To finance a project for a house in multiple occupation (HMO), you need a specialist mortgage.
An HMO property is defined as one that’s occupied by three or more unrelated tenants who share facilities, such as kitchens, bathrooms and toilets. As such, you can’t use a standard buy-to-let mortgage as this is designed for a property that’s occupied by a single household, such as a family, couple or individual.
At Trinity Finance, we have formed good relationships with lenders who provide funding for HMO properties. Whether you’re looking to buy an HMO property, convert an existing one to be used as an HMO, refurbish an HMO property or carry out extensive build works, we can find the right type of financing for your needs. In this guide, we’ve detailed the different types of HMO mortgages available and their uses.
Why do you need a specialist mortgage?
From a lender’s point of view, an HMO property is considered to be more of a risk than a standard buy-to-let property. The property has to meet certain standards and there are various legal requirements to comply with. The tenants usually sign individual tenancy agreements and make their rental payments separately. Due to the nature of the tenancy, with tenants sharing communal areas and lacking the care that would be taken with a single household, more maintenance is required and the property suffers from more wear and tear. In addition, there is a higher turnover of tenants and more void periods between tenancies. To mitigate their risk, lenders have stricter criteria for HMO mortgages and charge higher rates and fees. Despite this, HMO investments are popular as they can yield high returns.
Our mortgage brokers, located throughout Kent, London and Edinburgh, can guide you through the complex process to make it as straightforward as possible. They can help you decide whether to arrange the loan in your name or via a limited company, a special purpose vehicle (SPV) or a limited liability partnership (LLP). They can also advise you on your legal and tax obligations as an HMO landlord and ensure your mortgage application is tailored to achieve the best solution for your needs. When you’re ready to proceed, simply give us a call on 01322 907 000 to discuss your HMO project. If it’s out of office hours, send an email to us at firstname.lastname@example.org or an enquiry via our contact form and one of our specialist brokers will get in touch with you as quickly as possible.
HMO mortgages and remortgages
HMO mortgages and remortgages are for existing multi-let properties. Interest-only mortgages are a popular choice as with this option you only have to pay the interest each month. Without having to repay the capital, your monthly payments are much lower.
The majority of lenders set a maximum loan-to-value (LTV) ratio of 75% for HMO mortgages so you’ll need a substantial deposit equating to 25% of the property’s value. Some lenders are more limiting and only offer lower LTVs of 60%. This means you need to have a 40% deposit to proceed. On the other hand, there are more flexible lenders who are prepared to offer higher LTVs of 80% or even up to 85%.
The criteria to be met
As mentioned earlier, lenders have stricter criteria for this type of loan with both you and the property having to meet certain specifications.
Your eligibility for an HMO mortgage
Usually, lenders prefer you to be an experienced landlord before venturing into an HMO arrangement. There are lenders, however, who will consider your application if you’re a first-time landlord. As part of their lending criteria, some lenders may insist that you employ a third party to manage the property on your behalf.
As you’d expect for a mortgage application, the lender will assess your affordability and carry out a credit score check. Some lenders require that you have a minimum income while others are more flexible and don’t have this stipulation. The rental income for your property is usually taken into account in the same way as for standard buy-to-let mortgages. It often has to be a certain percentage, such as 25%, higher than the amount you’ll make for the monthly mortgage payment.
The property’s suitability
Lenders often insist that a property has to have a minimum value, such as £75,000, for them to consider offering an HMO mortgage. Other lenders require the property to have a maximum number of bedrooms. As HMO investments involve more risk, some lenders may insist that your property is suitable for a minimum number of tenants or that you have an HMO licence for it. Typically, lenders 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
HMO refurbishment mortgages
This type of mortgage is suitable for projects that require either light or heavy refurbishment. It can apply to an existing HMO property that needs refurbishment or a property that you wish to convert to an HMO. For example, you may wish to upgrade your existing HMO property to benefit from a higher rental income or to buy a property that’s uninhabitable with the purpose of renovating it to meet HMO standards. Another reason to consider an HMO refurbishment mortgage is if you need funds for an HMO development project but would rather not use bridging finance.
Light refurbishment works
This level of refurbishment improves a property without the need for any structural changes. The property’s overall use isn’t changed either. Light refurbishments can include rewiring the property, fitting a new bathroom and kitchen, redecorating the property internally and externally, replacing the central heating system and conducting specialist works, such as treatment of the timber.
Heavy refurbishment works
This degree of refurbishment is either used to improve or convert a property. To proceed with this type of project, you’ll need to obtain planning permission or building regulations approval. Heavy refurbishments can include all structural work, extensions, loft conversions, altering the property’s internal layout and conversion works that change the use of the property.
The lending criteria
To be eligible for an HMO refurbishment mortgage, some lenders stipulate that you need to be a homeowner or have had a buy-to-let investment for at least a year. Others may require that you have reached a certain level of experience as a property investor and own a specified number of properties. Some lenders expect you to have experience when it comes to property refurbishment.
How do HMO refurbishment mortgages work?
You can take out this type of mortgage on either a repayment or interest-only basis and lenders usually offer funds of up to 75% of the property’s value or purchase price. It may be possible for you to arrange a deal with a lower LTV while the refurbishment works are in progress and then switch to a higher LTV arrangement when the refurbishments have been finished. Check with your mortgage broker to ensure that you won’t incur an early repayment charge for this type of deal.
The lender will expect the refurbishment works to be completed within a predetermined time frame, such as 6 months. You should be aware that you may need to apply for an HMO licence for the property upon completion of the works. Our mortgage specialists can advise you on this, depending on the size of your property and the local council’s requirements.
HMO development loans
For an extensive build project that requires a lot more work than heavy refurbishments, you need an HMO development loan. You can use this for a large-scale conversion or to construct a property from scratch. HMO development finance is also suitable for part-completed projects, such as a stalled development or a building that has been partly constructed.
How does development finance work?
With development finance, funds are provided in advance for you to purchase the property or land and then additional funding is released in stages so that you can carry out the required works. These stages are generally prearranged with the lender and are a good way to keep track of your budget. Building projects can often fall behind schedule, however, or even require additional funding when unforeseen issues occur. In such a situation, a lender will usually agree to change the payment stages to accommodate the project needs.
HMO development finance is a short-term loan, which is usually secured against the building that’s to be developed. You can, however, provide a different property or site for security if need be. Lenders prefer you to be experienced with HMO properties and development projects but there are those who will provide funding even if you’re a first-time developer. To be approved for a loan, you need to provide the lender with details of your exit strategy. For example, you may decide to sell the property when the work has been completed and repay the loan from the sale proceeds. Alternatively, you may prefer to refinance your newly developed HMO property so that you can rent it out.
What costs are involved?
The interest for this type of funding is usually rolled up and added to the loan. This benefits your monthly budget as you don’t have to make interest payments each month. There are other costs to consider as well as the interest and these vary between lenders. They generally include:
- An arrangement or facility fee: This is charged by the lender as a percentage of the loan amount – typically between 1% and 3% – and is usually added to the loan.
- A valuation fee: A valuation must be carried out by a surveyor to determine the current market value of the building or land and to give a projected gross development value.
- The legal fees: You need to pay your own legal fees as well as those of your lender.
- An exit fee: Not all lenders charge an exit fee but those who do often charge a percentage of the total loan amount while some lenders base it on the gross development value.
What happens next?
As mentioned earlier, you have to know your exit strategy before you proceed. When the work has been completed, you can sell the HMO property and repay the loan from the sale proceeds. On the other hand, you may prefer to rent out the property when the development project has finished. In this case, you can refinance to an HMO mortgage. You’ll benefit from a lower rate than the one provided during the construction phase, which will help to increase your profit margin.
It’s a good idea to prearrange this with your lender and avoid paying an early repayment charge. Our mortgage brokers, located throughout Kent, London and Edinburgh, can compare the different rates, fees and terms of refinancing deals offered by lenders before you make a decision on the initial loan. That way, you can move forward with your development plans knowing that the optimum lending options are in place.
Look no further for your specialist HMO mortgage
At Trinity Finance, we have extensive experience with HMO projects and their financing requirements. HMOs are increasingly in higher demand and provide high returns. However, if you’ve already searched for a loan yourself, you’ll know that not all lenders provide funding for HMO properties and those who do offer loans don’t necessarily deal with each type of HMO mortgage. This is due to the riskier nature of HMO investments as well as the specific standards, regulations and licencing requirements that have to be met. Our mortgage brokers work closely with specialist lenders to ensure the right type of mortgage is secured for your HMO investment. Whether you need a standard HMO mortgage, a remortgage, a refurbishment mortgage or a development loan, just give us a call on 01322 907 000 to get started with your loan application.
We can help you realise your HMO dreams whether you’re an experienced investor or a first-time landlord. We can advise you on the differences between arranging the loan in your name or via a limited company, a special purpose vehicle (SPV) or a limited liability partnership (LLP). We can also guide you on your tax liabilities and legal obligations as an HMO landlord, help determine whether your property requires an HMO licence and arrange the correct insurance cover on your behalf.
HMO mortgages are often only available via brokers rather than being advertised on the open market. This means we always have access to the latest deals and can tailor your application to secure the optimum solution for your needs. Our specialist mortgage brokers are available on 01322 907 000 to discuss your HMO financing options. If you prefer, send your enquiry to us by email at email@example.com or via our contact form and we will reply to you with more information to help you get started on your HMO journey.