Getting a Mortgage on a House of Multiple Occupation (HMO)

Houses in Multiple Occupation (HMOs) can be highly profitable investments for landlords who rent out individual rooms or sections to earn more overall income than with a standard buy-to-let (BTL). However, they come with greater complexities and often require a specific HMO mortgage.

In this article, we’ll explain how HMO mortgages work, the unique criteria sometimes attached to them, and why using a specialist broker will ensure you maximise returns on your HMO investment property.

Can you get a mortgage on an HMO?

Yes. While HMO mortgages are not quite as commonplace as standard buy-to-let mortgages, plenty of UK lenders offer them. Most borrowers will take out their loans on interest-only terms.

The UK government defines an HMO as “a property rented out by at least 3 people who are not from one ‘household’ (for example, a family) but share facilities like the bathroom and kitchen.” Each rented room usually has its own tenancy agreement.

What rates to expect

Take a look at our table below to get an idea of the current interest rates available for HMO mortgages.

Please note that the above rates were accurate at the time of writing but are always subject to change at the lender’s discretion. The best way to find the most up-to-date deals is to speak to a mortgage broker.

As with all mortgage types, a larger deposit often results in more favourable rates. Lenders offering the best rates typically do so only to borrowers who apply via a broker.

How to get an HMO mortgage

If you’ve decided that now is the right time to enter the HMO landlord sector, you can take some simple steps to make the process much more straightforward.

First, make an enquiry with us, and we’ll arrange for an HMO specialist advisor to contact you who can help with:

• Establishing the HMO regulations in the area you’re looking to buy ( large HMOs – with five or more tenants from more than one household – will require an HMO licence from the local authority. Once granted, an HMO licence is valid for five years in England and Wales – different rules apply in Scotland and Northern Ireland. It’s important to note the licence is issued for a property, not a landlord. A licence generally costs around £500 – £1000 but can be more. Your broker will be able to discuss this with you in more depth and assist you in getting the required license.)
• Creating a business plan required by mortgage lenders for these types of properties
• Finding the best mortgage lenders who have previous experience with HMOs and assist with submitting your application

Lending criteria for these properties

Lending criteria differ significantly from one lender to the next for HMO buy-to-let mortgages.

In addition to the providers’ standard eligibility factors such as age and credit history, they typically have criteria relating to:

• Experience as a landlord: Many providers will only approve HMO mortgages for people with at least two years of landlord experience. This is because managing an HMO presents additional challenges. That said, a handful of lenders will offer them to first-time landlords.
• Management arrangements: Some lenders will only approve an HMO mortgage if the property is managed by a letting agent rather than the landlord themselves. For inexperienced landlords, this is often a condition of the loan.
• HMO location: There are two main issues here. Firstly, lenders will need to be satisfied that the location has an adequate rental market for this type of property. For example, a city centre will usually be preferable to a rural village. Some lenders only lend in certain postcodes.
• Number of storeys in the building: Some lenders cap the number of storeys a building can have (typically at four or five), while others do not.
• Number of bedrooms: Again, lenders have different criteria here. Some limit the number of bedrooms to four and others who have no maximum. It is not always the case that each room houses just one tenant. If the area of the room meets local authority regulations, there could be more than one person in a single tenancy. You will need to also check that your lender accepts this.
• Number of kitchens: Not all lenders limit the number of kitchens, but some do.
• Tenants: You may be asked what type of tenant you will be trying to attract. Young professionals, for example, are considered to bring fewer problems than students.
• HMO licence: Some lenders insist you have a licence even if one is not compulsory. Others will not lend on one for which a licence is mandatory. We’ll explain more about why and when you need a licence later.

What size of mortgage can you get?

This will depend on how much rental income the property can generate. You will usually need to prove that the rental income from the property will cover at least 125% of the mortgage payments. With some lenders, this will be higher. This ensures you can continue to meet your contractual payments during void periods if repairs are required or if rates increase.

Many lenders have criteria regarding the maximum loan-to-value (LTV) for an HMO. If you speak to a specialist advisor, they will be able to advise you further on this.

Some mortgage providers amend their LTV based on the value of the loan.

For example:

• £1 million loan = LTV capped at 75%
• £1.5 million loan = LTV capped at 70%

However, not all valuations are based on the value of the bricks and mortar. Some lenders will value the HMO based on its potential rental yield (i.e. its business potential) rather than its market valuation.

Calculate your rental yield

Use our calculator below to work out the potential rental yield for the property you’re looking to buy:

Options for first-time landlords

As a first-time landlord, you will have fewer borrowing options, but it’s by no means impossible to get approved. Provided you have the right deposit amount, can prove affordability and have a strong business plan, there is no reason you shouldn’t be approved.

Some people even invest in HMO properties as their first-ever property purchase. This suits young people living with their parents who want to get on the property ladder and earn an additional income.

This type of borrower will face even greater restrictions in finding the right lender, but it can be done. You will usually need a minimum of 35% deposit and can expect to pay rates in excess of 5%. Applying through a broker who specialises in HMO mortgages is also recommended.

Getting a commercial HMO mortgage

You will need a commercial HMO mortgage if the HMO property is one where commercial business and living arrangements meet. If your building does not fall within any kind of trading or commercial activity, you might be able to look at straightforward buy-to-let mortgages instead.

Examples of properties

Properties such as pubs with living space for occupants, B&B guesthouses, student accommodation, and mother and baby units.

If you have bought a commercial space and intend to convert it into an HMO, this would fall in this bracket, as would converting an HMO into a family home. It is at each lender’s discretion to determine what falls within this product’s remit, so it is worth speaking to a broker first to get a clearer picture of your position.

• You will need to meet the standard criteria for a business mortgage, which you can find in full in our complete guide to commercial mortgages.
• Additionally, your property must meet specific requirements to qualify as an HMO. First, it must include accommodation space that non-family members can rent and share facilities, such as a bathroom or kitchen.
• Some lenders might also impose a cap on the number of accommodation spaces the property can have and may reconsider their lending decision if the property does not have a licence from the local council

Eligibility criteria

• You will need to meet the standard criteria for a business mortgage, which you can find in full in our complete guide to commercial mortgages.
• Additionally, your property must meet specific requirements to qualify as an HMO. First, it must include accommodation space that non-family members can rent and share facilities, such as a bathroom or kitchen.
• Some lenders might also impose a cap on the number of accommodation spaces the property can have and may reconsider their lending decision if the property does not have a licence from the local council.

Lenders

Specialist financiers who provide these types of mortgages include Landbay, Precise Mortgages, Shawbrook Bank and The Mortgage Lender, among others. Approaching directly is not recommended, as you might miss out on a better offer elsewhere.

Can you use a portfolio mortgage to buy multiple HMOs?

While each lender will have its own rules, in theory, you could add HMOs to your portfolio mortgage. This is a fairly standard practice for landlords and investors, and portfolio buyers usually go through commercial loans rather than HMO products. You can also add HMOs to a mixture of other properties in your portfolio, including semi-commercial and buy-to-let buildings.

Get matched with a specialist HMO mortgage broker

HMO mortgages are a complicated area of lending that demands expert knowledge, and each lender has their own strict criteria. Applying without the advice of an expert may well see you rejected on a technicality simply because you approached the wrong lender.

We work with expert HMO mortgage advisors who understand the industry and know which lenders will approve a loan in any given circumstance. Our broker matching service will assess your situation and then pair you up with the most appropriate broker based on knowledge and experience.

Call today on 0330 818 7026 or enquire online to get matched with your ideal broker.