HMO Mortgages – What you need to know
What is an HMO Mortgage?An HMO is a House of Multiple Occupancy, which refers to any property that has more than one tenant from different families living in it.
If you wish to buy a property that meets this criteria, for example, a house let on a room by room basis, you will require an HMO mortgage. You will also need to obtain a license from the local authority in most circumstances.
Types of HMO MortgageAn HMO mortgage can be taken on either fixed-rate or variable rate terms and can be set up as repayment or interest-only, much like a standard residential mortgage, although most are set up on an interest-only basis. The interest rate is normally higher than for other mortgage types, given the commercial value of this type of property.
Who can get an HMO Mortgage?Whilst lenders have slightly different criteria for HMO Mortgages, most will be looking for the applicant to fulfill the following:
- You reside in the UK
- You are already a UK homeowner
- You are an experienced landlord with two years or more letting experience
- You are able to prove that you have a reliable income
- You have a strong credit score
- The property is valued at between £100,000 and £750,000
Additional criteria might be that you use a professional letting agency to manage the property, especially where your experience is shorter. Some also only offer finance to those letting properties with a specified maximum occupancy and may not approve properties intended for certain tenant types, for example, local authority or housing association tenants.
When would you use an HMO Mortgage?If you’re buying a property that has between two and five bedrooms that will be rented individually by members of separate families, for example, student accommodation or bedsits then you’ll need an HMO Mortgage.
If you’re planning to purchase a property with more than five bedrooms, you will likely require commercial finance, as most lenders will only consider HMO Mortgages for properties with a maximum of five bedrooms.
How would you arrange an HMO Mortgage?HMO mortgages are a highly specialist product and are ordinarily only available through a Mortgage Broker. Many lenders will only consider applications made via a qualified Mortgage Broker with specialist HMO knowledge.
Lenders will be looking for the property to meet set criteria, they will consider the property based on its value and its potential rental income. The loan amount is predominantly based upon the rental yield, rather than your personal affordability, much like with a Buy to Let mortgage.
How are HMO Mortgages different to Buy to Let Mortgages?Buy to Let Mortgages are not valid for properties with multiple tenancies, there are three main differences between an HMO and a Buy to Let Mortgage:
License RequirementA license is usually required from the council to operate an HMO rental property, whereas it’s not for a Buy to Let property. This is a requirement where there are more than three people (from different households), three storeys to the property or three separately lockable rooms.
CostAn HMO Mortgage is likely to be more expensive than a Buy to Let Mortgage in a number of ways. Arrangement fees are generally higher and a deposit of at least 25-30% is required.
HMO mortgage rates are also higher, as they’re more niche and therefore not subject to a great deal of competition.
How you apply for your mortgage, for example, an individual or limited company will also affect your tax liability as a landlord.
Lending criteriaHMO mortgage lenders apply stricter lending criteria to HMO Mortgages than standard Buy to Let Mortgages. For example, your experience as a landlord is more essential and your income requirement is likely to be higher, in line with the typical higher value of larger properties. There are also minimum and maximum property value and size requirements to comply with.
Other things to consider about HMO Mortgages
Better earning potentialThere is generally a higher rental income available in multiple occupancy HMO properties, given that they’re let on a room by room basis, rather than as a whole property.
Licensing rules to noteIt is a serious offence to rent out an HMO property without a license, where one is required. You are also unlikely to secure an HMO mortgage offer without the license.
Where HMO licenses are required, it’s per property, not per Landlord, so you will need a separate HMO application for each property you own. Different local authorities will each have their own criteria to meet in order to obtain a license. Licenses can be refused or withheld until properties meet their minimum acceptable standards.
Property standardsYou can only offer assured shorthold tenancies of between three and thirty-six months at a time.
HMO properties must have no more than four storeys and no more than one kitchen.
The property must have a maximum of seven available rooms available to let, although some lenders will only allow five.
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