Why remortgage your HMO?
What are the main reasons why you should remortgage your HMO?
Although you can choose to remortgage for any reason, the two most common ones are to either save money, or release equity from your property.
Both can have major advantages for property investors. Whatever your reason for refinancing, as there are big differences in the rates charged by HMO mortgage lenders, there can be huge differences in the rate that you end up paying.
This is especially true if you’ve come to the end of a fixed or discounted rate period, where you may find yourself paying 5% or above.
How does the purpose of the remortgage impact the products you qualify for?
Although each lender has their own criteria, most take a keen interest in your reasons for refinancing. For example, when looking to raise capital, your prospective lender will want to understand the reasons for this.
If you’re looking to raise funds which will be put towards a new property investment, the lender would be more open to this than if it were to be spent on a holiday or new car.
Other popular reasons for a remortgage include debt consolidation, funding property improvements, buying out a partner and even just to secure a better interest rate. Some lenders will even let you capital raise to hold funds for a future purchase.
All of these reasons will usually acceptable to almost all lenders.
If your reasons for refinancing don’t fit into these categories, you will still be able to refinance, but may find your choice of lenders reduced slightly.
Releasing equity from your HMO
What is the maximum loan to value (LTV) that I can borrow?
Although this will depend on the property type and tenant profile, the maximum we can offer is currently 80% LTV.
Mortgages for large HMOs may be restricted to 75%, although again, this will depend upon a number of factors.
How is the valuation calculated?
There are two common methods for calculating the value of an HMO:
Bricks and mortar value – The bricks and mortar value of an HMO is the valuation of the unit as a property. For example, if it is a 4 bedroom terraced house in a row of other 4 bedroom terraced house, then the value will be similar (assuming they’re in similar condition). This approach takes no account of any potential income that the property will provide you with and is common for smaller HMOs, usually up to 6 bedrooms.
Investment value – The investment takes into account both the value of the bricks and mortar, plus the income that the property produces. The investment value of a property is generally higher than the bricks and mortar value. Some lenders base their LTV calculation on the investment value of larger HMOs, which often means that borrowers are able to release all of their own funds from a property.
Key product features
|Max LTV||Up to 80%|
|Interest rate||From 2%|
|Repayment type||Capital repayment, interest only or part and part|
|Interest type||Fixed or variable available|
|Acceptable security||Any UK HMO|
- Loans from £25,000 with no maximum loan size
- Available to individuals, partnerships, LLPs, Ltd companies, offshore companies, foreign nationals and pension funds
- Minimum applicant age 18 years – no maximum age
- Available in England, Scotland, Wales and Northern Ireland
- Adverse credit accepted (on a case by case basis)
- Products with no early repayment charges available
The documents needed when applying for an HMO remortgage
The following information is usually required when making a new application:
- A copy of your HMO licence (where held)
- Copies of ASTs
- Copy of your latest tax returns or payslips
- Details of any other properties that you own
HMO remortgage rates and fees
What interest rate will I pay?
This depends on the property type and application profile.
If the application is in a personal name and the property could easily be let to a family, some lenders will lend at around 2%. If the application is under a limited company or SPV or the property is more suited as a HMO, rates tend to start at nearer 2.8%
If the property is larger or more specialist, HMO mortgage rates can fall between 3.2% – 5%. If you than add adverse credit or unusual property types, you could expect to pay between 5% and 9%.
A good HMO mortgage broker will always find the best rate for your personal situation.
Are there any other fees to consider?
Yes, in addition to the interest charged, you will also be charged several fees when remortgaging.
The main fees to consider are lender arrangement fees, valuation fees, legal fees and in some cases, broker fees.
How the type of tenant impacts the deal you get
Tenant profile is a big factor in any lenders decision to approve an application. There are generally options available regardless of your tenant profile, but again, it may restrict your choice of lender.
Generally speaking, young professionals and healthcare workers are typically acceptable to all lenders. Student lets are a specialist area and may restrict your choice of lender.
Any type of vulnerable tenants will prevent lending by most lenders, but we will most likely still be able to help – although it may mean a slightly higher interest rate.
How the property impacts the deal you get
Property type is another key factor in the deal that you get. Converted houses tend to be the most popular property type for most lenders, ideally with 6 or less bedrooms.
Larger converted houses can also be funded relatively easily, however, as the number of bedrooms increase, a more specialist lender may be required. This may open the opportunity to borrow based on the investment value, rather than the bricks and mortar value.
Finally, unusual properties, or those more commercial in nature are more likely to require a specialist lender. In this situation, a more bespoke approach is taken, with each application assessed on its merits.
HMO remortgage affordability
How is affordability calculated?
Affordability is calculated based on the rental income of the security property, with some attention being given to the financials of your overall property portfolio (for portfolio landlords).
Lenders usually require your annual rental income to be a set percentage more than your annual mortgage payments. This figure is often between 125-145%, meaning that annual mortgage payments of £10,000 would require a minimum annual rent of £12,500-£14,500.
Some lenders apply a ‘stress test’ to ensure that the mortgage will remain affordable even if interest rates rise. This is more common on variable, tracker or short-term fixed rate products, with longer fixed rate products often benefitting from more relaxed affordability rules.
A stress test sets a higher interest rate as the basis for your affordability calculation, for example, a rate of 5.5% could be applied. In this situation, the rental income must be a minimum of 125-145% of the annual mortgage repayments if the interest rate were 5.5%.
Can your personal income affect an HMO remortgage?
In some cases, your personal income can impact your HMO mortgage application, however this is relatively rare.
If the rental income falls short, some lenders will use your personal income to top up the loan, this is often call ‘HMO top slicing’
Some lenders have a minimum income that applicants must earn in order to qualify. Where used, the minimum income tends to be £25,000. In some cases however, some lenders don’t have a minimum income level at all.
How to get the best HMO remortgage deal
Some lenders publish their rates and basic criteria online, which allows you to manually search for the best deal.
While this can be effective, there is a lot more nuance in the HMO mortgage market than is the case with standard buy to let mortgages.
This can lead to difficulty in finding a suitable lender and in some cases, may even lead to declined applications. As such, it’s important that you tread carefully when taking this approach.
Working with a specialist HMO broker
As the HMO mortgage market is a specialist area of the mortgage market, many borrowers choose to work with a specialist HMO mortgage broker.
They will help you to navigate the different products available from each lender and how to use them to your advantage.
In addition, some specialist lenders will only work through brokers, meaning you may have more options available when working with a broker.
Whether that’s calculating whether it’s worth paying a fee to achieve a lower rate, finding a lender who will accept an investment value or simply a lender who can complete quickly, we can help.
Top tips when refinancing your HMO
- Disclose all information to your lender or broker, both positive and negative. Any missed information may come back to haunt you later on and slow the process down or mean a change of lender is needed.
- Prepare the property for the lenders survey. This could be minor decoration, checking kitchens and bathrooms are in order and making sure the property is tidy.
Tell your tenants a surveyor will be visiting, if the surveyor can’t access all rooms, you may be charged again for a re-inspection.