How HMO Mortgages Work
HMO mortgages operate similarly to traditional mortgages, allowing you to finance the purchase or refinancing of a property through regular monthly payments. However, they are specifically tailored for properties designated as Houses in Multiple Occupation (HMOs), which are rented out to multiple tenants who share facilities like bathrooms and kitchens.
These mortgages are offered by specialist lenders and typically structured as interest-only loans. This means that you only pay the interest on the loan each month, with the full balance remaining outstanding at the end of the mortgage term. It’s essential to note that HMO mortgages may have specific requirements, such as a minimum HMO property value, early repayment charges, and other arrangement fees.
Types of HMO Mortgages
Fixed, Variable, and Tracker Rates: Like residential and buy-to-let mortgages, HMO mortgages can come with fixed, variable, or tracker interest rates. Fixed-rate mortgages offer a stable monthly payment over a set period, while variable and tracker rates fluctuate with market interest rates.
Interest Only or Capital Repayment: Most HMO mortgages are structured as interest-only loans, where only the interest is paid each month. This approach keeps monthly payments lower but requires repayment of the full loan amount at the end of the term.
Borrowing and Affordability
Loan-to-Value Ratio (LTV): The maximum LTV on an HMO mortgage is typically 80%. Lower LTV ratios usually result in better interest rates. Some lenders may impose additional criteria, such as requiring a low Energy Performance Certificate (EPC) rating or preferring experienced HMO landlords. Use our LTV calculator for your next investment: click here
Affordability Calculation: Affordability for HMO mortgages is primarily based on the property’s rental income rather than personal earned income. Lenders typically require rental coverage of 125% to 140% of the mortgage payment, based on either the pay rate or a stressed rate.
HMO Mortgage Rates and Costs
Interest Rates: HMO mortgage rates vary depending on factors such as applicant experience, loan amount, property type, and borrowing entity. Rates may be higher for first-time landlords or larger HMO properties.
Fees: Arrangement fees, application fees, valuation fees, and legal fees are common costs associated with HMO mortgages. Fees can vary significantly between lenders, with some offering free valuations and legal fees.
Choosing a Lender and Working with a Broker
Lender Options: HMO mortgage lenders can be categorised into high street lenders, specialist HMO lenders, and commercial mortgage lenders. Each type offers different rates and criteria, so it’s essential to compare options carefully.
Broker Benefits: Working with a specialist HMO mortgage broker can streamline the process and help you access the best deals from multiple lenders. Brokers can provide personalised advice and support, especially for complex HMO mortgage applications.
HMO Valuations, Conversions, and Regulations
Valuation Methods: HMO properties are typically valued based on their bricks and mortar value or their investment value. Conversion of properties into HMOs may impact their valuation, depending on factors such as the number of letting rooms and local market conditions.
Regulatory Considerations: Converting a property into an HMO may require planning permission and compliance with local regulations, including Article 4 Directions and HMO licensing requirements. Failure to obtain necessary licences can affect HMO mortgage eligibility.
In conclusion, HMO mortgages offer an attractive opportunity for landlords to invest in properties with higher rental yields. However, they come with specific requirements and considerations, including eligibility criteria, affordability assessments, interest rates, and regulatory compliance. Working with experienced professionals, such as mortgage brokers and lenders, can help navigate the complexities of HMO financing and ensure successful investment outcomes.
Looking for a HMO Mortgage? Get in touch with We Do Financial Services for more information.
