Houses in Multiple Occupation (HMOs) have demonstrated the potential for greater profitability compared to standard buy-to-let investments. An observable trend involves a surge in landlords seeking HMO mortgages. However, the question remains: is an HMO mortgage necessary, or can a conventional buy-to-let mortgage adequately serve the purpose?
HMOs possess the capacity to yield higher returns when contrasted with traditional buy-to-let options. The UK’s robust rental demand, coupled with favourable interest rates, enables landlords to optimise their rental yields. The selection of an appropriate mortgage plays a pivotal role in ensuring that the gains derived from rental income are maximised.
What type of mortgage will be necessary for an HMO?
If you are leasing to more than three tenants from different households, securing an HMO mortgage becomes essential. This is because your property would not meet the requirements for a standard buy-to-let mortgage, as those mortgages are tailored for single-household tenancies. Opting for a regular mortgage on an HMO property would result in a breach of the mortgage’s terms and conditions, potentially leading lenders to pursue legal remedies.
What distinguishes HMOs from regular buy-to-let properties?
A conventional buy-to-let property typically accommodates an individual or a single family. Rent payments are made by the household on a weekly or monthly basis, and they are responsible for covering utility bills. These are commonly known as ‘single-lets’.
Now, let’s explore the reasons behind the enhanced profitability of HMOs compared to traditional buy-to-let setups:
Traditional Buy-to-Let Property:
4-bedroom semi-detached house with 2 reception rooms
Occupants: A family comprising a husband, wife, and 2 children
Monthly Rent: £700
Annual Rent: £8,400
HMO Property:
4-bedroom semi-detached house with 2 reception rooms
Conversion: 1 reception room transformed into an additional bedroom
Occupants: 5 single working professionals
Monthly Rent per Tenant: £400
Monthly Rent (Total): £2,000
Annual Rent: £24,000
Using the example, the substantial contrast in gross rental income between the two options becomes evident. This disparity underscores why an increasing number of landlords are showing interest in HMO properties.
HMO Mortgage Criteria
Many HMO mortgage lenders typically mandate landlords to possess prior experience in property leasing. While only a small number of lenders might entertain new landlords lacking experience, the interest rates they offer could surpass the average rates. Additionally, certain lenders could exhibit a preference for the management of the HMO, favouring a letting agency over self-management.
Despite their growing popularity, HMO mortgages still retain their status as a specialized mortgage category. The mortgage application process for HMOs is notably more comprehensive in comparison to standard buy-to-let mortgages. Hence, HMO mortgages are commonly facilitated through accredited mortgage brokers rather than being directly available to landlords.
Lenders may solicit information encompassing the following aspects:
- Landlord experience
- Mortgage under personal name or limited company
- HMO location
- Number of rentable rooms
- Management approach (landlord or letting agency)
- HMO licensing status
- Individual AST agreements for each room
- Proposed or actual rental income
- Tenant demographics (students, professionals, housing associations)
In addition, lenders will undertake conventional mortgage evaluations encompassing factors like affordability, requested loan amount, and creditworthiness.
HMO Mortgage Lenders
Securing the right HMO mortgage for your property is of paramount importance. A high-rate or high-fee HMO mortgage can swiftly decrease the attractive yields you anticipate. If your intention involves renting out the property as an HMO, then acquiring an HMO mortgage is a necessity. Conversely, if you currently hold a standard buy-to-let mortgage but are considering transitioning to an HMO model, it’s important to notify your lender first to ascertain its permissibility.
Each lender operates on distinct criteria, and often, the most niche deals are accessed through mortgage brokers. The specific nature of your HMO setup can either expand or limit the number of lender options at your disposal.
For instance, certain lenders may only extend loans up to a maximum number of rooms. Therefore, understanding your lender’s criteria before applying is crucial, this is something an HMO mortgage advisor can support with.
Lenders for Licensed HMOs
Most HMO mortgage lenders entertain properties with up to five bedrooms. Larger setups might necessitate commercial finance. If your HMO mandates a license, securing an HMO mortgage is highly probable, as a standard buy-to-let mortgage would prove unsuitable.
The specific tenant demographic you intend to cater to can impact your available lender choices. Lenders could decline your application if you intend to house students or tenants reliant on housing benefits, owing to the perceived risk. Possessing a licensed HMO can positively affect how a lender appraises the property’s value.
When evaluating your HMO’s value, some lenders might consider the anticipated rental income. This is particularly beneficial when you’ve converted the property and intend to extract equity.
However, not all lenders will base their valuation on rental income. Some might value the HMO as a standard residence, limiting the borrowing amount—defeating the purpose of having an HMO mortgage.
Lenders for Unlicensed HMOs
If your HMO operation does not mandate a license, it might be regarded as too modest for an HMO mortgage. Consequently, lenders could only offer you a buy-to-let mortgage option.
While some lenders might entertain the notion of an HMO mortgage for your case, providing tailored advice is challenging without insight into the specifics of your HMO setup. You can submit an inquiry anytime or pose your questions to our specialists.
HMO Mortgage Rates
HMO mortgage rates generally exceed those of standard buy-to-let mortgage products. This is due to the less competitive nature of the HMO mortgage market in terms of lender count. However, in the current lending climate, buy-to-let rates are currently exceeding some HMO mortgage rates, therefore making HMO investment a more attractive investment opportunity.
Lenders willing to engage in HMO lending tend to levy slightly elevated fees and rates for their mortgages. Nevertheless, the income generated from an HMO setup should comfortably cover mortgage payments, utility expenses, and maintenance costs.
Furthermore, an HMO mortgage lender will often factor your rental income into the equation, potentially leading to a significantly higher maximum mortgage amount. HMO mortgages are available with variable and tracker rates. Loan-to-value (LTV) rates typically commence at 80% LTV, with more favourable rates linked to larger deposits and lower LTV ratios.
