HMO Mortgage First Time Landlord
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Your home may be repossessed if you do not keep up repayments on your mortgage
HMO Mortgage First Time Landlord
Marcus Robinson explains how an HMO mortgage works if you are a first-time landlord.
Can you buy an HMO as a first time landlord? Can you get an HMO mortgage with no experience?
Yes, which is good news. There’s just a more limited choice of options if you’re a first time landlord, but you can actually get one if you’re a First Time Buyer as well. If you haven’t owned any rental properties before, you can still get an HMO mortgage.
Most lenders look at HMOs differently from standard Buy to Lets. They deem them a bit riskier, because you’re dealing with multiple tenants in the property. You will have void periods where one person leaves and you’ve got to fill that space – then someone else leaves… and so on.
Lenders normally like borrowers to have experience as a landlord because of that. For larger HMOs, you may benefit from partnering up with someone who does have that experience. A larger HMO is generally above seven bedrooms.
What lending criteria do I need to meet for an HMO mortgage as a first time landlord?
It varies between lenders, like all mortgages. If you haven’t got experience, you’re probably going to undergo close scrutiny from the lender as it’s a riskier application.
Lenders will ask for a minimum income, which isn’t always the case on Buy to Let lending and HMO lending. Generally, lenders prefer a clean credit file, so you really don’t want to have missed payments on loans, credit cards and especially mortgages.
Rental stress tests and the level of income you need will vary between lenders. With an HMO, the good thing is the rental stress test usually fits – the rental income is much higher with multiple tenants.
If it doesn’t fit, I’d question whether the case is viable – because it should easily meet any lender’s rental stress test.
You might also encounter some age-related criteria. For HMOs, lenders often have a minimum age of 21. Maximum age is not such a problem. It used to be 75, but now you’ve got lenders going 80, 85 and even no limit.
In every case, we’ll narrow down our search based on your circumstances and explore the to find the best option for you personally.
How much deposit is needed for an HMO mortgage?
Usually at least 25%, but some lenders can accept 20%. But in the first time landlord scenario, I would say stick with 25%. Lenders prefer you to have that if you don’t have the experience.
If you’ve got experience, it could be 20%. We used to see 15%, but that’s not back quite yet. We’re hoping things may change on that front.
If you’ve got a bigger deposit, though that improves rates. If you can put down 40% plus, you’re getting the best rates possible on a mortgage.
Is an HMO mortgage different to a Buy to Let Mortgage?
An HMO is a house in multiple occupation. That’s the main difference. You’re looking for a mortgage on a property that has multiple tenants, whereas a standard Buy to Let is for a property with a single shorthold tenancy agreement – perhaps for a family, a couple or a single individual.
The mortgage works in a very similar way and how they underwrite the case is very similar.
With HMOs there are specific rules and regulations around room sizes, the size of the kitchen and whether there is communal space. You need fire doors and there are rules around bin stores and even bike stores outside of the property.
You’ll usually need a licence from your local council to run an HMO. Applying for that is not difficult but it does cost a certain amount of money. In Bristol, we’re usually looking at just over £1,000 per annum.
The difficulty is that sometimes these licences take an awfully long time to come through. In Bristol at the moment, it takes up to a year to get it through.
Don’t worry too much on the mortgage application because most lenders understand that there’s a backlog. They’ll just accept proof that you’ve applied for the licence and paid the fee required.
Can I buy an HMO property to live in?
No, sadly not. The rules are quite clear on that. You can’t live in a property that has an HMO mortgage in place. It’s all down to how mortgages are regulated.
HMOs are considered investments for tenants only. They’re not regulated by the Financial Conduct Authority, but the rules are strict on the mortgage side that you can’t live there.
Can I get an HMO as a first-time landlord if I’m also a First Time Buyer?
Yes, but it is a lot more difficult. There are limited options. It goes back to the risks that lenders perceive in having multiple tenants, so they want you to have the experience.
If you’re a First Time Buyer, you’ve not even had experience of a mortgage, let alone a Buy to Let property, so it adds complications. Usually the lender is going to want more information from you. They may want a higher income to show you’ve got backup if you lost your tenants.
They may ask you to pair up with someone who’s got the experience, but there are options if you fit the criteria. We’ll look at your personal circumstances and compare it to all the lenders on the market and confirm to you what options you have.
Can I get an HMO as a first time landlord if I’m self-employed or a contractor?
The way you earn money shouldn’t affect the mortgage. They’ll assess you and look at your income. If you’re self-employed, it just means you’ve got to prove it in a different way.
You’re not showing payslips – they usually ask for either your accounts or your tax calculations. They used to be called SA302s. You can get those from your accountant or download them directly from HMRC.
Some lenders do require a minimum income, but that can just be your self-employed income. It’s not a problem at all.
What if I have bad credit? Can I still get an HMO as a first-time landlord?
You can, but it depends on the severity of your adverse credit. We’ll always ask clients for their full credit report to see what’s on there.
Often people don’t even realise they’ve got black marks on their credit files. Water companies are notorious for putting county court judgments on your credit file without you even knowing.
Lenders want to know that you’re going to repay the debt to them. If you’ve got a few credit blips, it’s not necessarily a problem if we can give a good reason. Perhaps we can prove that it’s an error. It all depends on the severity.
Can I remortgage my HMO property? How does this work?
Yes, you can remortgage as with any other mortgage, really. You just remortgage onto another HMO product. We can also look at deals with your existing lender, which is usually called a product transfer.
We also look at the market and potentially remortgage to a brand new lender on another HMO product. As a broker, we look at your circumstances and the figures, give you both options and you can decide which you prefer.
You need to be mindful of any fees and make sure you’re not tied into a redemption penalty period. You can still do it, but there could be a fee to pay whilst in that period. We’ll look at that and explain any costs or fees involved.
Can I sell my HMO property?
It’s the same as any other property you own. If you want to sell, you sell. The number of people interested in buying HMOs is probably more limited than with standard residential property. There just aren’t as many landlords out there as standard homebuyers.
You’d probably put it on with an estate agent like any other property, or consider auction or private sale. If you have an outstanding mortgage, make sure that the purchase price covers the mortgage you’ve got. Otherwise, you’ll have a shortfall to pay.
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Is it worth buying an HMO property? What are the pros and cons of an HMO mortgage?
Those are big questions. It’s very subjective and depends on the budget you have available to invest, where you’re buying, and what you’re trying to achieve.
HMOs can generate a better return than a single Buy to Let, because multiple tenants mean more rental income. Often people have a strategy and own multiple HMO properties, because although it’s deemed to be a bit riskier, the returns are a lot higher.
Even if you’ve got five rooms out of six let out, you’ve still got a good level of income coming in. Meanwhile, if you’ve got a single Buy to Let and you lose your tenant, that’s all your rental income gone.
These are things to bear in mind. We work with many clients who’ve got really good income from an HMO property. Many of them have given up their day jobs to be full-time landlords. They manage their own properties as well, so they’ve grown over time.
With HMO mortgages, the lenders understand that these are run as businesses and consider the mortgage application with that in mind. You can often get a commercial valuation on the property, which gives a higher value because it’s based on the rental income.
That means you can borrow more against the property – you’re borrowing 75% of the valuation. You could pull more money out and then buy more properties, as lots of our clients have done.
All lenders apply a rental stress test to a property let out to tenants, to consider whether you can afford to repay the mortgage if rates were to rise. Typically, it’s easier to meet an HMO mortgage stress test because these properties can generate more money than a single unit Buy to Let.
HMO mortgages can be a little more expensive than a standard Buy to Let mortgage. The interest rates are sometimes a little higher, which again comes back down to how the lender perceives the risk to be.
Why are HMO mortgages so expensive? What costs are involved with an HMO mortgage?
As I’ve just mentioned, lenders consider HMOs to be riskier than regular Buy to Let investments, which is why they charge higher interest rates. Having said that, the returns are so good that those rates are easily covered by the rental you’ve got coming in. HMOs are really attractive financially.
From a lender’s perspective, if they had to resell the property after a repossession, the market of potential buyers is smaller – less people are in the market to buy HMOs. It’s good to bear that in mind. When it comes to the pricing, this is what the lenders are thinking about.
The fees are generally in line with standard Buy to Let mortgages. You’ll have an array of options, and if you want the lowest interest rate, you’ll have a higher fee. If you want a middle-of-the-road interest rate, the fee will be cheaper.
How do I get an HMO mortgage as a first time landlord? What is the process here?
The easiest way to get an HMO mortgage as a first time landlord is to talk to an experienced broker like ourselves. Our job is to look at the right deal for your personal circumstances and search the market.
We’ve got 18 years experience of doing this and we’ve won awards for it. We really know where to look for the best deal for our clients.
I’ll map the process out in steps. Step one is to do an initial review meeting with you, either on the phone or via Teams or Zoom. That’ll take about 10 to 20 minutes, just talking through your situation.
We’ll ask how much you’ve got to invest, where you’re looking to buy, whether you’ve found a property and if that property needs any work. Does it need to be converted?
At the end of the call we’ll send you a link to our online portal to give us any additional information we need and copies of your identification documents.
We’ll also need to establish if you’re purchasing within a limited company structure or your personal name. That’s something we’ll talk in depth about. You’re probably going to need to liaise with an accountant to confirm which route to choose.
Step two – we’ll do the research. We’ve got all the details from you, we know what you’re looking for, so we look at thousands of deals from hundreds of lenders and narrow that down to the best option for yourselves, bearing in mind everything you’ve told us.
Step three is our advice. We’ll present a recommendation to you explaining the mortgage in detail. We’ll give you details of all the costs, charges and lending policies to be aware of.
Then we go to step four, which is getting you a mortgage Agreement in Principle.
Like a residential mortgage, once you’ve decided to go ahead with our advice, we can approach a lender for an Agreement in Principle. They do a credit check on you and confirm they would be happy to lend.
An estate agent will probably ask for proof you can get this mortgage. If your lender doesn’t offer an Agreement in Principle, we’re happy to liaise with the agent to confirm that you’re good for the money and we’ve done full checks on you.
Step five is the full application. You find your property, give us all the information and documents, then we apply to the lender on your behalf.
We’ll need the HMO licence at this point, so you’d have to pay the fee and get the application in. We don’t need it actually in place, just applied for. The lender would instruct a survey and then carry out their underwriting process.
Step six – Mortgage Offer – this happens once everything’s gone through, the lenders have done their full assessments and the survey reports come back – hopefully they now give you a mortgage offer.
Step seven is the legal work. The solicitors you’ve instructed carry out all their checks, making sure there’s no issues with the property, run local authority checks, all that stuff.
Step eight is mortgage completion. The legal work is completed, the monies from the lender are passed to the solicitors and onto the sellers, and then you get the keys.
What else do we need to know about HMO mortgages for a first time landlord?
We’ve covered where we can help and where we feel we add value. I’d say our biggest value to clients is in communication and doing the chasing on your behalf.
We’re not just liaising with the lender, we’re liaising with third parties in the process. That could be the surveyors, solicitors and estate agents. Buying a property is stressful, so when you’ve got someone on your side doing that for you, it’s a real relief.
Also, it’s great to know you have one place to call for an update on anything, whenever you want. We’ve got a large team of experienced administrators and most of them are actually qualified mortgage advisors as well, which is unusual. They’re always on hand to do all the chasing for you.
If you look at our reviews, most talk about how positive the communication is. That’s a real positive for anyone looking to buy a property. To add to that, this year we won the HMO National Awards for the best financial services supplier. We really do understand HMOs and we’ve been recognised for that.
We’ve got access to exclusive deals with a number of lenders, just because of the amount of time we’ve been trading and our knowledge. We can also get deals that aren’t available on the high street. So it’s well worth speaking to a broker like ourselves.
Your property may be repossessed if you do not keep up repayments on your mortgage
Initial Consultations are completely free of charge. There’s no obligation to proceed and our broker fee will only become payable if we proceed to a full application. The precise amount of the fee will depend on your circumstances and will be discussed and agreed with you at the earliest opportunity. Typically, in most cases, our fee will be £495. We charge £595 for bridging and adverse credit cases; and £995 for Later Life Lending.
Mortgage Style Ltd is registered in England and Wales. Registered Number 5743648. Registered Office: Elm Tree Farm Estate, The Sheepway, Portbury, Bristol, BS20 7TF.
Mortgage Style Ltd, trading as Mortgage Style, is an appointed representative of the HL Partnership Limited, which is authorised and regulated by the Financial Conduct Authority.