When looking to invest in a house in multiple occupation (HMO), you may be confused about your borrowing options. With different property sizes, configurations and tenant types to consider, the mortgage products offered by lenders vary accordingly. Do you need a standard HMO mortgage or is a commercial HMO mortgage needed?
What is an HMO?
An HMO is a property that’s rented out to three or more tenants from different households. They each have their own bedroom but share communal areas, such as the kitchen and bathroom. For example, you can rent out your HMO property to a group of working professionals or a group of students.
When does an HMO require a commercial mortgage?
If your property falls outside the standard criteria for an HMO mortgage, that’s when you’ll need a commercial mortgage instead. This can apply if your property is a large HMO, is an unusual type, needs an investment-based valuation, has a mixed use or is part of your portfolio refinancing strategy. We’ll explain each of these below.
Large HMOs
A large HMO is a property that is rented out to five or more occupants who form more than one household. It’s considered to be a specialised business investment rather than a standard residential rental investment. There’s generally a higher tenant turnover, a larger maintenance requirement, a higher degree of management involved and the need for HMO licensing. The property valuation is income-based rather than being a bricks-and-mortar valuation, which is typically carried out for small HMOs. As such, specialised underwriting is required that comes with a commercial mortgage.
Mixed-use properties
A mixed-use HMO is a property that combines residential and commercial aspects on the same title. For example, flats located above a shop, a building that is divided between professional offices and shared housing or a converted pub with rental accommodation on the upper floor. As the income streams are divided between commercial and residential tenants and the property requires complex valuations and needs a higher level of management, either a commercial or semi-commercial mortgage is required.
Unusual property type
An unusual property type, often involving a complex conversion, increases the risk for a lender. Examples include converted commercial buildings, such as care homes, pubs, office blocks or churches. Former hotels and guesthouses fall under this category as do mixed-use properties, purpose-built student accommodation and large historic homes that have been retrofitted. Needing to comply with various HMO regulations and licensing requirements, these properties require commercial financing.
Investment-based valuation
Some HMO properties are valued based on their rental yield rather than a bricks and mortar value. This is especially the case for large HMOs, which are classed as business investments because they generate a much higher income.
Portfolio refinancing
If you are buying or refinancing multiple HMO properties under one loan rather than dealing with a single property, you’ll need a commercial mortgage. This is due to the complexity of the arrangement and the risk involved for the lender, with a need for specialised underwriting.
Speak with our HMO mortgage specialists
To ensure that you have the right type of finance in place for your HMO, give us a call on 01322 907 000. Our HMO mortgage brokers can discuss the property details with you to ascertain whether you need a standard HMO loan or a commercial mortgage. We work closely with HMO lenders and can provide you with a tailored financing solution for your investment property.