If you want to buy [or remortgage] a property and rather than let it to one tenant, you want to maximise the space and revenue potential so decide to instead let the property to individual tenants – you’ll need a HMO mortgage.
In any market, bull or bear it can be far more lucrative to individually sublet rooms to students or working people than letting a property signulary, to say a couple or family.
Naturally then the high yields on HMO’s have attracted savvy investors looking to capitalise on higher house prices and a better ROI.
What is a HMO Mortgage
A ‘House in Multiple Occupancy’ mortgage or H.M.O for short, is a specific mortgage product offered to investors, both individuals and through LTD companies, for purchases or remortgages of properties where the intention is to let to more than one tenant.
The truth is they aren’t always called HMO mortgages as they still come under the Buy-to-Let [BTL] bracket with many lenders but due to the increased popularity of HMO’s over the last two decades lenders now have tailored specific mortgage products. Despite the name however the mortgage itself is really just like any other.
Do you need a HMO Mortgage?
Not necessarily, but depending on the location of the property you may need a license to operate an HMO.
A HMO is defined as a property let to 3 or more people from more than one household. A ‘household’ is usually a couple or family but this does extend to single persons too. You could then by definition actually rent to 3 sisters if they were each classed as being from a different household themselves, but lets keep this simple for now.
The typical set up inside a HMO is 3 or more rooms let to individuals but they then share some ‘common’ living space like say the kitchen and or bathroom.
As I said above 3 or more people from more than one house is the official definition [for any clarification there go onto the .gov site] but there are grey areas as lenders actually have their own clarification of an HMO.
For example Mortgage Works, sister company of Nationwide Building Society, defines an HMO as being occupied by 5 or more people with more than one tenancy agreement. So, depending on your proposed lender you may not actually have to get a specific HMO mortgage. Why then ‘5 or more individuals’? Well it comes down to the law and licenses.
HMO License in England & Wales
You only require them in certain circumstances, such as if the property is deemed to be ‘large’. And it’s deemed to be large if it’s going to be let to 5 or more individuals. So this then ties in with most lenders criteria like The Mortgage Works, who class an HMO as 5 or more individual lets. The property still has to meet some criteria and whom ever wishes to hold the license needs to be ‘fit and proper’ to do so.
The rules for HMO’s in Scotland and N. Ireland are more straightforward – you require a license, it’s that simple.
So to answer the question ‘do you really need a HMO Mortgage’? No not always, it depends on the number of individuals you want to let, you could just need a Buy-to-Let mortgage.
Can I Get a Buy to Let Mortgage for an HMO?
So as we figured out above, yes sometimes all you actually require is a buy to let mortgage for an HMO. Most often this is when you want to sub let to 4 or less individuals. 5 or more and lenders often class this as an HMO are therefore requiring an HMO mortgage.
BTL mortgages are readily available from nearly all lenders but often require you to have 1 or more BTL properties, to demonstrate ‘landlord experience’.
HMO Mortgages for first time landlords
This can be particularly difficult to obtain. Even through a broker there is only a very slim chance of being able to obtain a mortgage for an HMO in your name if you don’t already own a BTL or investment property.
Due to the ‘turn over rate’ of the individual lets within an HMO, HMO criteria and required licences, lenders view first timers as high risk and as such HMO mortgages for first time landlords aren’t always readily available.
You could look down the avenue of getting either a BTL or HMO mortgage through a limited company and have someone with landlord experience as a director of that company.
One other option could be firstly renting the property out to a couple or family and then when you have the required ‘experience’ get an HMO mortgage when you come to remortgage?
HMO Mortgage Criteria
- Maximum number of storeys – If the property is more than 4 storeys you may not be able to get a mortgage. [This is usually because of the risk of fire.]
- No more than one kitchen within the property
- A maximum number of bedrooms [this could be 6-8]
- Communal seating area is often required
- Experience – 1-2 years of landlord or HMO experience can be necessary
- Minimum value of a property
HMO Mortgage Rates
Around 3.5% fixed for 2-5 years is common. That is with a 25% deposit or 75% LTV [Loan to Value]. 75% LTV is typically the requirement with any lender. Higher LTV, BTL or HMO mortgages do exist but interest rates are often north of 5%. Having said that with HMO properties the rental yield is better than average so this could still make for a lucrative investment.
You could, to get yourself on the ladder, take out a mortgage with a higher LTV [and therefore a higher interest rate], wait for property prices to go up before remortgaging and then you would require a lower LTV mortgage – being then able to obtain a better interest rate than before. But that’s provided the Bank of England base rate hasn’t increased during that time, pushing up commercial lending rates. The property market is a market like any other after all. Work out your risk reward beforehand to protect any downside.
Try our HMO Mortgage Calculator
Ok actually it’s not specifically a HMO mortgage calculator but you don’t need one. To work out mortgage repayments just put in the property purchase price and adjust the 3 other categories. You can change things, like the mortgage term and the deposit amount, until you find that perfect monthly amount.
Top Tip: Remember to stress test yourself. Banks do this anyway so you may aswell beat them to it. Calculate that you have an unforeseen drop in rental income of 20% pa. Can you still cover the monthly repayments? Ask any seasoned property investor about void periods and they will give you a long lecture about factoring this in. So be smart and do this from the start.
Buying an existing HMO
For properties of the same size even on the same road you will usually pay more for a HMO. HMO’s offer far superior yields and as such property prices for HMO’s are normally higher than non HMO’s. For anyone not wanting to obtain licenses, instruct agents to fill the rooms and generally just hit the ground running, buying an existing HMO can make the most sense.
For other investors looking to take on more risk could come greater reward. Obtaining any licenses, making any alterations to the property and filling rooms all takes time. That time could be expensive with no income to pay the mortgage. But the minute you have everything in place and everything let, you could expect significant capital growth from the property on day one.
If you are buying an existing HMO check any required licenses are in place and that the property complies with regulations.
HMO Mortgage Lenders?
Barclays HMO Mortgages
They don’t offer a mortgage with a HMO label. They simply class them under their Buy-to-Let umbrella. Barclays state you don’t need to have a residential mortgage to apply and their other rules and criteria are no different to most other lenders:
- Must be 21 or over
- Typically a 25% deposit is required
- You cannot live in your own BTL property
Santander HMO mortgages
Again like Barclays there is no mention on their website about specific HMO mortgages so they are classed as ‘standard’ Buy-to-Let mortgages.
Mortgage Works HMO Mortgage
They do offer a specific HMO mortgage but only classify them as HMO properties if there are 5 or more rooms. So you may or may not require a specific ‘HMO mortgage’ with The Mortgage Works but this is dependent on the number of individuals you want to let to.
Aldermore HMO Mortgage
Aldermore offers a really good range of HMO mortgages for most situations including ‘large HMOS’ for over ‘7 bedrooms’. Aldermore does state that you are required to be 21 years of age to apply for a BTL mortgage with existing landlord experience, but 25 if you don’t have any experience.