HMO mortgage comparison
When looking to compare HMO mortgages, you should decide exactly what you want from the product, and then narrow down options.
Here, we’ll break down some of the main considerations:
Loan to value (LTV)
You should compare the option of putting down a larger deposit to obtain a lower rate and a smaller deposit to allow you to keep funds back, although the rate will be higher.
Fixed or variable rate
A fixed rate gives you certainty, a variable rate could be cheaper initially. There are also different fixed rate lengths.
Aome lenders offer free valuations and some don’t. Valuation costs also differ lender to lender.
Some lenders do not charge fees and some do. There may also be an upfront lender admin fee to pay. These costs should be considered when comparing products.
Early repayment charges (erc’s)
These are the charges for repaying the loan early and within the tie-in period. Generally, these erc’s last for the fixed rate period, and end when the fixed rate ends.
Comparing fixed rates and variable rates
The decision between fixed or variable rates is a key one when taking out a HMO mortgage. It’s not always the simplest choice, but the first stage is to fully understand the difference:
Fixed rates offer the certainty that your costs over the fixed rate period, usually 2 to 5 years, will remain the same. During this period, the interest rate will not move in line with the Bank of England Base Rate, LIBOR or lenders variable rate.
When the fixed rate ends, you will usually revert to the lender variable rate, unless you choose a new fixed rate. You are also free to compare other lenders products without being charged for moving.
This is a safe option and guarantees your monthly payment, although it can work against you if interest rates drop. Where rates increase, you will usually pay less than you would have on a variable product. Where rates drop during your fixed rate period, you may end up paying more than you could have.
During your fixed rate period, you will usually have early repayment charges, meaning you must pay an exit fee – usually 2-5% of the loan – if you repay the loan within this time. You may however, be free to make overpayments of say 10% of the balance each year to reduce the loan.
Variable rates can be broken down into pure variable rates, base rate trackers and LIBOR linked products. The difference comes down to what interest rate the mortgage is linked to.
Variable rates can rise or fall from the day the mortgage is set up, meaning your monthly payments could change month by month.
These products work in the opposite way to fixed rates, you will benefit when rates drop and pay more when rates rise. This can be a riskier approach when compared to a fixed rate.
Which product should I choose?
The answer to this question is not simple, there is no right or wrong answer, it’s down to personal choice. If you prefer the certainty of your monthly costs staying the same, or feel that rates will rise, you should consider a fixed rate.
Of course, if you end up paying more for your fixed rate, you should consider this alongside how much you expect rates to increase.
Should I use an HMO mortgage broker to compare products for me?
This is really down to personal choice. The clear advantage to using a broker is that they know the market and will be able to find you a suitable product quickly.
As HMO criteria differs between lenders, knowledge of the market is key. A good broker will know instantly who to approach. This saves you the slog of trawling through the internet and contacting lenders yourself and comparing products yourself.
The choice to apply through a reputable HMO mortgage broker or go directly to lenders is an important one. By having an initial chat with us, you will receive a whole-of-market view and get free, impartial advice. This will give you a good idea of the rates you will be able to achieve based on your situation and preference.
Although searching the market can be tough, working closely with ABC Finance Ltd can make the process far simpler and hassle free. As your portfolio grows, 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.
In summary, using an HMO mortgage broker will not only save you time but will also provide you with the best rates available. Be aware that some do charge fees as well as receiving a payment from the lender.
Generally, we don’t charge a broker fee on loans over £200,000. This can be considered individually on smaller loans.
Can I apply for an HMO remortgage?
Yes, depending of course on a few factors. You may be looking for a better interest rate, raising funds for debt consolidation or to increase your portfolio. If you are refinancing an existing debt, it is crucial to check if you have any ERCs (Early Repayment Charges).
Raising capital to invest in additional 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 simpler.
HMO property vs. standard buy to let comparison
More and more landlords are exploring the move away from the standard buy to let market and towards HMO’s.
Given the rental yield of HMO’s coupled with multiple tenants occupying the property, and therefore creating less chance of rental voids, it certainly makes sense to explore this.
As HMO properties are let per room, and the demand for affordable housing is high, the rental value is higher compared to ‘vanilla’ buy to lets. In some instances, you may receive 3 times the rent.
As a HMO is let room-by-room, if a tenant decides to leave, you would still be generating rent from the remaining tenants. This isn’t the case with a standard buy to let whereby if the property is let to a family for example, and they leave, the rent ceases completely.
HMO property vs. commercial investment comparison
Investing in commercial property can be a good investment compared to residential HMO as business tenants tend to occupy the property for a number of years.
Business tenants may lease the property for between 3 and 10 years typically. This is advantageous in that you do not have the hassle of sourcing new tenants and creating new AST’s.
The downside to letting commercial property is that the demand for commercial property is lower, and finding tenants could be more difficult. The demand for affordable residential housing is always high.
Another thing to consider is the interest rate of the loan, commercial interest rates are higher than HMO rates, meaning less profit.
HMO property vs. semi-commercial investment comparison
Semi-commercial investments are a good mix of both commercial and residential. A semi-commercial property could, for example, be a retail shop with a flat above.
The advantage here is that although it may be harder to find a commercial tenant, the flat should be fairly easy to rent out. This means that the property is generating a buy to let rent with the added bonus of a long term tenant in the commercial element.
Again, should the commercial aspect prove difficult to rent out, the yield for the residential part would be low compared to an HMO. A HMO in comparison should remain relatively easy to let.