HMO mortgage, or houses under multiple occupancy, can yield greater returns than conventional buy to let investments. The number of landlords applying for HMO mortgages has also increased, but is an HMO mortgage really necessary or would a conventional buy-to-let mortgage be adequate?
When compared to conventional buy to let, a house in many occupations can be more profitable. In the UK, there is a huge demand for rentals, and thanks to low mortgage rates, landlords can increase their rental returns. The key to maximising the benefits from your rental income is having the correct mortgage.
An HMO is what?
A house with three or more tenants who are not related to one another and who may share amenities like the kitchen or bathroom is referred to as an HMO. An HMO gives landlords the option of renting a property to numerous households rather than just one.
‘Multi-let’ or ‘home share’ are other names that can be used to refer to an HMO, but they are more frequently associated with smaller properties that don’t need a licence. Then, landlords can charge by the room, by the flat, or by the area of the property, typically generating a higher rental income.
Unless the property was converted into flats and had separate title deeds through the land registration, it is typical for HMO landlords to pay the utility bills for the property.
Which type of mortgage will I require for an HMO?
An HMO mortgage is required if you are renting to more than three tenants from different homes. This is due to the fact that your property will not be eligible for a typical buy-to-let mortgage because those are only intended for single-household tenants. You would be violating the terms and conditions of the mortgage if you took a standard mortgage on an HMO home, and the lender might take legal action as a result.
Mortgages for rental properties frequently have lower rates and costs, and there are undoubtedly more lenders offering them. As the requirements are less stringent, they are also simpler to get. Having said that, the extra profit an HMO can make frequently covers extra mortgage-related expenses.
How do HMOs vary from traditional buy-to-lets?
Typically, a standard buy-to-let property could house one person or a family. On a weekly or monthly basis, the household would be required to make a single rental payment. Utility bills would also be paid by the household. ‘Single-lets’ is a common term for these.
Here are some reasons why an HMO is thought to be more profitable than a conventional buy to let:
Traditional buy to let
4 bedroom semi-detached house with 2 reception rooms
Rented to a family, consisting of a husband, wife and 2 children
Monthly rental income = £700
Annual rental income = £8400
HMO buy to let
4 bedroom semi-detached house with 2 reception rooms
1 reception room converted to a bedroom
Rented to 5 single working professionals
Monthly rental income per tenant = £400
Monthly rental income = £2000
Annual rental income = £24,000
It is easy to see why more landlords are thinking about HMO properties using the aforementioned scenario. It might be rather astonishing how much the overall rental revenue can vary.
How much does it cost to maintain an HMO?
Not every HMO will bring in nearly three times as much money from rentals as a typical buy to let. It’s also crucial to keep in mind that landlords typically cover utility costs. However, even with a £2k–3k annual power expense, the aforementioned scenario still generates a lot greater rental return.
An HMO often has higher operating costs and demands more time and effort. For instance, the health and safety requirements for an HMO are much more stringent than those for a typical buy-to-let, and each room will need locks. As a result, compared to a typical buy-to-let, an HMO will have greater setup fees.
Describe void periods.
There are also void times to take into account. While an HMO often has more void periods, a standard buy-to-let may have fewer of them. When compared to conventional buy to let models, an HMO could cost landlords more in maintenance costs. This is a result of shared spaces including kitchens, bathrooms, and living rooms (if applicable).
Shared spaces frequently “get left” because nobody wants to clean up someone else’s mess. To keep the property maintained, landlords can need to do the cleaning themselves or hire cleaners.
Are HMO landlords required to offer furniture?
Frequently, HMOs come fully equipped. Consider the additional cost of this as well. Typical buy-to-let properties are often unfurnished when rented.
Individual renters prefer HMOs because they are typically more economical, completely furnished, and include utilities. This is particularly valid for international students, independent contractors, and workers on work visas. HMOs are enticing due to the ease of “moving straight in” at low cost.
HMOs frequently have geographical restrictions. HMOs, for instance, cater to specific types of tenants, like single professionals or students. As a result, properties in city centres or those near excellent bus routes and facilities are sometimes the only ones where an HMO may be found. Having an HMO in a rural area in the middle of nowhere would undoubtedly be useless.
The locations of conventional rental properties are not constrained. We collaborate with letting agencies all throughout the nation who have rented homes in practically every conceivable area. They have been hired, whether in the countryside, the city, or both!
HMOs can be more challenging to manage than conventional buy-to-let structures. In an HMO, where facilities are typically shared, tenants may occasionally clash. You can even find yourself serving as a middleman between tenants if you’re also the landlord.
A family or at least individuals who have chosen to live together would normally be housed in a classic buy to let format. Disputes are typically settled within the home without the landlord’s involvement. Landlords typically have a specific HMO type, such as an HMO exclusively for working professionals or a student buy-to-let.
It’s rarely a good idea to have tenants who are a mix of professionals and students.
Do I require an HMO licence?
HMO properties are more difficult to set up, despite the fact that they often produce higher yields. The type of HMO will determine whether landlords need an HMO licence.
If accepted, local authorities issue HMO licences that are good for five years. Each property, not each landlord, is given an HMO licence. If each HMO requires a licence, for example, a landlord with three HMO properties will need a licence for each one.
It depends on the size and type of the property whether or not an HMO needs a licence. Additionally, the criteria and conditions for HMO licencing vary depending on the local government. While smaller residences might be exempt, larger HMOs frequently need licences.
What is a huge HMO, exactly?
In the UK, large HMO properties are those that meet all three of the following criteria:
- Five or more individuals who constitute several households are allowed to rent an HMO.
- Tenants share amenities like restrooms, kitchens, and toilets because the building is at least three stories high.
It doesn’t follow that you won’t need an HMO licence if an HMO doesn’t satisfy all three of the aforementioned requirements. Smaller HMOs could also require a licence, depending on the local authority where the property is located.
How much does a licence for an HMO cost?
The cost of a licence will also vary depending on the council you apply with and how long it takes for an application to be processed.
Some authorities may base their fees on how many rooms your HMO has, while others may have set rates. In spite of this, HMO licence fees can run into the hundreds of pounds.
What happens if my HMO licence is rejected?
Councils may not grant HMO licences to every landlord or HMO because applications are subject to denial. This is due to the fact that councils must assess factors like whether the property is eligible to be an HMO and can accommodate the anticipated number of tenants. In order to make sure landlords haven’t already broken the law, councils will also evaluate the landlords themselves.
If the Residential Property Tribunal rejects your request for an HMO licence, you may appeal the decision. Alternatively, until certain aspects of the property achieve a specified level, your local council may refuse the application. When your HMO satisfies the necessary criteria, the municipality may issue you an HMO licence.
Do not try to rent an HMO without an HMO licence if your HMO requires one. This is a serious infraction that carries a hefty fine. A prison sentence is another option in situations where landlords have disregarded housing regulations.
HMO mortgage requirements
Most HMO mortgage lenders will demand that landlords have rental property management expertise. Only a small number of lenders will consider first-time landlords without any prior experience, although the rates they provide can be higher than usual. Some lenders might also prefer that the HMO be managed by a letting agency rather than by the borrower themselves.
HMO mortgages remain a specialised mortgage type despite its widespread use. When compared to a typical buy-to-let mortgage, the mortgage application process is quite thorough. Due to this, licenced mortgage brokers rather than landlords directly tend to issue HMO mortgages.
Lenders may ask for details on any or all of the following:
- Encounter as a landlord
- Personal or business mortgage
- Place of the HMO
- Amount of available rooms for rent
- (Landlord or rental agency) Management type
- Does the HMO need a licence or already have one?
- Is there a separate AST agreement for each room?
- Rent received, either planned or actual
- Renters’ backgrounds (students, working people, housing associations)
Lenders will also do conventional mortgage assessments in addition to the aforementioned. This will involve evaluations of your credit score, desired borrowing amount, and affordability.
HMO Mortgage lenders
It’s important to get the ideal HMO mortgage for your home. High HMO mortgage rates or fees could quickly begin to reduce those excellent yields. An HMO mortgage is required if you plan to rent the property as an HMO. If you currently have a buy to let mortgage but want to switch to an HMO model, let your lender know first to find out if this is possible.
The greatest discounts are often obtained through mortgage brokers because each lender has different requirements. The type of your HMO will also either add or remove lenders from your list of available possibilities.
For example, some lenders may only give money for a certain number of rooms. This is why it’s crucial to comprehend your lender’s requirements before applying. You can get advice on this from an HMO mortgage advisor. It can also matter whether an HMO needs a licence or not.
Lenders for HMOs with a licence
Most HMO mortgage lenders accept applications for homes with up to five bedrooms. Anything larger could need to be financed commercially. You’ll almost certainly need an HMO mortgage if your HMO needs a licence. This is due to the fact that a typical buy-to-let mortgage wouldn’t be appropriate.
The lenders you have access to may vary depending on the kind of renter you want to rent to. If you intend to accommodate students or tenants receiving housing benefits, certain lenders might reject you. The risk involved is the only reason for this. Regarding how a lender will value the property, having a licenced HMO can be advantageous.
When determining the value of your HMO, lenders may take the planned rental income into account. This is especially helpful if you’ve converted the home and want to take some equity out.
Not all lenders will value an HMO based on the rental income and on the assumption that the HMO is a typical house. This could limit how much you can borrow, which would be counterproductive if you had an HMO mortgage.
Lenders for HMOs without a licence
Your HMO can be regarded too small for an HMO mortgage if it doesn’t need a licence. As a result, lenders might only think about providing you with a buy to let mortgage.
Although it’s impossible to provide you a personalised response without knowing the specifics of your HMO, there may be lenders who would take you into consideration for an HMO mortgage. You can contact us at any time with questions or to make an inquiry.
HMO Mortgage rates
Mortgage rates for HMOs are typically higher than those for buy-to-let goods in general. This is as a result of the HMO mortgage market’s lower level of lender competition. Mortgage costs and interest rates will be slightly higher from lenders who are willing to lend on an HMO. Having said that, the income from an HMO ought to be more than sufficient to pay for a mortgage, utilities, and upkeep.
Additionally, an HMO mortgage lender will typically take into account your rental income. This can significantly raise the maximum mortgage amount that is available. Mortgages for HMOs may be available with variable or tracker rates. With greater deposits and lower LTV ratios, rates that are more enticing are typically offered. LTV rates typically start at 80% LTV.
Mortgage experts for HMOs
Calculating numbers is necessary to make an HMO profitable. By evaluating your total plan, our experts, who specialise in HMO mortgages, can help you enhance your rental income. Securing a fantastic bargain is the first step in making your HMO as profitable as possible. Most lenders that provide preferential rates frequently do so via mortgage brokers.
It is never a good idea to approach lenders in the hopes of obtaining a mortgage because you won’t be fully aware of each lender’s requirements. A expert can make sure the appropriate lender is contacted and that you are receiving the best rates available. To get started, ask our mortgage specialists any questions.