(House in multiple occupation)
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Are you considering buying a property to use as a house in multiple occupation (HMO) or converting the use of an existing property for HMO purposes? Whilst HMOs can be complicated to set up and time-consuming to manage, they can be far more lucrative than standard buy-to-let investments. There’s also more risk involved with an HMO investment and the criteria set by lenders for a mortgage are stricter than for standard buy-to-let properties. As a result, you need a specialist mortgage for your HMO project.
At Trinity Finance, we have extensive experience with HMO properties and work closely with lenders offering this niche type of mortgage. In this guide, we’ll explain some of the differences between HMOs and standard buy-to-lets, what you can use an HMO mortgage for, the criteria and whether you need an HMO licence to be approved for a mortgage.
When is a property classed as an HMO?
A property is defined as being an HMO when it is occupied by three or more unrelated tenants who have their own bedrooms but share facilities, such as a toilet, kitchen and bathroom. A standard buy-to-let property, on the other hand, is rented out to a single household, such as a family, couple or individual. For this type of tenancy, one tenancy agreement is signed and one rental payment is made each month. Tenants in an HMO property pay separate rents and usually sign individual tenancy agreements.
For these tenants, an HMO gives them the opportunity to rent somewhere when they’re unable to afford rented accommodation on their own. From your point of view as a landlord, this enables you to collect a higher rent overall as you can charge each tenant more whereas you’re limited to what you can charge a single household.
As mentioned earlier, an HMO is a riskier investment than a standard buy-to-let property. There’s a higher turnover of tenants, the likelihood of more void periods, an increased need for maintenance as well as more wear and tear on the property. As a result, you need a specialist HMO mortgage instead of a standard buy-to-let one.
What is an HMO mortgage?
An HMO mortgage is more complex to arrange than a standard buy-to-let mortgage with stricter lending criteria to minimise the lender’s risk. This niche mortgage is also usually more expensive with higher rates and fees. Interest-only mortgages tend to be a popular choice and this option means you only have to pay the interest each month rather than repaying the capital. This helps to keep your monthly payments lower. You can arrange this type of mortgage in your name or via a limited company, special purpose vehicle (SPV) or limited liability partnership (LLP), which will provide you with tax benefits.
The type of loan you can have for an HMO property depends on the stage it’s at, as detailed below.
- HMO mortgages and remortgages: These are for existing multi-let properties.
- HMO refurbishment mortgages: Suitable for projects requiring either light or heavy refurbishment, these mortgages are for existing HMO properties that need refurbishment as well as for properties that are to be converted to HMOs.
- HMO development loans: This type of loan is used to finance extensive build projects.
Not all lenders offer mortgages for HMO properties and those who do provide them don’t necessarily deal with each of the different types. Lenders also have different criteria that have to be fulfilled for each of these loan types and, for the purpose of this guide, we’ve detailed the criteria for standard HMO mortgages below.
Our mortgage brokers, located throughout Kent, London and Edinburgh, are highly experienced in dealing with HMO loans and will approach the right lender for your needs. When you’re ready to proceed with your HMO investment, just give us a call on 01322 907 000 and we’ll be happy to help you. If it’s out of office hours, send an email to us at firstname.lastname@example.org or a message via our contact form and one of our specialist brokers will get in touch with you as quickly as possible. We’ll find the optimum HMO mortgage deal to suit your needs and maximise the financing option for your investment.
The criteria for an HMO mortgage
When applying for this niche mortgage, both you and the property you wish to buy need to fulfil certain specifications to be eligible.
Lenders usually expect you to be an experienced landlord before dealing with an HMO property although there are lenders who consider first-time landlords. Part of a lender’s criteria may be for you to instruct a third party to manage the property on your behalf.
As with any mortgage application, the lender will assess your affordability and check your credit score. Whilst some lenders insist that you have a minimum income, others offer a more flexible approach and offer mortgages without this requirement. The rental income is also usually taken into account, just like it is for standard buy-to-let mortgages. This often needs to meet a set percentage over the monthly mortgage payment you’ll have to make, such as 25% higher.
You’ll need a substantial deposit for your HMO mortgage. Most lenders offer a maximum loan-to-value (LTV) ratio of 75%. This means you need to have deposit funds that equate to 25% of the property’s value. You may find that some lenders have more stringent requirements, offering much lower LTVs of 60% so that you’d need to have a 40% deposit available. On the other hand, you may be lucky enough to secure a mortgage via a lender offering a higher LTV of 80% or even 85%.
Some lenders insist that the property has a minimum value, such as £75,000, while others stipulate a maximum number of bedrooms. Lenders generally want to know:
- How many lettable bedrooms there are
- What communal rooms are available
- How many storeys the property has
- Where the property is located
- The types of tenants that will be residing there, such as working professionals or students
- Whether each tenant will sign an individual tenancy agreement
- The rental income you expect to achieve
- Whether an HMO licence is needed
As more risk is involved with an HMO investment, you may find that some lenders insist on a minimum number of tenants or that you have an HMO licence for the property.
Do you need an HMO licence?
In Scotland and Northern Ireland, it’s mandatory to have a licence for your HMO property. In England and Wales, however, whether or not you need to apply for a licence depends on the size of the property and the local council’s licencing requirements. Large HMOs must have a licence and a property falls under this category if it’s rented to five or more tenants comprising more than one household and the tenants share facilities that can include a kitchen, toilet or bathroom. Smaller properties don’t necessarily need HMO licences as this is determined by the local council.
Licence validity and costs
An HMO licence is assigned to a property rather than to you as a landlord. Therefore, if you have more than one HMO property that falls under the licencing requirements, you need to obtain a licence for each one. If your property requires a licence and you rent it out without one, it’s considered a serious offence and you may be subject to an unlimited fine. An HMO licence is valid for up to 5 years, except in Scotland where licences are valid for a maximum of 3 years. Wherever your property is located, the licence must be renewed before it expires.
The costs for HMO licences vary depending on the local councils. Some provide fixed rates while others charge according to the number of bedrooms in the property. The fees can range from hundreds to over a thousand pounds so it’s important to take this into account when working on the calculations for your HMO investment.
Lenders’ licence requirements
Due to the risk involved with HMO investments, some lenders only provide loans for licenced properties. Others, though, are happy to lend when properties don’t require an HMO licence. The time taken to approve licence applications varies between councils and lenders take this into account. Therefore, if you need a licence and don’t already have one, the lender will likely give you a time frame within which to apply for a licence while your mortgage application is being processed. This is on the proviso that you’re deemed to be ‘fit and proper’ to manage an HMO property. If you already have a licence for the property, this can help to accelerate the underwriting process.
Approval of the licence
You should be aware that licence applications aren’t always approved. You may need to make improvements to the property to bring it up to the required standards, for example, before you can reapply for a licence. Don’t worry if HMO investments are new to you — our mortgage brokers, based in Kent, London and Edinburgh, can help determine whether you need an HMO licence for your property and assist you with the process.
Boost your investment opportunities with an HMO mortgage
At Trinity Finance, we’re here to help you realise your investment goals. Whether you’re an experienced or first-time landlord, we’ll approach the right lender on your behalf and secure the best mortgage deal for your needs. Lenders often only promote HMO mortgages through brokers rather than on the open market so you can rest assured we have access to the latest deals. We have good relationships with flexible lenders who can provide bespoke solutions for your HMO mortgage, remortgage, refurbishment mortgage or development finance needs.
Simply call us on 01322 907 000 to discuss your HMO investment requirements with one of our specialist mortgage brokers. We can offer advice on having an HMO mortgage in your name or via a limited company, special purpose vehicle (SPV) or limited liability partnership (LLP). We can also provide professional guidance on the legal requirements for HMO properties and your tax obligations as a landlord. As well as arranging your HMO mortgage, our financial experts can ensure you have the correct insurance cover in place. If it’s out of office hours, send your HMO enquiry to us by email at email@example.com or via our contact form and one of our mortgage experts will reply to you as quickly as possible.