Andy Done answers the most common questions on HMO mortgages.
What is an HMO mortgage?
HMO stands for House of Multiple Occupation, and an HMO Mortgage is a type of Buy to Let product specifically for landlords who want to rent out their property to multiple tenants who are not from the same household.
They are typically a single property let to individuals on separate tenancy agreements, although some student tenancies are now set up as joint tenancies and each bedroom in the property is rented out separately. The tenants often share some communal areas, such as bathrooms, kitchens and reception rooms in HMO properties. You need to obtain a licence from the local authority in order to rent properties this way.
HMO is very popular with students and young professionals, because the rent is usually more affordable than a small flat or house, and the main benefit for landlords is that rent for multiple rooms can sometimes generate higher rental yields, as opposed to a standard Buy to Let property.
What are the different types of HMO mortgage?
HMO mortgage products are very similar to Buy to Let mortgage products, the interest rates and fees can be slightly higher, but you can have a Fixed-rate mortgage, typically from two to five years. You also get Variable-rate products which have no repayment charges, and these tend to track the Bank of England base rate.
You can choose between Capital Repayment and Interest-only. With the Repayment mortgages you repay some of the capital you’ve borrowed every month in addition to paying back the interest. This ensures that your mortgage is paid off at the end of the term. With an Interest-only mortgage you only pay the interest, which can make your monthly payments lower, but the problem is that you will have the capital balance to repay at the end of the term. Most people will either pay by selling the property or using the rental income to build up a lump sum.
Who can get an HMO mortgage?
Most HMO Mortgage Lenders prefer the applicant to have some level of experience as a landlord, because it’s more complex than a standard Buy to Let, there are multiple tenants and you need to have an HMO licence and follow regulations. First Time Landlords can secure an HMO Mortgage, but they’ll be limited to a few niche lenders.
When would you use an HMO Mortgage?
An HMO Mortgage can be used to purchase a property where the landlord intends to rent the property as an HMO from the outset. If the property doesn’t have an HMO licence and doesn’t meet the requirements, some lenders will allow you to use an HMO Mortgage on the condition you apply for the licence on completion.
If you intend to buy a property and convert it to an HMO using Cash or Bridging Finance, for example, they can purchase the property and then when it’s all completed, apply for an HMO Mortgage. This can be useful when the conversion increases the value of the property substantially, because it allows the landlord to pull out a lot of Equity. It’s becoming more common for landlords to buy commercial properties, convert them into large HMO properties and use an HMO Mortgage to release Equity when the conversion has been completed.
How are HMO Mortgages different to Buy to Let Mortgages?
There’s not a huge difference between them. They are very similar, although some of the more specialist products for larger HMOs for six or more rooms, are underwritten slightly differently.
There are slightly different affordability calculations and the lender tends to use more information, so you’ll have to do a property schedule and may have to do a business plan, there’s a bit more involved compared to a Buy to Let mortgage.
Are you supposed to have a Buy to Let first and then go on to an HMO Mortgage?
Some lenders will prefer you to have a normal Buy to Let first and then have six months, or up to a year of experience before you buy an HMO and that gives them some confidence that you’ve got experience in renting properties.
Landlords tend to buy and convert HMO properties because they see a better earning potential from the increased rental yield. High streets have now got more empty properties available, so it can be more cost effective to buy and convert a commercial property. It’s become a bit more popular since the additional Stamp Duty and Buy to Let taxation rules affected the profitability of standard Buy to Lets.
It’s more complex with the licensing rules and properties must meet the regulatory requirements, which can be an additional initial expense setting up and running the property. You’ve also got to think about certain instances where councils have introduced article 4, which means they can refuse permission for an HMO.
If you’re intending to buy an HMO in one of those areas, you need to do your groundwork to make sure you can actually get that property to be an HMO. We’re actually seeing property standards improve as the regulations become stricter and more competition in the market means tenants have more choice. This has led to some landlords putting shower and toilet facilities in individual bedrooms and even cinema rooms in basements to make it more attractive to tenants.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.