Buy-To-Let HMO Mortgages

If you’re a property investor looking to maximise your rental income, a house of multiple occupancy (HMO) might be a profitable option. 

No wonder more and more landlords these days are opting for HMO mortgages.

However, before you start, you must figure out if you need an HMO mortgage or if a conventional buy-to-let (BTL) mortgage will suffice. 

So, keep reading as we explain everything you need to know about BTL HMO mortgages and help you make an informed decision. 

What Is HMO?

A property that can be rented to at least three tenants who are not related to each other is called a House in Multiple Occupation (HMO).

These tenants can share kitchens or bathrooms. The terms “house share” or “multi-let” are similar to an HMO, although it generally applies to smaller properties that may not require licensing. 

Moreover, landlords can charge per flat, section or room of the property, which typically results in a higher rental income.

In most cases, HMO landlords pay utility bills unless the property has been remade into flats and has different title deeds; this would then typically not be classed as an HMO.

The Housing Act

The Housing Act 2004 and the Housing (Scotland) Act 2006 established HMOs as a type of property rental aimed at providing protections for residents of multi-unit properties.

In the past, such accommodations have put tenants in more danger due to a lack of safety measures from the landlord or other tenants.

So, these acts allowed local authorities to ensure that landlords of HMOs and other types of properties adhere to specific key requirements.

However, it’s essential to note that not every HMO requires landlords to obtain a licence. The general definition of an HMO is a property where at least two “households” share a common area, such as a toilet, bathroom, or kitchen.

As such, a “household” can refer to a couple or single person, not just a family, occupying a single unit of the property.

Generally, every household should have a separate agreement with the landlord. But sometimes, a group of tenants (students, employed individuals, etc.) may share a group agreement with the landlord, although the law still views them as four separate households. 

HMO Mortgages Eligibility Criteria

Every lender follows their own set of criteria when it comes to mortgage applications for HMOs.

However, the eligibility criteria for HMO mortgages are largely similar to those of conventional BTL mortgages. 

• Property Value – The minimum HMO property value is usually not below £100,000, but it may vary from place to place (it could be higher in London).
• Loan-to-value – Most lenders only lend a maximum of 75% of the property’s value, although some may lend more, although rare.
• Loan Sizes – Access to larger mortgage loans is possible due to the typically higher rental income from multi-let properties.
• Client Types – Mortgages may be extended to portfolios or personal landlords under a limited company or their own name.
• Occupancy – Most lenders limit the maximum number of units in an HMO property to eight, while others may allow more. Oppositely, it could be below 8.
• Experience – First-time BTL purchasers are typically not considered, and a minimum of 12 months’ experience in owning and running a BTL property is usually required.

Do You Need A Licence for An HMO?

Landlords of larger HMOs with many tenants must get licenced by local authorities. This is compulsory for properties consisting of three or more stories with at least households comprising five or more individuals in usual rules.

To be granted a licence, you should be deemed a “fit and proper person.” The authorities will even consider your record as a property owner.

Additionally, local authorities can impose additional requirements and licensing criteria for other HMO types.

They may do so if an HMO or a property in a geographical area pose a higher risk of fire or other types of danger.

As such, you must enquire with your local authority to determine whether your property requires a licence.

Operating an unlicensed HMO can result in fines of £50,000 in Scotland and £20,000 in Wales and England. 

What Is HMO Mortgage?

An HMO mortgage will be required if you rent to more than three tenants from different households. 

This is because a conventional BTL mortgage is only intended for single-household tenants and would not suit your property.

If you opt for a regular mortgage on a property for HMO, you could be violating the mortgage rules, resulting in legal action from lenders.

Compared to HMO mortgages, BTL mortgages typically have lower rates and fees. There is also a larger pool of lenders to choose from. Plus, they are easier to obtain since the eligibility requirements are less stringent. 

However, the extra profit generated by an HMO property can often offset any additional costs associated with an HMO mortgage.

Lenders for HMO Mortgages

Getting the right HMO mortgage is essential as it can largely impact your profits. And you will require an HMO mortgage if you plan on renting out your property as an HMO.

Changing from a standard BTL to an HMO mortgage requires informing your lenders to determine if it is permitted.  

Note that lenders have different requirements, and mortgage brokers can assist in finding profitable deals.

The nature of your HMO can also affect the lenders available to you, such as those with maximum room restrictions. 

Additionally, obtaining a licence for your HMO can affect your options:

1. Licensed HMOs

Most HMO mortgage lenders approve up to five rooms, while larger properties may need commercial finance or specialist HMO lenders. 

The lenders available to you may be impacted by the type of tenant you plan to have. As such, lenders may not approve your application if you aim to house students or tenants receiving housing benefits due to the associated risks.

Hence, owning a licensed HMO can benefit you, as lenders may consider the property’s value differently.

Moreover, most lenders will look at the projected rental income when determining the HMO value.

This can be advantageous if you are converting the property and plan to withdraw some amount of equity as it is now going to be let as an HMO. . 

2. Non-licensed HMOs

HMOs not requiring licensing may be considered too small for HMO mortgages for certain lenders, and lenders may only offer a BTL mortgage instead.

Some lenders may offer an HMO mortgage for your property, but without knowing the specifics of your HMO, it is difficult to provide personalised advice. 

HMO Mortgage Rates

The lenders evaluate your borrowing capacity to determine the amount to be borrowed. While you may get a higher loan on an HMO than on a regular BTL, lenders consider the former riskier, which leads to higher interest rates. 

You can decrease the risk and obtain a lower interest rate by providing a larger deposit or equity in the property.

Additionally, the amount of fees for a mortgage deal can affect interest rates as a mortgage product with a higher fee may have a lower rate and vice versa.

However, one should not chase lower interest rates only, as it is crucial to consider all costs.

Typically, fixed-rate mortgages are higher than variable-rate mortgages, and long-term fixed rates have higher interest rates in usual economic environments.

How Do HMOs Differ From Regular BTL?

Conventionally, standard BTL property is suitable for individuals or families. The tenant/s will have to pay the monthly or weekly rent for a single household.

They may also have to pay electricity and water bills. Such properties are commonly known as “single-lets.”

Here’s a brief example explaining how HMOs can be more beneficial for landlords than traditional BTLs.

This is just an example to see what potential benefits landlords may attain. 

1. HMO BTL

• One reception room remade into a bedroom
• Two reception rooms with four bedroom semi-detached house
• Rented to five employed individuals 

Monthly income per tenant = £400

Monthly income = £2,000

Annual rental income = £24,000

2. Traditional BTL

• Four-bedroom semi-detached house with two reception rooms
• Rented to a married couple with two children

Monthly rental income = £700

Annual rental income = £8,400

How Much Does It Cost To Run An HMO?

Not every HMO will produce thrice the rental income of a traditional BTL. But even if the annual utility bill is between £2k and 3k, the rental profit generated by an HMO is still significantly higher.

Furthermore, HMOs typically have higher running costs and require more management effort.

For example, each room must have locks installed, and safety and health guidelines for HMOs are more comprehensive than standard BTLs. 

FAQs

1. Should HMO landlords provide furniture?

Typically, HMOs should be fully furnished, while traditional BTL properties need not. This makes the former costly for the landlord and affordable for the tenants. As such, HMOs are favoured by single tenants, like foreign workers and students. 

2. What is the cost of an HMO licence?

The cost of obtaining an HMO licence varies depending on the council to which you apply and the length of time required to process the application.

Certain councils may base the fee on the number of rooms in your HMO, while others may have a set price. 

Generally, the cost of an HMO licence can start at £500 but can increase to several thousand pounds.

**A buy to let mortgage will be secured against your property.

Some types of buy to let mortgages are not regulated by the Financial Conduct Authority.

All content is written by qualified mortgage advisors to provide current, reliable and accurate mortgage information. The information on this website is not specific for each individual reader and therefore does not constitute financial advice.