What Counts as an HMO Property, and How Can I Finance Buying One?
Houses in Multiple Occupation, or HMOs, are defined as:
- Properties rented to three or more tenants.
- Tenants are separate and not a family.
- Homes with a shared bathroom or kitchen.
More commonly known as a house share, an HMO often requires a licence from the local authority, although rules about licensing vary in different regions.
An HMO is profitable for many landlords, particularly in university cities or where young professionals look for affordable housing solutions to live in prime areas with very high property values.
The benefit is that if one property contains multiple bedsits, the rental yields available are higher than a conventional, one-tenant buy-to-let property.
Today our mortgage brokers explain a little more about HMO classifications and the best way to finance this acquisition through a mortgage.
Criteria for an HMO Mortgage
HMO properties are specialist assets for mortgage purposes, so not all lenders offer this type of product.
Those lenders that have HMO mortgages products will often have a set of requirements to assess eligibility and what interest rates to offer, such as:
- The number of bedrooms – most HMO buy to let lenders will accept up to five or six bedrooms per property. Niche lenders have far more flexibility and may lend against an HMO with up to 20 bedrooms.
- Tenancy types – a lender may have restrictions on the kinds of acceptable tenants in an HMO property, so some providers may not lend against student accommodation, for example, or tenants in receipt of benefits.
- Rental income – affordability is a basic metric in any mortgage application. A lender will want to know how much revenue the HMO will generate and see this reach a minimum above the mortgage interest payable.
Lender Valuations on HMO Mortgages
Valuations are equally diverse and depend on how the HMO mortgage provider assesses the value of an HMO property.
Some will use a typical survey and evaluate what the property is worth as a bricks and mortar asset compared to other local properties. If there are no nearby HMOs to compare it to, the lender usually looks at the possible sale price.
However, other lenders look at an HMO similarly to any other buy to let property.
In that case, they’ll assess the home as an investment asset and evaluate the income generated.
HMO vs Multi-Let Properties
A multi-let is comparable to an HMO, but this description usually applies to a house with multiple, separate tenants, but that doesn’t require an HMO licence.
The phrase unlicensed can seem negative, hence the alternative mortgage description.
While not always the case, most HMO mortgage lenders will also finance multi-let properties, although they’ll usually use the single dwelling valuation process.
HMO mortgages aren’t usually a product you’ll find from a high street bank, but almost 50% of buy to let lenders offer an HMO product.
Rates and Eligibility for a UK HMO Mortgage
Mortgage rates for HMO investments are higher than typical buy to let mortgages, but the pricing is becoming more competitive as more lenders enter the market.
Running these properties can be complex, so lenders will have criteria, such as:
- A minimum number of years experience – although this doesn’t apply across the board. Most lenders prefer HMO mortgage applicants to have two or more trading years.
- Caps on maximum mortgage values (or Loan to Value rates).
- Policies about lending to applicants with bad credit or a low credit rating.
A lender will also look at the location and size of the property, how you expect to manage it, whether or not you need an HMO licence, the expected rental income, types of tenants and whether you’re buying as a private HMO landlord or through a limited business.
Applying for an HMO Mortgage
It’s tricky to say with any certainty how long it will take to apply for an HMO mortgage, although they shouldn’t generally take much longer than a regular buy to let mortgage application.
Most loans are agreed in about four to six weeks, although that’s likely to reduce to three to four weeks as the property market settles down from a chaotically busy year!
Lenders are also becoming more flexible, recognising that a licence requirement isn’t always practical, especially if your local authority takes its time in issuing new permits.
Therefore, you can usually apply straight away, provided you can prove that an HMO licence application is pending.
Please give Revolution Brokers a call if you need any further guidance about buying an HMO, finding the right lender, or securing the most competitive mortgage rates.
We’re available via email at info@revolutionbrokers.co.uk or 0330 304 3040 for an informal chat about your HMO approval prospects and how to get your application started.
Pranab Bhandari is an Editor of the Financial Blog “Financebuzz”. Apart from writing informative financial articles for his blog, he is a regular contributor to many national and international publications namely Tweak Your Biz, Growth Rocks ETC.
