HMO Mortgages Complete Guide 2017-06-16T14:45:28+00:00

HMO Mortgages

  • Licenced or unlicenced
  • Term up to 35 years
  • No minimum income
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The Complete Guide to HMO Mortgages

Last Updated 10 May 2017.
Using the index below, click on a link to scroll down to that section.

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Introduction

HMO Mortgages, or HMO buy to let mortgages are becoming more and more popular with landlords as rental yields tend to be very high. HMO Mortgage lenders are also competing to offer the best HMO Mortgage rates meaning a better choice of products is available than ever before.

HMO property can be very profitable if dealt with properly. This makes them very appealing to first-time and experienced landlords alike.

If you’re thinking of buying an HMO property please read our useful HMO Mortgages guide below.

In this guide, we will aim to cover all areas around HMO properties, including:-

  • What is an HMO?
  • How much can I borrow?
  • How do I achieve the best HMO mortgage rates?
  • Is there a difference between buy-to-let and HMO’s?

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What Is An HMO?

A House of multiple occupation (HMO), is a form of shared rental property whereby 3 or more rooms are let individually to unconnected tenants forming more than 1 household. This could be a 4-bed house, each bedroom is let to a separate tenant. The individual letting rooms are not self-contained meaning they all share kitchen and bathroom facilities unlike a flat. Typical HMO’s could include:

  • Bedsits
  • Shared housing
  • Hostels
  • Privately operated halls of residence
  • Employee accommodation

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Is There A Difference Between Buy-To-Let And HMOs?

A buy to let or single let property is, for example, a house let to a single family unit whereas an HMO is let to multiple (3 or more) tenants, such as student lets. There are advantages and disadvantages of both, e.g. a straightforward buy to let is simpler to manage but rental yields will be lower than with an HMO.

Also, if the tenant moves out of a simple BTL there could be a rental void however as an HMO has several tenants this void is less likely. Rents differ because the rent of a simple buy to let is charged monthly to the tenant based on the property value whereas an HMO landlord usually charges per room, per week.

A four-bed house could achieve say £700 rent as a buy to let but may bring in say £70 per room per week as an HMO. This would equal a monthly rent of £1,213 per month.

Depending on the loan to value ratio, simple Buy to Lets do tend to achieve slightly lower interest rates however as rents are higher with HMO property, this isn’t too off-putting.

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How Do I Achieve The Best HMO Mortgage Rates?

When looking at HMO mortgages, there are many factors that can affect the interest rate charged by HMO mortgage lenders. This could be things like lettings experience, credit history or the loan to value (LTV) ratio.

The loan to value ratio is simply the ratio the loan amount is against the value in percentage. An example of this would be a loan of £75,000 against a property value of £100,000 is at 75% LTV.

HMO mortgage lenders tend to offer the best HMO mortgage rates when the LTV is lower at 60% or less. An 85% HMO mortgage would generally have a higher interest rate than a 75% LTV mortgage due to the increased risk in the event of repossession.

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How Much Can I Borrow?

HMO mortgages start from around £25,000 with no real maximum depending on the property itself and the clients letting experience. The maximum Loan to Value ratio for HMO mortgages is currently 85% however to achieve this, the applicant profile must be strong.

A strong applicant is considered to be a property owner already with lettings experience, no adverse credit and a satisfactory income. As mentioned above, the higher the LTV, the higher the interest rate you can expect to pay.

The maximum HMO mortgages available will also be determined by the rental value of the property. Most HMO lenders have a ‘stress test’ to assess affordability, however, this can differ from lender to lender. If you would like us to calculate this for you based on your property, get in touch and we will be happy to provide personalised figures.

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Location Of Property

The location of an HMO property is important as this could determine how appealing the property is to tenants. A property in a close proximity to a college or university or with good transport links would be more appealing to a property with far lower demand.

The property itself may need work doing to it to be able to let it as an HMO. Some properties have 2 reception rooms, therefore, some landlords may convert one of these into an extra bedroom. Also, the condition of the property will have an effect on the rental income achieved.

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Can I Convert A Property Into An HMO?

Yes is the simple answer, subject to planning permission. Not all lenders will allow this, however, we do have specialist HMO mortgage lenders that will assist in funding the conversion regardless of the level of work involved.

Some lenders have specialist conversion products available to fund such scenarios. The interest rate will be higher while the work is carried out however a lower rate will be available when the work is complete.

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What Is A Large HMO?

A property is considered to be a large HMO if it is 3 or more storeys high and 5 or more tenants reside there forming more than one household. Large HMO properties require more specialist HMO mortgages.

Some specialist HMO mortgage lenders do not have a maximum number of bedrooms allowed, they will simply take a view on the application as a whole. They will mainly look at applicant experience in managing a large HMO property, the property, location and the rent received.

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Interest Rate Options

There are a vast number of HMO mortgages available to suit pretty much everybody. If you are undecided when it comes to choosing an interest rate, we will happily talk you through options until you’re satisfied you have found the perfect product.

HMO mortgage lenders offer either variable rates or fixed rates. A variable rate is just that, variable, meaning it can go up or down during the mortgage term. With fixed rates, the rate stays the same for a pre-agreed period.

Variable rates usually move in line with the Bank of England (BOE) base rate or with the London Interbank Offered Rate (LIBOR).

A fixed rate will stay the same for a period of time meaning that you have the certainty that your payments will not increase for that period. HMO lenders offer fixed rates from 1 year to usually up to 10 years, however, longer terms can be available.

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Repayment Or Interest Only

The repayment method usually comes down to personal choice. Repayment, also known as capital repayment, means that with each monthly payment, both interest and capital are paid, therefore the outstanding loan gradually reduces. Interest only is when with each monthly payment, only the interest is paid meaning the loan balance stays the same throughout the mortgage term.

Both have advantages and disadvantages, repayment mortgages guarantee that the loan is repaid at the end of the term but as a result, the monthly repayments are higher. With interest only, the monthly payments are lower but at the end of the term, the loan is still outstanding in full.

Some investors opt for interest only to reduce payments and when the loan term ends they sell the property to repay the loan, their aim being to make a profit if the property value increases.

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Should I Use An HMO Mortgage Broker?

This is really down to personal preference. The obvious advantage to using a broker is that a specialist HMO mortgage broker will be able to secure you a suitable lender and product quickly.

Knowledge of the market is key here as different lenders have different criteria. A good broker will have good contacts at each lender meaning a quick yes or no from each lender will be obtained.

ABC Finance Ltd, in particular, have built up effective partnerships with lenders which help when guiding an application through to completion. Some brokers do charge broker fees as well as receiving a procuration fee from the lender. As a general rule, we don’t charge broker fees on loans above £200,000 however on smaller loans this will be considered on a case by case basis.

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Can I Apply For An HMO Remortgage?

Yes, depending of course on several factors. The new lender will look at your credit history, the property, reason for the refinance and loan to value ratio.

You may be refinancing to obtain a better interest rate, to raise funds for debt consolidation or reinvestment into your portfolio. If you are refinancing an existing debt it is important to check if you have any early repayment penalties (ERC’s) with your existing lender as this could be costly.

Capital raising to purchase further property will not be an issue in most cases and some lenders will help fund the new purchase at the same time which can make the process easier.

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Does Adverse Credit Affect HMO Mortgages?

This will restrict the choice of lender and some HMO mortgage lenders do not lend to applicants with adverse credit. There are some adverse credit HMO mortgage lenders available who lend to applicants with a heavy adverse credit profile, however, the interest rate will reflect the added risk.

Many cases of adverse credit are minor, a historic or a one off item. We deal with lenders that take a view on minor adverse and with a good explanation, there will be no issue when borrowing.

If you have previously suffered any adverse credit, it is advisable to disclose this to the lender or broker from the outset as it will have an impact on which lender is right for you.

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Is Planning Permission Required?

This depends on the property itself and the location of the property so it is worth checking with the relevant council. A House in Multiple Occupation generally holds C4 usage. An HMO property, whether licenced or not, will naturally fall into this category.

The General Permitted Development order streamlines the process by allowing change of use from C3 (residential) to C4 (HMO) without planning consent being required. This is a major advantage to smaller HMOs.

A Sui Generis HMO property is a term used to describe a larger HMO property that doesn’t fall under C4 usage. A Sui Generis HMO may need planning permission, however, this will be on a case by case basis. C3 to Sui Generis will likely need planning permission, however, C4 to Sui Generis may not.

This can become quite complex therefore if you are unsure about HMO planning consent, please feel free to contact us and we will be happy to help.

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Is An HMO Licence Required?

Different councils may have different rules regarding licencing therefore even if your property does not fall into the above description, it is worth contacting the local council to find out.

Any property deemed as a Large HMO will be required to have an HMO Licence in place. According to the Government website, an HMO is considered to be large if all 3 of the following apply:

  • It is let to 5 or more separate tenants forming more than 1 household.
  • It is 3 or more storeys high.
  • And, tenants all share a bathroom, kitchen and toilet facilities.

You must have a separate HMO licence for each HMO Property you run. An HMO licence usually lasts for 5 years and must be renewed before it runs out.

When applying for an HMO licence, the council will want to make sure:

  • You or your letting agent are deemed to be ‘fit and proper’ with no criminal convictions or breaches of the landlord code of practice etc.
  • The property is suitable in size and facilities are adequate for the number of tenants.

The council will also require:

  • That you send them an up-to-date gas safety certificate every year.
  • Have adequate, maintained smoke alarms fitted.
  • Provide them with safety certificates for electrical appliances.

If your HMO property does need a licence you can apply for one on the governments’ ‘gov.uk’ website.

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Here Is An Example Of The Likely Application Process

  1. Discuss your enquiry with either an HMO mortgage lender or broker who can point you in the right direction and issue you with likely terms showing rate and fees etc.
  2. When a suitable property is found or if this is a refinance, the process can begin. The lender or broker will run through the application form and send a list of the required documentation needed to begin the application process.
  3. If the initial decision in principle is agreed by the lender (credit searches carried out etc.), the full application can be submitted and all documents will be checked through by an underwriter.
  4. If everything is acceptable, the valuation will be instructed and legal work started. The valuation report will provide information to the lender regarding property and rental values, demand for an HMO property in that area and condition of the property.
  5. If the valuation report is satisfactory, the mortgage offer will be issued. A copy of this will be sent to you and your solicitor. If using a broker, they will usually run through this document with you to ensure it is understood and answer any questions you may have.
  6. Your solicitor will handle the legal work such as carrying out searches etc. When everything is satisfied and the offer document is signed and returned, the funds can be ready to be drawn down.
  7. Completion of the mortgage can now take place.

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Typical Documents Needed To Apply

  • Application form or Factfind
  • Passport (proof of identification)
  • Driving licence (proof of identification)
  • Recent utility bill (proof of home address)
  • Payslips/SA302 (proof of income)
  • 3 months bank statements
  • Proof of deposit

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What Fees Am I Likely To Have To Pay?

  • Lender Arrangement Fee – A majority of HMO mortgage lenders charge an arrangement fee. This can either be a set amount or a percentage of the loan. This fee can usually be added to the loan.
  • Valuation Fee – A survey or valuation report will be required to satisfy the lender that the property is suitable security. In most cases, this is charged on application and is not refundable once the valuation has been completed.
  • Assessment fee – Some lenders charge a fee for assessing the application, this is not refundable once the work has begun.
  • TT fee – a telegraphic transfer fee is the fee paid to transfer the funds from the lenders account to either your account or your solicitor’s account. This usually costs £35.
  • Early repayment charges (ERC) – If the loan is redeemed within the first few years there is usually an ERC to pay. This is usually worked out at a set percentage of the remaining loan balance.
  • Solicitors fees – If there is a solicitor involved there will be a fee to pay, this fee will vary depending on which solicitor you use. It is advisable to obtain a quote before any work is started. In some cases, you also have to pay the lender’s solicitor fees.
  • Broker Fees – Some brokers charge broker fees for arranging the mortgage and managing the mortgage once completed. Arranging an HMO mortgage can get complex therefore you are also paying for the knowledge of the broker when finding you the best deal and lender for your circumstances.

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Conclusion

Managing an HMO is more complex than a standard buy-to-let property. HMO mortgage lenders criteria tend to vary significantly and as such, finding the best lender for you can be more difficult.

Lenders will not only assess the property that you’re looking to fund, but will also consider your experience and portfolio. As your portfolio grows, some lenders may become wary and be unwilling to lend.

The key to securing the best HMO Mortgage rates is having an understanding of where your potential application sits in the market. A very large property with more than 8 tenants is going to require a specialist, or even commercial lender.

The decision between using a reputable HMO mortgage broker or going directly to the lender is an important one. By having a conversation with a broker initially, you will received a whole of market view and get some unbiased advice. This will give you a good idea of the likely rates you would be able to achieve based on your circumstances.

Raising finance for your HMO doesn’t have to be difficult. Although the market can be complex, working closely with a specialist can make the process straightforward. As your portfolio evolves, the right lenders for you will also change. Building a relationship with a trusted advisor can save a lot of time in the long run.

For more information on HMO mortgages, visit our other pages:-

To speak to an unbiased advisor and receive a free quote based on your circumstances, enquire online now or call us on 01922 620008.

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Capital repayment basis
interest only also available

Limited companies accepted
also applications from individuals

100% loan to value
with additional security

Whole of market
including specialist lenders

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