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How to Secure HMO mortgages

Looking to get a HMO Mortgage? Our HMO mortgage specialists are here to help you secure the right HMO property for your needs, whatever your circumstances.

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What is a HMO?

A House in Multiple Occupation (HMO) is a rented residence fit for three or more tenants. HMOs don’t apply to households and family units. The tenants are unrelated and are simply sharing communal areas with their own private bedrooms (which may include en suite bathrooms). They can be students renting a home or working professionals renting a room in a HMO property.

Nevertheless, each unit in the residence can house an individual, a family, or a couple. For instance, a HMO can accommodate one family unit and two single persons.

Landlords can charge each unit separately, accumulating more rental income. Typically those living at a HMO property will expect to have bills included in the rent, meaning as a landlord it’ll be your responsibility to ensure all utility bills are paid and any repairs are carried out in a timely manner.

Achieving your Mortgage Dreams

We know how unpredictable the mortgage market can be. Trust our team of dedicated mortgage specialists to find you mortgage providers who are more likely to offer you HMO Mortgages. If you’ve been rejected by high street banks in the past, don’t give up on your HMO dream yet. We have access to specialist HMO lenders (entered in the Financial Services Register for your protection) who offer more flexible HMO mortgage criteria, allowing them the opportunity to understand your credit history and the steps you’ve taken to make better choices. You won’t find the best HMO mortgage rates if you have a poor credit history but we can help you find the most competitive deals for you.

A 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 a HMO licence 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 ambitions for a multiple-occupation property can be fully realised.

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What are the types of HMOs?

If you’re thinking of setting up as a HMO landlord, then you have a few different options open to you in terms of the type of HMO you set up:

Bedsits
Hostels
Flatshares
House shares
Student accommodation
Working professional accommodation

There are different pros and cons to each, and you’ll need to think carefully about the costs involved in each once. For example, as you set up a student accommodation HMO you’ll probably be able to get away with opting for a more basic spec that’s a lot cheaper. The same can’t be said for a house share designed for working professionals – more money will need to be spent upfront to keep your tenants happy and demand a higher potential rental income.

What are the pros of a HMO property?

Shared living spaces are in higher demand since they’re more affordable than living in a single housing unit, which means there’s usually far more applications from potential tenants. With a larger tenant pool to choose from, you can also make sure you select the tenants that you think are more likely to pay on time and treat your property with respect.

Another key benefit is the increased income you can make as a landlord. If you have a large 5 bedroom home, you’ll almost certainly make more by renting the space out as a large HMO property to five or more tenants than you would renting it out as a large family home to a single family unit.

You also need to consider the flexibility you have as a HMO landlord in setting prices. For example, a large double room with an en suite bathroom will fetch a higher income than a single bedroom with a shared bathroom. However, you can set your prices based on location, spec of the finish in the HMO, and facilities which gives you a huge range of earning potential.

Turning Your Nightmares Into Dreams

When you think you’ve hit that brick wall and have all but given up hope of finding mortgage finance, When the Bank Says No are here to turn your ‘No’ into a ‘Yes’. We have access to a range of specialist lenders who are willing to help those that the High Street banks just won’t touch. Get in touch today and see how we can turn your dreams into a reality.

How Complex Is The HMO Mortgage Market?

If you understand how HMO mortgages work then you’ll know that they can be a complex thing – and the market follows suit in that regard. With our team of mortgage experts at When the Bank Says No, we untangle that web for you.

With connections to specialist mortgage lenders with a range of specialities, including buy to let mortgage for HMO and more, we can help you find your yes even when the bank has said no. Interest rates tend to be higher when you require a specialist mortgage lender vs high street lenders, but you’ll stand a much greater chance of being accepted for the mortgage if you have a less than favourable credit history.

Unsure about being accepted for a HMO mortgage? Confused about the state of the HMO mortgage market? Not quite sure where to begin? Don’t worry! When The Bank Says No can help you today. Reach out to our expert team and we’ll get to know more about you and what you’re looking for and do all we can to put you in touch with a HMO mortgage lender that can support you.

Frequently Asked Questions

Are there any cons to a HMO mortgage?

HMOs tend to have tighter regulations in the mortgage industry so, without support, can be difficult to find. They require a license and permission to let out, so you’ll need to prove yourself reliable. And to top it all off the housing arrangement also costs more to prepare and maintain.

Why are HMOs more profitable than standard buy-to-lets?

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

As you can see, you can almost double your yearly income by changing the 3 bed property from a single renting unit to a HMO property instead. Of course, it’s hard to switch from a buy to let property to a HMO one – a lengthy legal process is often involved – which is why it’s best to decide upfront if you want to rent your property out to a single family unit or as a HMO.

What are the types of HMO mortgage lending?

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, but you’ll end up paying back far more over the course of your loan if you opt for this option.

Should you invest in a property with an HMO mortgage?

Houses in multiple occupation reap higher monetary benefits compared to other options. As long as you find the right location, so you’ll have an easier time finding tenants to occupy all the rooms in the property to maximise your rental income, then operating a HMO can be straightforward enough. For example, you can find a place near a university where students are plentiful if you’re open to running student accommodation.

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. You’ll need to be able to commit your time to your new role as a HMO landlord.

Overall, it’s a profitable investment since the HMO mortgage repayments are lower than the rent received, but it is something you should treat as a business opportunity that requires time and effort to get right – unlike other investments which can often tick away in the background with little required from you.

What do you need to apply for an HMO mortgage?

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

HMO License Fees

You need a HMO license if the residence covers more than five units. It’s advisable to get documentation if you have fewer tenants too, as it protects you in the event of any problems. Besides that, HMO licenses cost approximately £600, but the cost varies depending on location since it can go from as low as £60 to as high as £1,000 depending on the appetite for HMOs in the area.

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 regardless.

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 of the occupant(s).

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 gas safety 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.

What are the costs involved in HMO mortgages?

Before jumping into a 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 – as you can see, being a HMO landlord can be a profitable and rewarding job.

What are the HMO mortgage interest rates?

HMO mortgage interest rates will determine the amount you’ll need to add to the principal mortgage amount and repay each month. The interest rates on fixed rate mortgages usually are for terms of between 2 to 10 years.

Meanwhile, variable and tracker rates tend to be for a shorter period of 2 to 5 years. The Bank of England’s base rate determines the percentage each month as these mortgages follow the rates set by the Bank of England as it varies month on month.

A factor that impacts the interest rate with HMO lending is the Loan-to-Value (LTV) ratio. The LTV amount determines the risk involved for mortgage lenders offering HMO mortgages. If you have been rejected for a HMO mortgage in the past based on your credit history, then the best thing you can do to ease lenders’ concerns is put down a larger deposit.

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 because they can get their money back more easily if you default on the loan and they have to repossess the property to sell it and cover their costs.

Does landlord experience impact HMO rates?

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, too. A larger HMO space will also fetch higher rates. So whilst landlord experience does impact rates, there are other influences to consider too.

What fees can you expect from a specialist HMO mortgage?

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 non-refundable in most cases. 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. HMO valuation fees are usually essential, higher, and non-refundable, too.

Broker Fees

If you’re using a HMO broker or specialist lender to secure a mortgage deal for a multiple 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 our team at When the Bank Says No, the fee can be up to 2% but a typical fee is around £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 expects an interest charge alongside the principal as a way to earn money as they risk their capital by lending to you in the first place. In turn, the ERC attempts to cover that loss if you pay back early or try to cancel a fixed term early. 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.

How do you manage tenants in a HMO?

A single buy-to-let household’s tenants are easier to manage since they’re all familiar with each other. HMO tenants don’t apply to live together and are unlikely to know who they’re living with before they move in. This can cause some issues as new personalities meet and live together.

For this reason, a well-drafted tenant contract is critical. Communication is also an essential factor when managing your occupants. You should consider setting up a formal WhatsApp group for all your tenants to leave their concerns or inquiries so you can respond in one place and ensure everyone gets the info they need all at once.

Streamlined communication between all tenants is key to making your HMO management tasks easier. You can arrange check-ins to note any issues before they inflate – provided you communicate your visiting date ahead of time.

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