for a mortgage on a conventional residential or single-let property is common practise, the additional work required for purchasing a House in Multiple Occupancy might leave applicants feeling confused and intimidated.
Using a mortgage broker, particularly a professional broker like our team at The Mortgage Centres, may be quite beneficial to HMO investors, regardless of their level of experience. With such a wide range of variables and a complicated terrain of conditions and criteria, an experienced HMO Mortgage broker with a thorough understanding of the market will be able to ensure that you get the best mortgage for your needs and ambitions.
Our team at The Areton Limited has a lot of experience dealing with mortgage applications for HMOs and Buy to Let properties, so we’re in a good position to find the right mortgage for you. We work with a handful of niche-market lenders who offer deals you won’t see advertised online or on the high street.