When Does an HMO Require a Commercial Mortgage?

Many people think that a commercial mortgage is needed for HMO properties however this is often not the case. Some standard buy-to-let lenders offer HMO mortgage products at competitive interest rates.

The flip-side to this is that, as HMO property is becoming more popular, some commercial mortgage lenders are now offering rates that sit between standard HMO rates and commercial investment mortgage products.

Commercial finance is needed if the property itself doesn’t meet standard HMO mortgage criteria. This could mean that the property is more unusual, such as a pub or guesthouse converted to an HMO. In these cases, the property is deemed a ‘large HMO‘ which also occurs if there is a commercial property element e.g. a retail shop downstairs with an HMO above. In this situation, a commercial mortgage may be required.

A common misconception is that if you use a commercial mortgage lender to finance your HMO, a commercial investment valuation will be used to inflate the value of the property. Unless the property is either a purpose-built block or larger conversion that has a strong lease in place, it will likely be valued as vacant possession bricks and mortar only.

HMO portfolio mortgages

Another area where commercial mortgages would be used to fund an HMO is where a whole portfolio is being financed, as opposed to a single property.

Portfolio purchases and refinances are fairly common and are usually funded on a commercial basis, rather than through traditional HMO mortgages.

These loans can include mixed portfolios, where there is a mixture of HMOs, buy to let properties, commercial and semi-commercial properties.

Commercial HMO interest rates & criteria

If your HMO property does need a commercial mortgage, it doesn’t mean to say that the interest rates will be high. A larger HMO mortgage of, for example, £1,000,000+ could still achieve an interest rate of 2.35%.

As commercial mortgages are only really needed for more specialist property and larger loans, lenders do require HMO lettings experience. The typical LTV (Loan to Value) ratio is usually capped at 75% although 80% LTV is not unheard of for the right deal.

We’re here to help

If you’re unsure as to what type of HMO mortgage you need, you can send us the property particulars or similar and we will happily take a look for you. We’ll be able to break down the products available, the documents needed to apply, which is very important when buying your first HMO.

To discuss which type of HMO mortgage is needed, call us on 01922 620008 and we will talk you through your options. You can also get in touch online. We will always aim to find you the lowest interest rate possible for your circumstances.