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HMO mortgages
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What is an HMO?
HMO mortgages are a type of buy-to-let mortgage that is used to buy property that will be rented to multiple tenants from different households - otherwise known as HMO properties.
HMO properties provide great investment opportunities for landlords because of the higher returns possible from multiple tenants. However, this also makes them more risky, so it can be more difficult to secure an HMO mortgage compared to a buy-to-let for a single tenancy property.
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How do HMO mortgages work?
An HMO mortgage works like a traditional buy-to-let mortgage, but not all lenders are happy to offer buy-to-let mortgages on an HMO basis and there are a few key differences:
All large HMO properties and some standard HMO properties require a licence before HMO mortgage lenders will approve a mortgage
HMO mortgage rates are often linked to SONIA (Sterling Overnight Index Average), rather than the Bank of England base rate. This is typically more expensive as it's purely for commercial use
There is more extensive criteria for HMO lending when compared to standard buy-to-let mortgage criteria. The criteria also vary widely from one lender to another, as some prefer certain types of property or tenant over another
Which properties need an HMO mortgage?
Any of the following building types could be considered HMO - which you may also hear referred to as a multi-let. However, it’s how you intend to let them to tenants that determines whether you'll need a traditional buy-to-let or an HMO buy-to-let mortgage:
Bedsits
House shares
Private halls of residence
Self-contained flats
Cluster Flats
Hostels
On-site business accommodation for employees
To be classed as a HMO tenancy, the property needs to be let to three or more tenants from different households or families, on separate tenancies.
There also needs to be an element of shared facilities. For example, the kitchen, bathroom, lounge, or similar communal provisions are shared between tenants.
How do I qualify for an HMO mortgage?
To get a mortgage for an HMO property the typical buy-to-let mortgage criteria will apply:
At least 25% deposit
Property can generate a rental income of 125-145%
Lender specific income requirements and age limits
HMO mortgage lenders are also likely to ask you to meet any or all of the HMO specific criteria shown below:
'Certain local authorities restrict the number of HMO properties in any given area - lenders will want to ensure that your purchase does not exceed these limits'
HMO mortgage criteria
Property type
Property location
Tenant type
Landlord experience
Professional letting management
Licensed property restrictions
Types of HMO mortgage
There are not really different types of HMO mortgage, simply lenders that will only accept certain types of HMO property.
Some lenders accept only standard HMOs, whereas others will also consider large HMO properties.
HMO
A House in or of Multiple Occupation (HMO) is a property let out to more than three tenants from different households. Tenants typically have their own private bedrooms but share some aspects of the facilities in the property, such as the kitchen, bathroom and/or lounge.
Large HMO
A large HMO shares the same definition, but has five or more tenants from different households, rather than three.
The major difference is that all large HMOs require a licence from the local authority. However, to further complicate things, some local authorities require a licence for standard HMOs too - so be sure to check.
If your property is larger than five bedrooms, you may need to look at commercial finance instead as this tends to be the cut-off point for many HMO lenders.
What is an HMO licence?
You can get an unlimited fine if you rent out an HMO without a licenses that's required.
If multiple properties in your portfolio require this type of licence, each must have one - which will need to be renewed every five years (three in Scotland).
Some licences include conditions, such as limiting the number of rooms, or improving the quality of shared facilities, depending on the local authority. It’s also fairly common for licences to be rejected.
Which lenders offer HMO mortgages?
There are still far fewer lenders offering HMO buy-to-let mortgages than standard ones. That said, over 800 products are available from lenders such as Santander and Lloyds, as well as many building societies and specialist lenders.
As there are fewer lenders and the criteria can be quite extensive, it’s a good idea to use a mortgage broker if you’re looking for a mortgage to buy an HMO property.
What mortgage rates can you get for a HMO mortgage?
As HMO mortgage are quite niche, there is less competition between lenders and therefore, interest rates tend to be higher.
Interest rates based on SONIA also tend to be higher than those based on the Bank of England base rate.
As with any other mortgage, the best HMO mortgage rates are typically available to those with the largest deposit, and that pose lowest risk to the lender. ”Kellie Steed, Mortgage Content Writer
HMO FAQs
What is the difference between an HMO and a buy-to-let mortgage?
An HMO mortgage is a type of buy-to-let mortgage used for a specific type of property. Traditional buy-to-let mortgages do not allow for a property to be let under multiple tenancies, whereas by opting for an HMO buy-to-let you’re ensuring that you can do so.
Not all lenders are happy to incorporate multiple tenancies into one mortgage arrangement and the process can be longer and more complicated than a traditional buy-to-let purchase.
What are the tax implications for an HMO borrower?
The tax implications will vary depending on whether you intend to buy as an individual, through a limited company, or via a Special Purpose Vehicle (SPV).
Either way, this is an income generating investment, so you'll need to pay tax on the income gained from rentals, and capital gains tax on profits made from the resale of HMO properties.
It’s advisable to talk to an independent property tax adviser for guidance, as how you choose to structure your business will impact the amount and type of tax you're liable for.
How much can I borrow on a HMO mortgage?
Like traditional buy-to-lets, you can typically borrow around 75% loan to value (LTV), but some lenders may go as high as 80% LTV. However, to get a higher LTV loan, you will likely need HMO landlord experience and potentially need to meet other additional criteria, such as a higher EPC rating.
As it's a buy-to-let, the loan will be based on the potential rental yield of the property, rather than your personal affordability - although this will usually also be considered.
YOUR HOME/PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.
The FCA does not regulate mortgages on commercial or investment buy-to-let properties.
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