How do I achieve the best HMO mortgage rates?
Our HMO mortgage comparison tool gives you a snippet of the best HMO mortgage rates on the market. When looking at HMO mortgages, there are many factors that can affect the interest rate charged by lenders. This could be things like lettings experience, credit history or the LTV (Loan to Value) ratio.
If you already have lettings experience there will be a greater choice of products available. Although, there are still some good interest rates available if you have little or no lettings experience.
As with any mortgage or loan, credit history also plays an important factor when looking to borrow and the products available to you.
LTV is simply the ratio of the loan amount 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 lenders tend to offer the best rates when the LTV is lower, at 60% or less. 80% HMO mortgages would generally have a higher interest rate than a 75% LTV mortgage due to the increased risk to the lender in the event of default or repossession.
A handy tip is to look at the overall cost rather than just the lowest rate. Some low initial rates have high revert-to rates meaning there is a greater chance you will need to refinance after the ‘tie-in’ period ends.
The lender fee also has an impact on the overall cost. Some HMO lender fees can be high, which has an impact on the total cost of your mortgage.
Understanding HMO Mortgage Rates & Fees
Interest rates vary based on the client’s lettings experience and also the property itself.
As with most mortgages, HMO mortgage lenders tend to offer either variable rates or fixed rates. A variable rate is just that, meaning it can go up or down during the mortgage term. With fixed rates, it stays the same for a pre-agreed time. Fixed rates are usually slightly higher than variable rates.
Variable, or tracker rates, usually move in line with the Bank of England base rate or with LIBOR (London Interbank Offered Rate). Although the latter is being phased out by the end of 2021. Some variable rates are simply decided by the lender. Discounted variable rates are at a discount below the lenders standard variable rate for a set time, typically 2-5 years.
A fixed rate will stay the same for a set period, meaning that you can be certain your payments will not increase during that time. HMO lenders offer fixed rates from 2 – 10 years, however, longer terms can be offered. Usually, the longer the term of the fixed period, the higher the rate.
Should I go for a fixed or variable rate?
This is really down to personal preference. If you feel comfortable knowing that your payments will remain the same for a set period, a fixed rate is probably a better option for you. If you feel that variable rates will remain lower than a fixed and you would benefit financially, this may be the best option for you.
If you’re looking for more information on the available interest rates, you can find this on our comparison page.
Are rates higher than buy-to-let mortgage rates?
HMO mortgage rates tend to vary depending on the type of property and number of tenants, along with a number of other factors. As a general guide, rates start at very similar levels to standard buy-to-let mortgages, starting at around 1.85%. In many cases, the products are almost identical.
Due to the number of different factors in applications and the differences between HMO mortgage lenders, it is crucial that finance costs are considered early.
HMO mortgage lender fees
When looking at HMO mortgages, lender fees vary greatly between lenders and products.
Standard HMO lenders typically have different products with varied fees. In some cases, you may find that the lower the lender fee, the higher the rate and vice versa. Some lenders do not charge a fee at all, however, the interest rate may counteract this saving.
HMO lender fees tend to range from not paying a fee at all to some options which are 3% of the loan amount. Some products offer a flat fee of say £995. Most lender fees can be added to the loan rather than paid separately. You should bear in mind that interest will be charged on any fees added to the loan.
Specialist HMO lenders tend to base their fee on a set percentage of the loan amount, a good guide would be 1.5% to 2% of the loan amount. Again, in most cases, the fee can be added to the loan although some lenders ask for say 0.25% of the fee to be paid when the mortgage offer has been issued.
What other fees am I likely to have to pay?
Before applying for an HMO mortgage it’s crucial that you understand all of the costs that you may incur throughout the process. Here are some points to consider:
- Broker fee: If using an HMO mortgage broker, you can usually expect to pay a broker fee. For standard HMOs, brokers tend to charge a flat fee of between £500 and £1,995. For more specialist HMOs, mortgage brokers may have access to specialist lenders. Specialist HMO mortgage brokers tend to charge a percentage of the loan amount, usually 1%. We don’t usually charge broker fees on specialist HMO applications and in most cases charge £495 for standard, small HMOs.
- Valuation fee: A property survey or valuation report will be required to satisfy the lender that the property is suitable security. Given the specialist nature of the property, HMO valuation fees can be higher when compared to simple buy to lets. In most cases, this is charged when you apply and is not refundable once the valuation has been completed. We always aim to get the application agreed subject to valuation. Some lenders do offer free valuations however this is rare with HMOs.
- Assessment fee: Some lenders charge a fee for assessing the application, this is not refundable once the work has begun. This may also be called an application fee and is usually paid at the same time as the valuation fee.
- TT (Telegraphic Transfer) fee: A TT fee is paid to transfer the funds from the lender’s account to either yours or your solicitor’s account. This usually costs around £35 and in most cases can be added to the loan.
- ERC (Early Repayment Charges): 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. This fee tends to reduce with time. It could for example be 3% for the first year, 2% for the second year and 1% for the third year. This charge will usually be payable for the length of the fixed rate with no charge once the fixed rate has ended. In this instance, if you opted for a 5 year fixed rate, the ERC would be payable for the first 5 years with no fee thereafter.
- Solicitor fees: If there is a solicitor involved, there will be a fee to pay. The amount will vary depending on which solicitor you use. It’s advisable to obtain a quote before any work is started. In some cases, you also have to pay the lender’s solicitor fees. Some lenders do offer a free legal service but again, this is rare with HMO’s.