If you are a landlord or property investor curious about HMOs and the opportunities they offer, this guide on HMO mortgages has everything you need to know.
What are HMO Mortgages and How Do They Work?
HMO (standing for house in multiple occupations) mortgages provide funding for a property where several people cohabit and share house facilities such as bathrooms and kitchens. Traditionally, this style of letting has been popular for student lets, but in recent years, it is a common way of offering rental property. This is particularly true in London, where the cost of renting a property is expensive, so it is more affordable for people to share living premises.
Other property types which fall under the HMO remit include:
Several bedsits in a large building
Blocks of converted flats
Self-contained cluster flats
HMO mortgage is a specialist loan aimed at this type of property, providing finance for landlords or property investors. There are specific regulations that need to be adhered to qualify and classify as an HMO. Many landlords are aware of these, but people entering the market will need advice from experienced professionals to help them navigate the opportunities.
What are the Benefits of Letting an HMO?
There are many benefits to letting an HMO, including:
These properties generally offer a greater yield resulting in a strong cash flow position
There is significant demand for this rental opportunity, leading to less void periods
The associated long-term benefits of owning property such as possible capital gains
Overall, HMO properties provide greater rental income for landlords. In dealing with more tenants, there is sometimes more work to do, but a savvy landlord will use a property manager or place the responsibility onto the tenants. It is important to mention though that HMO properties can have a higher turnover of tenants and the ongoing maintenance can be more costly when compared to a standard buy to let property.
How to Apply for an HMO Mortgage
When applying for HMO mortgage finance, there are specific criteria lenders will consider. This includes:
The size of the property and number of tenants it can accommodate
The location – HMOs tend to perform better in cities where rental demand is high
Your experience as a landlord or HMO property investor
Your credit history and income
The HMO license and local authority regulations for the property
Type of tenants you will house such as professionals, or students or social housing
It is important to have all necessary documentation ready, including proof of any HMO license or planning permission. Lenders will also want evidence of a strong business plan, with potential rental income and expenses clearly outlined.
Working with a qualified mortgage advisor can ensure you have the best chance of success with your HMO mortgage application. They will be able to advise on the lenders who offer HMO mortgages, and guide you through the process step by step.
What are the Challenges for HMO Mortgage Applicants?
There may be some challenges in applying for HMO mortgage finance, including:
More strict criteria from lenders
A larger deposit may be required
Greater paperwork and documentation needed
Some lenders, not all, may want you to have experience as a landlord &/or be a homeowner
However, working with a professional mortgage advisor can alleviate these potential hurdles. They will ensure you have the best chance of success in securing the necessary funding.
How Do I Qualify for an HMO Mortgage?
To qualify for an HMO mortgage, you will need to prove that the property meets HMO regulations and has all necessary licenses. To learn more about HMO licences, please visit the Government website and their Renting Out A Property page. You should also have a strong credit history and financial stability, as well as experience as a landlord or HMO property investor.
As is often the case, a specialist advisor will provide you with tailored guidance, which will help you make the best possible mortgage application.
What Deposit Do I Need for an HMO?
There is usually a need to raise at least a 25% deposit on a property for HMO letting purposes. In extreme cases, it has been known for some lenders to request a 40% deposit when arranging a HMO mortgage – this would be mainly down to the construction type or bad credit registered.
Depending on the cost of the property, this can be a sizable amount of money.
On a £200,000 property, a 25% deposit equates to £50,000. For a £400,000 property (which is on the very affordable side of London house prices), a 25% deposit equates to £100,000.
How Much Can I Borrow with an HMO Mortgage?
The amount you can borrow with an HMO mortgage will be mainly dependent upon the rental income achievable for the property. Other factors in identifying the right lender will be your experience as a landlord, your income, your credit profile and the type of tenant. An experienced hmo mortgage advisor can help search the market and let you know available hmo mortgage rates.
Can You Get a HMO Mortgage on a Non-Standard Construction Property?
There are lenders that will provide non standard construction mortgages on properties that are built using methods such as timber framed or concrete. These mortgages are typically provided by mortgage specialist lenders accessible through mortgage brokers.
What are HMO Mortgage Rates?
Interest rates on HMO mortgages can vary, but they are typically higher than traditional buy-to-let mortgages. This is due to HMO properties often having a higher level of risk for lenders as the turnover of tenants can be higher. Your mortgage advisor will be able to advise you on hmo mortgage rates on offer from different lenders and discuss different repayment methods such as a repayment mortgage (capital and interest) or an interest only mortgage.
What are the Different Types of HMO Mortgages Available?
There are different types of HMO mortgages to consider, with most of the differences focusing on the circumstances of the applicant:
HMO Mortgages for Individuals
HMO Mortgages for First Time Landlords
HMO Mortgages with No Minimum Income Requirements
HMO Mortgages for Limited Companies (LTD) and Special Purpose Vehicles (SPV Mortgage)
HMO Mortgages for Limited Liability Partnerships (LLP)
If you need guidance on the different vehicles available to purchase and manage a HMO, please speak with a specialist broker.
Can First-Time Buyers Arrange an HMO Mortgage?
It is possible for a first-time buyer to arrange a HMO mortgage, but there are additional challenges to consider. They’ll be viewed as a first-time landlord, and these applicants face stricter lending criteria. Although there are lenders that can still provide hmo mortgages to first time buyers the rates will higher and you may well need to put down a larger deposit.
How to Explore Your HMO Mortgage Options with The Money Hub
If you are looking to buy a property to let in a HMO format, help is available.
Call The Moneyhub Limited on 0203 725 5830 and speak to one of our highly specialised and dedicated Mortgage Advisors or you can complete an enquiry form which will allow you to schedule a call time.
Typically you will need to put down a deposit of at least 25%. Depending upon the property construction type and your credit profile you may well need to put more money down. Seeking advice from an experienced broker is important.
A Buy to let mortgage is for a rental property that is let out to a single person, family, couple on a standard tenancy agreement (AST) which can be over a 1 year term, whereas a HMO mortgage is for a property with multiple non-related tenants that share the facilities (kitchen, Bathroom) and the tenancy tends to be on a short term basis such as 30 days.