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How to Secure an HMO mortgage

Looking to get HMO Mortgages? Our mortgage advisors are here to help you secure the right product for your needs, whatever your circumstances.

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What is an HMO?

A House in Multiple Occupations (HMO) is a rented residence fit for three or more tenants. HMOs don’t apply to households and family units. The tenants are unrelated. They can be students renting a hostel or an employee housing space.

Nevertheless, each unit in the residence can house an individual, a family, or a couple. For instance, an HMO can accommodate one family unit and two single persons. They’ll share communal areas such as bathrooms and kitchens.

Landlords can charge each unit separately, accumulating more rental income. They’re responsible for utility bills and repairs.

 
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An HMO mortgage is one of the most profitable options in the housing market. It allows you to rent the residence to multiple unrelated tenants. Despite the monetary benefits gained from HMO mortgages, they are more challenging to manage and maintain and involve several costs and requirements, from an HMO license and property permission to utility and repair bills. Besides that, managing the household requires effective tenant communication. We’re here to help you secure a HMO mortgage so that your landlord’s ambitions for a multiple-occupation property can be fully realised.

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What are the types of HMOs?

HMOs tend to come in various formats. Some of these include:

What are the pros of an HMO property?

Shared living spaces are also in higher demand since they’re more affordable than living in a single housing unit.

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Which lenders operate in the specialist HMO mortgage market?

As the market for HMOs grows, so does the specialist mortgage broker market.

Buy-to-let mortgage lenders:

The standard mortgage lenders are stricter regarding HMO capacity but offer the cheapest rates. Nevertheless, their main speciality is buy-to-let property.

Specialist HMO mortgage lenders

You may find specialist HMO mortgage lenders within buy-to-let mortgage companies. They’re more versatile with their requirements, but you may have to pay more for their service.

Commercial HMO mortgage lenders

Commercial HMO mortgage lenders are often the best option for beginner landlords operating a complex residence. Their flexibility comes at the highest cost compared with the other lender types.

Frequently Asked Questions

What are the cons of a HMO?

HMOs tend to have tighter regulations in the mortgage industry. They require a license and permission to let out. The housing arrangement also costs more to prepare and maintain. 

HMO mortgages apply to your rental space if it’s housing more than three tenants in separate units. Otherwise, a single household is applicable for a buy-to-let mortgage.

Although the latter offers cheaper rates and fees and is more accessible, they won’t be as profitable as an HMO. You can cover any excess expenses from a HMO with the additional rental income.

To illustrate, let’s assume you’re renting a three-bedroom space with one living area, a kitchen, and two bathrooms.

Buy-To-Let

HMO

Rented to

One Family

Three Tenants

Monthly Income

£1,000

£600 per tenant

Yearly Income

£12,000

£21,600

There are several types of HMO mortgages. You can apply for a fixed-rate HMO mortgage, lasting between 2 to 15 years. There are tracker and variable rates that are determined by the monthly interest rates.

Aside from that, you can also apply for an interest-only HMO mortgage plan. During the first five to ten years, you’ll only pay the interest portion. Afterwards, your monthly payments will include the principal.

Houses in multiple occupations reap higher monetary benefits compared to other options. As long as you find the right location, you’ll have an easier time finding tenants to occupy all the rooms in the property to maximise your rental income. For example, you can find a place near a university where students are plentiful.

It’ll reduce the likelihood of void periods as well. That said, HMO residences are sought after by renters due to their affordability compared to single housing units. The prime challenge with HMOs is that you’ll have to manage several tenants and their housing arrangements.

Overall, it’s a profitable investment since the HMO mortgage repayments are lower than the rent received.

HMO mortgages tend to have several requirements. These factors are critical to consider before deciding to purchase a house in multiple occupations. Some of these include:

HMO License Fees

You need an HMO license if the residence covers more than five units. It’s advisable to get documentation if you have fewer tenants. Besides that, HMO licenses cost approximately £600. Nonetheless, the cost varies depending on location since it can go from as low as £60 to as high as £1,000.

Planning Permission

You’ll need planning permission if you’re housing more than seven tenants in the HMO. Aside from that, HMOs with fewer tenants won’t usually need the document since they qualify under permitted development.

Some locations follow Article 4, which limits permitted developments. Consequently, your HMO size won’t matter, and you’ll need planning permission.

Housing Criteria

  • No more than six to eight bedrooms
  • Minimum property value between £75,000 to £100,000
  • Maximum of one kitchen
  • No more than four storeys in the housing complex
  • Minimum of one communal seating area
  • One bathroom for every four tenants

Room Size Criteria

The room size criteria differ based on age.

  • Younger than ten years: 4.64 square meters
  • Older than ten years: 6.51 square meters
  • Two tenants older than ten years: 10.22 square meters

Safety and Sanitary Compliance

  • Ensure the presence of enough rubbish bins.
  • Confirm fire safety regulations are in place and that each floor has a smoke alarm.
  • Make sure the communal spaces are sanitary.
  • Follow a yearly safety gas check.
  • Bathroom and cooking facilities should accommodate tenants.
  • Ensure the space isn’t overcrowded.
  • Conduct an Electrical Installation Condition Report (EICR) every five years.
  • Maintain and repair any issues regarding gas pipes, water systems, electric systems, and appliances.

Before jumping into an HMO mortgage opportunity, it’s worth looking into the running costs. The costs can range as a weekly, monthly, or annual payment. They include various factors, such as:

  • Utility Bills: £150 – £330 per month
  • Maintenance Cost and Void Periods: £280 – £330
  • Letting Agency: £280 – £500
  • Broadband Costs: £35 – £45
  • Cleaning Costs: £80 – £120
  • Council Tax: £108 to £138

These payments range depending on the HMO property and its size, location, and number of tenants. The total running costs can set you back between £1,000 to £1,500. Once you subtract the amount from the monthly rental income, you’ll have your gross profit.

For example, if your monthly rental income is £2,400 and your costs are £1,000, you’ll have a gross £1,400 monthly profit.

HMO mortgage interest rates will determine the amount you’ll need to add to the principal mortgage amount. The interest rates on fixed rate mortgages usually are for terms of between two to ten years.

Meanwhile, variable and tracker rates tend to be for a shorter period of two to five years. The Bank of England’s base rate or London Interbank Offered Rate determines the percentage each month.

A factor that impacts the interest rate with HMO lending and other types of mortgage lending is the Loan-to-Value (LTV) ratio. The LTV amount determines the risk involved for mortgage lenders offering HMO mortgages.

Calculating the LTV involves dividing the mortgage amount by the appraised value of the residence. To illustrate, if the borrower pays a £20,000 deposit on a £100,000 home, they’ll need to borrow £80,000. In turn, the LTV will equate to £80,000/£100,000, which is 80%.

That said, the higher the LTV, the riskier the transaction is considered by the HMO mortgage lender, and as a result they’ll likely increase the interest rate charged. On the other hand, the more down payment is provided upfront, the lower the LTV and rate.

HMO mortgage rates depend on multiple aspects, such as the borrower’s experience, HMO residence, and loan payment. That said, a landlord with little experience can usually expect to pay more than a landlord with over five years of letting expertise.

Additionally, if a limited company is letting the HMO, the rates will likely be higher. A larger HMO space will also fetch higher rates.

There are several fees besides the running costs involved in applying for an HMO mortgage.

Assessment Fees

Assessment fees are the application charges. They’re, in most cases, non-refundable. You’ll likely pay them along with the valuation fees.

Valuation Fees

The valuation fees determine the appraised value of the HMO residence. It helps the lender survey the property. In some buy-to-lets, valuation fees are free. Nonetheless, HMO fees are usually essential, higher, and non-refundable.

Broker Fees

If you’re using a HMO broker or specialist lender to secure a mortgage deal for muliple occupancy property, you’ll likely incur a fee. Standard brokers may ask for a flat fee ranging between £500 to £2,000. Meanwhile, specialist HMO brokers can request a percentage of the mortgage loan. If you secure your HMO mortgage through a specialist HMO mortgage advisor like When the Bank Says No, the fee can be up to 2% but a typical fee is £995.

Early Repayment Charges

The early repayment charge (ERC) applies if you want to pay off the mortgage earlier than the originally agreed term. For example, if you’re on a fixed-rate five-year plan and want to reduce it to three years, you’ll be subject to this charge.

That charge comes because the lender expected an interest charge alongside the principal. In turn, the ERC attempts to cover that loss. Your lender calculates that fee by taking a percentage from the remaining loan.

Telegraphic Transfer Fees

The telegraphic transfer (TT) fees come with each transaction you complete with the lender. It costs approximately £35.

Solicitor Fees

A solicitor will manage all the legal aspects of purchasing the HMO. Solicitor fees vary depending on the service you choose. Lenders may already offer free legal services, but it’s unlikely when dealing with HMOs.

A single buy-to-let household’s tenants are easier to manage since they’re all familiar with each other. Nonetheless, HMO tenants don’t apply to live together. In turn, that may raise more complications.

For this reason, a well-drafted tenant contract is critical. Communication is also an essential factor when managing your occupants. In turn, you can establish a formal WhatsApp group for all your tenants to leave their concerns or inquiries.

That way, you can also have streamlined communication between all tenants rather than contact each separately. You can arrange check-ins to note any issues before they inflate. Ensure that you inform the occupants of your visit beforehand.

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