HMO Mortgages stands for house of multiple occupations (HMO). This type of rental property is often considered to be more profitable than a standard buy to let. There is often some confusion over what classes as an HMO property. Knowing this will allow you to get a clear understanding of the type of finance you will need to purchase your investment property.
What exactly is an HMO?
The Government defines a house in multiple occupation as a property rented out by at least 3 individuals who are not living as 1 household, for example not a family. The individuals share facilities such as living area, bathroom and kitchen but have separate bedrooms that they individually rent from a landlord. It is also more commonly known as a house share.
The Government defines a household as a single person or members of the same family who live together
- Couples married or co-habiting
- Extended Family
- Step Parents/Step Children
HMO properties are increasing in popularity with both tenants and landlords. With the rising cost of renting it is a cost effective approach for young professionals and single individuals. It is also a good investment for the landlord as the yields that can be generated can be higher than a standard buy to let investment. Based on research average gross yields can be up to 3% higher than a standard BTL.
Do I Need An HMO License?
Since October 1st 2018 it is now mandatory to be licensed if you plan on having an HMO that is going to be let to 5 or more tenants, from two separate households that are sharing living space (Kitchen, Bathroom, Living room). Previous to this new regulation you would only require a license for large properties of 3 or more stories. The scheme has now been extended to include a large amount of smaller HMO’s of less than 3 storey’s.
Licenses are issued by your local council where the house is situated. Licenses are valid for 5 years and you will need a separate license for each property if you run more than one HMO. The penalty for running an HMO without the correct license is up to £20,000 so ensure you check you have the correct licenses before anything else.
Read more about HMO licenses here https://www.gov.uk/house-in-multiple-occupation-licence
Things to Consider
HMO properties are more complex than a standard buy to let and there are additional factors that will have to be planned for to ensure that you know all of the details before getting a mortgage for an HMO
When you have a number of unrelated individuals living under the same room it is enviable that there will be some issues that will arise such as different of opinions or noise complaints. It is a must to set out house rules to stop any issues before they happen. This will save you time and money in the long term.
Take into account additional security for bedrooms (locks) there will also more likely be more moving in and out of tenants so it is likely to require more upkeep than a single household BTL.
Mortgage Lenders for Licensed HMO
Getting a mortgage for a licensed HMO can be fairly straight forward provided you have a good credit history and deposit. Each lender has their own criteria and preferences on what they are looking for, this is why it is beneficial to speak with a specialist mortgage advisor that has knowledge of lending criteria and can search the whole of the market to find you the best deal.
Different Lenders have different preferences such as
With HMO properties landlords can generate a larger monthly income than the traditional BTL some lenders will take this into consideration when calculating lending decisions. Other lenders will only lend based on the value of the property as it was valued by a survey.
Amount of Bedrooms
The majority of lenders will be able to offer HMO mortgages for properties of up to five bedrooms. More specialists lending will be needed for larger HMO property types.
HMO Mortgage Rates
HMO mortgage rates are typically higher than a more traditional buy to let mortgage. This is not to say that the rates are too high. The rate that a lender will give you will depend on circumstances such as credit score, property value, and potential rental income. The larger deposit you have the more competitive rate you will be able to get.
How Much Can I Borrow?
When lenders work out how much they are willing to lend on an HMO property they will take into account the letting history (do you have a property portfolio?) along with the deposit size. Most lenders will lend at a maximum loan to value (LTV) of 80% for example if the property is valued at £100,000 the maximum mortgage a standard bank is likely to give is £80,000 meaning that you would need a deposit of £20,000 to secure the property. Some specialist lenders will lend up to 85% but this is a high LTV and to get this rate you will need to show a successful history of BTL or HMO properties. In general the higher the deposit the more competitive the rate will be. Getting a lower rate will mean lower monthly repayments which can help to increase the gross yield of your property. Lenders will typically lend from 5-30 years for HMO properties and this will depend on the age of the applicant.
HMO Mortgage with Bad Credit
If you or your business has had bad credit in the past it will make it more difficult to secure a mortgage. This doesn’t mean that it is impossible but it will depend on what sort of bad credit and how long ago it was. Speak with one of our specialist brokers that has experience helping our clients get there HMO mortgage with bad credit.
Get Expert Advice
If you are ready to proceed with find the best rate for your HMO mortgage call us or fill in one of our enquiry forms and speak with an expert HMO mortgage broker that has knowledge and the ability to search the whole market to get you the best deal.