What is an HMO Mortgage?
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What is an HMO Mortgage? (Part 1)
Oliver Potter explains all about an HMO mortgage.
What is an HMO mortgage?
HMO is an acronym that stands for House in Multiple Occupancy. Basically, it’s where you rent a property out room by room to more than three unrelated tenants.
It’s different from a standard Buy to Let, where you rent a house to a single family. HMO letting is becoming more and more popular over time.
How does an HMO mortgage differ from a standard Buy to Let?
There’s a physical difference – an HMO is rented out room by room, while with a standard Buy to Let the tenant has a whole house or flat.
HMOs are assessed a little differently as they’re stricter in criteria. It’s more dependent on landlord experience and the kinds of tenants that will fill those different rooms. It could be a student let, for example.
Valuations tend to be more costly compared to a standard Buy to Let as they are more complex to assess.
Beyond the mortgage, there’s usually more compliance involved for landlords – including fire safety doors, safety certificates and HMO licences, as this is a more niche and specialised area.
If you’re considering becoming an HMO landlord, come and talk to me – we’ll discuss everything in detail.
Is an HMO mortgage more expensive?
It’s more specialised than a standard Buy to Let, and so interest rates and arrangement fees are usually higher. You will normally need to work with more specialised lenders.
Stress testing can be tougher, too. On a standard Buy to Let mortgage the stress test is usually 125% or 145% – on an HMO it could be as high as 170%. As always, that varies from lender to lender.
Safety certificates are also needed, and the properties need to have the right spec to meet requirements around fire doors, safety certificates etc before they can be rented.
However, renting a property out room by room generally gets you higher profits, so it all balances out. It’s important to run a good assessment but, generally, higher yields do mean higher costs.
What deposit do I need for an HMO?
It’s the same as a standard Buy to Let – a minimum 25% deposit is needed. Some lenders, depending on how specialised the proposition is, might need a little bit more deposit. Generally a 25% deposit usually gets most people what they need.
It’s worth having a broker look at the property and the proposition in advance to check that everything is good to go.
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How many tenants can I rent to with an HMO mortgage?
It depends both on the lender and the local authority. Some local authorities won’t care, but others will. Some lenders will have a cap, while some won’t. Typically, at least three tenants will be allowed.
A lot of lenders have distinctions between large and small HMOs. A large HMO might have more than five tenants and more than three storeys. Smaller ones may be three tenants and below. There could be different pricing structures and licensing requirements, depending on the size.
It’s important to know exactly what you’re going for and the cost difference. Larger HMOs are usually more expensive from a mortgage perspective.
What types of property would I need an HMO mortgage for?
It depends on tenant requirements. Often a building rented out room by room is occupied by students or young professionals. Trainee or newly qualified doctors, lawyers or accountants often want to live in the city but don’t want the cost of a whole property to themselves. A variety of people require HMOs.
Essentially, the houses are split into multiple rooms with shared kitchens and bathrooms. In modern HMOs a kitchen and a bathroom can be included in the room.
It’s a way for tenants to save money on rent, and for landlords to potentially make more money – because there’s a higher rental yield, essentially.
Can I get an HMO mortgage and live in the property?
With the majority of lenders, no. HMO mortgages are unregulated and if you live in the property, they become regulated. Most Buy to Let lenders don’t like to get their wires crossed with unregulated and regulated mortgages.
What else do we need to know about HMO mortgages?
HMO properties are definitely becoming more popular, as landlords want to maximise rental yield. At the same time, a lot of tenants are struggling to pay the rent on a whole property.
With HMOs, it’s important to look into requirements from the local authority around licenses and regulations. Some local authorities just won’t allow HMOs at all.
Don’t go blindly into buying a property only to find out later that you won’t get permission – that would be awkward. Definitely vet the property and talk to someone about it before you buy. Likewise, converting a Buy to Let to an HMO without proper research could be a costly error.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE SOME FORMS OF BUY TO LET MORTGAGE.