HomeBuy to LetHMO mortgage guide
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HomeBuy to LetHMO mortgage guide

HMO mortgage guide

Last updated on 23rd August 2023 by Martin Alexander

Houses in Multiple Occupation (HMO) can be more profitable than regular buy-to-let investments. We’ve also noticed an increase in landlords applying for HMO mortgages, but do you need an HMO mortgage, or will a traditional buy-to-let mortgage suffice?

An HMO can be more lucrative when compared to traditional buy-to-let. Rental demand is high throughout the UK, and although interest rates have increased, landlords can still maximise rental yields. Having the right mortgage is pivotal in maximising the profits from your rental income.

What is an HMO?

A House in Multiple Occupation (HMO) is a property rented to three or more unrelated tenants that may share facilities such as a bathroom or kitchen. Rather than rent a property to a single household, an HMO allows landlords to rent the property to multiple households.

The terms ‘multi-let’ or ‘house share’ can also describe an HMO, but it’s often used for smaller properties that don’t require licencing. Landlords can then charge per room, per flat or per section of the property, usually resulting in an increased rental income.

It’s common for HMO landlords to pay the utility bills for the property unless the property was converted into flats and had separate title deeds via the land registry.

What mortgage will I need for an HMO?

If renting to more than three tenants from separate households, you’ll need an HMO mortgage. This is because your property won’t qualify for a regular buy-to-let mortgage, as they’re only designed for single-household tenants. If you took a regular mortgage on an HMO property, you’d be breaking the terms and conditions of the mortgage, which could cause lenders to take legal action.

Buy-to-let mortgages are often cheaper in terms of rates and fees, and there are certainly more lenders offering them. They’re also easier to get, as the criteria are less strict. That being said, the additional profit that an HMO can achieve often covers other costs associated with the mortgage.

How are HMOs different from regular buy-to-let?

A traditional buy-to-let property would typically accommodate one person or a family. In rental terms, a single rental payment would be due from the household on a weekly or monthly basis. The household would also pay the utility bills. These can often be referred to as ‘single-lets’.

Let’s take a look at why an HMO is considered more profitable than a traditional buy-to-let:

Traditional buy to let
4 bedroom semi-detached house with 2 reception rooms
Rented to a family consisting of a husband, wife and 2 children
Monthly rental income = £700
Annual rental income = £8400

HMO buy to let
4 bedroom semi-detached house with 2 reception rooms
1 reception room converted to a bedroom
Rented to 5 single working professionals
Monthly rental income per tenant = £400
Monthly rental income = £2000
Annual rental income = £24,000

Using the above example, it’s clear why more landlords are considering HMO properties. The difference in gross rental income can be quite staggering.

How much does an HMO cost to run?

Not every HMO will generate almost three times the rental income of a standard buy-to-let. It’s also important to consider that landlords usually pay utility bills. However, in the above example, even with a £ 2k- 3k annual utility bill, the property would still be profitable.

Running costs for an HMO are often higher and require more time and effort. For instance, each room will require locks, and the health and safety guidelines for an HMO are much more comprehensive than those for a regular buy-to-let. As a result, the setup costs for an HMO will be higher.

What are void periods?

There are also void periods to consider. A traditional buy-to-let may have fewer void periods, whereas an HMO tends to have more. An HMO may also result in higher maintenance bills for landlords than traditional buy-to-let models. This is because of shared communal areas such as bathrooms, kitchens and living rooms (where applicable).

Shared areas typically ‘get left’, as nobody wants to clear another person’s mess. Landlords may have to clean themselves or hire cleaners to maintain the property.

Should HMO landlords provide furniture?

HMOs are often provided fully furnished. This is also an extra cost to consider. Traditional buy-to-let properties are typically rented unfurnished.

HMOs are popular for individual tenants, as they’re usually affordable and fully furnished, with bills included. This is especially true for students, contractors or overseas employees on work visas. The practicality of ‘moving straight in’ with little cost makes HMOs desirable.

HMO location

HMOs tend to be limited to certain locations, as tenants are typically students or single professionals. As a result, an HMO’s location is typically limited to a city centre or a location with excellent access/bus routes and amenities. It would surely be pointless having an HMO in a rural location in the middle of nowhere.

Traditional rental properties aren’t limited in terms of location. Whether rural, country or city, they’ve been rented!

Tenant criteria

HMOs can be difficult to manage compared to traditional buy-to-let models. As facilities are usually shared within an HMO, tenants can sometimes fall out. As well as being a landlord, you may find yourself being a mediator between tenants who don’t see eye to eye.

A traditional buy-to-let model would typically house a family or at least tenants who have chosen to live together. Any disagreements are usually resolved within the household without involving the landlord. As a result, landlords will generally have an HMO type, such as student buy to let or an HMO designed solely for working professionals.

Having mixed tenants, such as students and working professionals, is rarely a good idea.

Will I need an HMO licence?

Although HMO properties tend to generate higher yields, they’re more complex in setting up. Depending on the nature of the HMO, landlords may require an HMO licence.

Local councils provide HMO licences, which are valid for five years if approved. HMO licences are provided for each property and not for each landlord. For instance, a landlord with three HMO properties will need a licence for each property, should each HMO require a licence.

Not every HMO will require a licence, as it depends on the size and nature of the property. In addition, each local council has its terms and conditions for HMO licensing. Larger HMOs often require licences, whereas smaller properties may be exempt.

What is classed as a large HMO?

Large HMO properties in the UK are defined as below only if all 3 points apply:

  • The HMO is rented to five or more people who form more than one household
  • The property is at least three storeys high
  • Tenants share facilities such as toilets, bathrooms or kitchens

If an HMO doesn’t meet all three of the above points, that doesn’t mean you won’t need an HMO licence. Smaller HMOs may also need a licence as it depends on the local council.

How much does an HMO licence cost?

Fees for licensing will also depend on which council you’re applying to and the duration of the application process.

Some councils may charge you on the number of rooms your HMO has, whereas other councils will have fixed rates. HMO licence fees typically start at £500 but can cost thousands.

What if my HMO license isn’t approved?

Councils won’t approve HMO licences for every landlord or every HMO, as applications can be rejected. This is because councils need to evaluate conditions such as whether or not the property is suitable for an HMO and can accommodate the proposed number of tenants. Councils will also assess landlords themselves to ensure they haven’t previously breached landlord laws.

If your HMO licence application is rejected, you can appeal to the Residential Property Tribunal. Alternatively, your local council may reject the application until specific elements of the property meet a certain standard. Once your HMO meets the required standard, the council may grant you an HMO licence.

If your HMO requires a licence, do not attempt to rent it without one. This is a serious offence that can result in an unlimited fine. A prison sentence is also possible for cases where landlords have not complied with housing standards.

HMO mortgage criteria

Most HMO mortgage lenders will require landlords to have experience in letting property. Only a handful of lenders will consider new landlords without experience, but the rates offered may be higher than average. Some lenders may also have a preference for who manages the HMO, such as a letting agency, instead of managing it on your own.

Despite their popularity, HMO mortgages are still considered a niche mortgage type. The mortgage process is very comprehensive when compared to a standard buy-to-let mortgage. For this reason, HMO mortgages tend to be offered through qualified mortgage brokers and not directly to landlords.

Lenders may request information on some or all of the below:

  • Experience being a landlord
  • Personal or limited company mortgage
  • Location of the HMO
  • The number of lettable rooms
  • Management type (landlord or letting agency)
  • Does the HMO have or need a license?
  • Does each room have its own AST agreement?
  • Rental income (proposed or actual)
  • Types of tenants (students, professionals, housing association)

In addition to the above, lenders will also make standard mortgage assessments. This will include assessments on your affordability, the amount you wish to borrow and your credit score.

HMO mortgage lenders

Getting the right HMO mortgage for your property is crucial. An HMO mortgage with high rates or fees can soon start eating away at those great yields. You will need an HMO mortgage if you intend to rent the property as an HMO. If you have a standard buy-to-let mortgage but wish to change to an HMO model, inform your lender first to see if this is permissible.

Each lender has varied criteria, and the best deals are typically secured through mortgage brokers. The nature of your HMO will also eliminate or add lenders to the options you can choose from.

For instance, some lenders only lend up to a maximum number of rooms. This is why it’s important to understand your lender’s criteria before applying. An HMO mortgage advisor can guide you on this. Whether an HMO requires a licence or not can also make a difference.

Lenders for licensed HMOs

The majority of HMO mortgage lenders consider anything up to five bedrooms. Anything bigger may require a commercial mortgage. If your HMO requires a licence, you’ll need an HMO mortgage. This is because a regular buy-to-let mortgage wouldn’t be suitable.

The type of tenant you aim to rent to can impact the lenders available to you. Some lenders may decline you if you hope to accommodate students or housing-benefit tenants. This is simply because of the risk involved. Having a licensed HMO can benefit how a lender values the property.

Lenders may consider the proposed rental income when assessing the value of your HMO. This is particularly advantageous when you’ve converted the property and want to withdraw some equity.

Not every lender will value an HMO based on the rental income and base the valuation on the HMO being a standard home. This can restrict the amount you can borrow, which defeats the purpose of having an HMO mortgage.

Lenders for non-licensed HMOs

If your HMO doesn’t require a licence, it may be deemed too small for an HMO mortgage. Lenders may consider giving you a buy-to-let mortgage instead.

There may be lenders who would consider you for an HMO mortgage, but without understanding the nature of your HMO, it’s impossible to provide you with a tailored answer.

HMO mortgage rates

HMO mortgage rates tend to be higher than standard buy-to-let mortgage products. This is because the HMO mortgage market is less competitive regarding the number of lenders. Lenders prepared to lend on an HMO will charge slightly higher fees and rates for a mortgage. That being said, the income from an HMO should be more than enough to cover a mortgage, utility bills and maintenance.

In addition, an HMO mortgage lender will usually consider your rental income, which can drastically improve the maximum mortgage amount offered. HMO mortgages can be offered on variable and tracker rates. LTV rates usually start at 80% LTV, with higher deposits and lower LTV ratios offering more attractive rates.

HMO specialists

Number crunching is a must to make an HMO profitable. Our advisors specialise in HMO mortgages and can help you maximise your rental income by assessing your proposal. Making your HMO as profitable as possible starts with securing a great deal. Most lenders that offer preferential rates often do so through mortgage brokers.

Approaching lenders in the hope of securing a mortgage is never advised, as you won’t have a comprehensive understanding of each lender’s criteria. A specialist can ensure the right lender is approached and that you’re on the best rates you qualify for.

About the author

Martin Alexander
Senior Mortgage Advisor

Martin is a senior mortgage advisor who has held a CeMAP qualification for over 15 years while completing an MBA in Global Banking and Finance.