What is an HMO Mortgage?
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Home » What is an HMO Mortgage?
What is an HMO Mortgage?
What is an HMO and an HMO mortgage?
An HMO mortgage is simply a mortgage secured on an HMO – a house in multiple occupation – that’s let to a number of individuals.
The official ruling to describe an HMO is any property occupied by three or more people that are not one household. They are not a family, but three individuals.
A large HMO is home to five or more people who share toilet, bathroom or kitchen facilities. An even bigger HMO is seven bedrooms or more – and these require planning permission.
How does a mortgage on an HMO differ from a standard Buy to Let mortgage?
The main difference is that with a normal Buy to Let you just have a single shorthold tenancy agreement – for one family, a couple or an individual. An HMO is for multiple tenants, each with their own contract.
There are specific rules for HMOs which you need to look out for. For example, there are minimum room sizes, requirements for communal areas, and all doors need to be fire doors to fit the regulations. There are even rules about bike sheds and bin stores outside.
A landlord often needs a licence on an HMO. It varies between councils around the country, but generally speaking, most councils will require a licence. It does take a long time. We’re based in Bristol, and at the moment, if you apply for an HMO licence here it could take up to a year.
If you’re thinking about a mortgage, you might worry about how to apply for it if you haven’t got the licence. But most lenders will actually accept proof of you sending in your application with a fee, rather than the licence itself.
The other main difference is the rental stress test. With HMOs the rental income is normally a lot higher, because you’ve got lots of individuals paying rent.
Is an HMO mortgage more expensive than a regular Buy to Let mortgage?
Yes. I can’t deny that. It’s because lenders consider them to be riskier. Because you’ve got multiple tenants, as you can imagine, it’s quite easy to not fill all the rooms. You may have a six bed HMO with six tenants, but one person leaves and all of a sudden your rent’s a bit shorter. That’s a consideration for the lenders.
Also, if they did have to repossess, which is hopefully very unlikely, there’s a smaller market to buy that property.
What deposit do I need for a mortgage on an HMO?
Across the board, I would say 25% is a requirement as a deposit. A few lenders may accept a smaller deposit of 20%. There’s even one lender at the moment who will accept a 15% deposit [information correct at the time of recording in November 2024].
The downside of a smaller deposit is the rates are usually higher. You might have a higher fee as well. But if you don’t have that deposit and you need that option to achieve your goals, it’s there for you.
If you’ve got a bigger deposit, you could get a better rate. So if you’ve got 40%, where you are borrowing 60% of the value, you’re going to get the right rates from lenders.
How many tenants can I rent to with an HMO mortgage?
It depends on the size of the HMO. You can’t have a small house and try and pack 30 people in there – there are regulations around the number of tenants for the square footage of a property.
But we deal with all sizes of HMOs, from three bedroom properties right up to 30 plus bedrooms. There’s almost no limit, as long as it fits council regulations.
Having said that, some lenders are only in the market at the smaller end of the HMO market. They only accept six tenants or six rooms. Others go up to 10 tenants or rooms, and some have no cap – it depends what you’re looking for.
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What types of property would I need an HMO mortgage for?
It’s not really about the property type, to be honest. It could be a period property, a barn conversion, a new build… But what the lender’s looking at is whether there will be demand for an HMO property in that area.
If you imagine a nice barn conversion out in the countryside, would there really be demand for six individual tenants to live in that property? If you’re in the centre of town, near a university, students are going to want to live there. If you’re near a big employer, you can attract young professionals.
That’s the main thing. Rather than the type of property, the question is whether it will rent as an HMO.
Can I get an HMO mortgage and live in the property?
Not if you want to stick to the rules, because HMOs are just for tenants. They’re a non-regulated product, as far as mortgages go, and they are purely for tenants living in an investment property.
Are there different types of HMO mortgages or mortgages for HMOs?
In terms of fixed rates, tracker rates etc, then yes, there are. Just as you have normal residential mortgages with different options, you have the same for HMO mortgages.
Generally, a lender will offer a two-year or a five-year deal. Some throw in a three-year or even a 10-year option. Those tend to be a fixed rate, where of course if interest rates do change, your monthly payments stay the same.
Tracker rates would follow the Bank of England base rate, and if that changes, your rate will also change. We would run through those options with clients based on their circumstances.
Do I need an HMO licence for an HMO mortgage?
Yes. As it does take a long time to get that licence with many councils some lenders appreciate that, so if you can show you’ve applied for that licence and you’ve paid the fee required, they will just go off that proof.
What are the eligibility criteria for a mortgage on an HMO?
It does vary a lot between lenders. They’ve all got their own nuances around what they will and won’t accept. Generally because HMOs are deemed to be riskier, most lenders require you to have some sort of experience as a landlord.
You might just have a normal Buy to Let, that you can show you’ve rented out. Having said that, some lenders will lend on HMOs to a first time landlord with no experience whatsoever.
They will also sometimes look for a minimum income. Some lenders ask you to evidence that you earn £25,000 a year through self-employed or employed income. Other lenders don’t have that requirement.
Most lenders would like a clean credit file, rather than missed payments. Missed mortgage payments are certainly not seen favourably.
With the rental stress test, lenders each have their own criteria, and a final area is age. A lot of HMO lenders want you to be 21 or above, and the maximum is often age 75. However, some lenders don’t have an age cap. There are lots of options for clients.
How is affordability calculated for an HMO Mortgage?
It does vary between lenders and their appetite for risk at the time. It also varies depending on whether you’re looking to hold the HMO in your personal name or a limited company.
You will get advice from your accountant on which is right for your personal circumstances. If you’re borrowing through a limited company, lenders view that to be more stable and you could offset more tax. Their rental stress tests are therefore a little more lenient.
But that may not be the way you go. It depends on what the accountant confirms. Usually lenders want the rent you receive to be between 125% and 145% of that mortgage payment, based on a default interest rate that they will dictate. Often it will be on their five-year fixed rate level.
Can I get a mortgage on an HMO with bad credit?
It depends how bad your credit file is and how recently you’ve had issues. We usually ask a client to give us their credit file, because sometimes there are blips they weren’t aware of. Water companies are notorious for putting things on your credit file, like County Court Judgements, without telling you.
Lenders are also aware that this can happen. They often take a view on blips, especially if there’s a good story behind it, and you could prove it wasn’t just that you decided not to pay these people.
Some lenders have more tolerance for credit blips, so we could look for those depending on your credit file.
How do I find lenders that offer mortgages on HMOs?
You could to speak to an advisor for an HMO, because it is a specialist product and there’s so much to be aware of. Obviously, I would suggest ourselves. One good reason is that this year we won the HMO Awards for the Best Finance Provider – that’s a national award.
We know our stuff, but of course there are other companies out there. Speak to someone that does deal with HMO mortgages on a regular basis, for sure.
How do I apply for a mortgage on an HMO?
When we’re dealing with a client, we’re going to ask for all your personal details and discuss your goals. We’ll collect that, then go away and do some research. We’ll come back to you with a recommendation and submit some proposals to you.
If you’re happy with one of those, we could then put an application into the lender. We don’t just leave it there – we’ll chase that through right to completion.
We’ve got a team of very experienced administrators. Most of them have been mortgage advisors in the past, and they will chase all parties in the process, not just the lender. They’ll be chasing solicitors, surveyors and estate agents on your behalf – because we want this to be a seamless process for you as we hope you’ll want to do it again.
What else do we need to know about HMO mortgages?
We take care of the whole process and keep you informed along the way. I do feel communication is really important. Our admin team gives us the ability to keep in touch with our clients and let them know what’s going on throughout the whole process.
We’ve been running for over 18 years, so we’ve built up really good connections and knowledge around HMOs. We could also get access to exclusive rates because of the amount of business we’ve done with certain banks.
A big one on HMOs is getting a commercial valuation. By doing that, you’re working off the rent, which is really high and pushes the value up quite a lot. In turn, you could borrow a lot more on the property.
Clients often want to do that, because if they could pull more money out of that property, they could reinvest it in further property purchases. Many clients will buy one property, refinance it, let it out and pull money out to do another one.
We know which surveyors to go to for the right valuation. Lenders are actually doing commercial valuations even on five bed HMOs – people often think you can’t get those, but you could. It’s just knowing who to speak to and where to go.
Your property may be repossessed if you do not keep up repayments on your mortgage 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, trading as Mortgage Style, is an appointed representative of the HL Partnership Limited, which is authorised and regulated by the Financial Conduct Authority.
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