HMO Mortgages

Expert advice on your finance options for houses in multiple occupation.

Our HMO property buy to let mortgage service provides:

• HMO Mortgages from £50,000
• Advice on finance products available for HMO lending
• First-time landlords welcome
• Licensed and unlicensed HMOs
• Expertise in dealing with buy to let portfolios, Limited companies using retained profits
• Funding solutions for portfolios with no limit on number of properties
• Landlord light & heavy refurbishment finance available on attractive terms
• Interest-only lending terms available
• Individuals, limited companies, LLPs, partnerships, trusts and pension schemes
• Refurbishment & short term finance options up to 100% LTV with additional security

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First-time investors and experienced single-tenant landlords may be attracted by the attractive returns offered by a property with multiple tenants – also known as a multi-let, or a house in multiple occupancy (HMO).

HMOs range from a house-share arranged by a group of friends, to a house or flat provided for a group of students sharing, to high-spec accommodation for young professionals or low-cost housing for shift workers or housing benefit recipients.

The projected annual returns of 4-5% for a straightforward buy-to-let (BTL) can be doubled for a multiple-occupancy letting. Which is more than enough to persuade many landlords to tackle the additional licensing and finance requirements. But the finance issues may be more complex and require specialist advice.

What is an HMO Mortgage?

Do I need a licence to run an HMO?

Tenants to target for HMOs

What kind of tenancy agreement do I need to run an HMO?

How profitable is an HMO?

How to finance an HMO

Why Become an HMO Landlord?

How to Get an HMO Mortgage

Finding the Right HMO Mortgage Lender

Using a Broker for HMO Finance

What is an HMO Mortgage?

An HMO mortgage is a mortgage that's specifically designed to fund the purchase of an HMO (House of Multiple Occupations). 

A house in multiple occupation (HMO) is any rental property with shared facilities (such as bathrooms and kitchens) which is rented out to three or more people who aren’t part of a single "household" (usually a family). They’re what’s often known as a "house share".

Many people refer to an HMO as a Large HMO, which is a rental property with five or more tenants, where the tenants share toilet, bathroom or kitchen facilities.  

There are two main types:

• Small HMO: Up to 4 occupants. No licence is required.
• Large/Licensed HMO: 5+ occupants. Licence required from local council. Must meet strict regulations on space, facilities, safety etc.

Licensing brings additional costs but also reassures lenders, as it proves the property meets important standards. 

Do I need a licence to run an HMO?

You don’t need a licence to run a standard HMO with four or fewer occupants. Landlords need an HMO licence to operate a Large HMO, which will usually be valid for five years - which is why they are sometimes referred to as Licenced HMOs.

Smaller HMOs, which don't need to be licensed, have commonly been referred to as "unlicensed HMOs," but the term can seem to suggest that they are somehow illegal or fly-by-night. Some owners, local authorities and lenders refer to these smaller HMOs as multi-lets, "HMOs Not Required To Be Licensed," or "non-licensable HMOs".

The different mortgage lenders for these specialist buy-to-let mortgages may have different definitions and requirements for their HMO lending. 

Tenants to target for HMOs

With the cost of buying a home still rising, the demand for affordable rented accommodation remains very strong. Local listing sites (Gumtree, Zoopla, Rightmove…) will help first-time landlords to assess the strength of demand from prospective tenants:

• Low-cost/affordable housing/housing benefit tenants: some landlords decide to give their whole properties to local authorities for low-cost housing at a discount but gain an assured, continuous income.
• Students: can have their rent guaranteed (often by parents) and usually have a natural study-course limit to the length of their tenancy.
• Working professionals: increasing numbers are renting into their late 20s and 30s, looking for higher-spec properties (often with more bathrooms) but they are usually more stable, less party-lifestyle tenants. 

What kind of tenancy agreement do I need to run an HMO?

Landlords can manage their HMO property by setting up one "joint and severally liable" agreement covering all the tenants or using an individual contract for each tenant.

Joint contracts

• Suitable for a group of students or friends moving in together
• Usually require less administration: one overall agreement with one single rent payable (and one deposit to protect, should you decide to take a deposit).
• Tenants are jointly liable for rent and property care and are responsible for the bills and council tax.

Individual contracts

• More common for large, low-cost HMOs, or inner-city HMOs designed for young professionals
• Each tenant pays his or her own rent separately
• If one tenant fails to pay, the others don’t have to make up the shortfall
• Individual tenancies are more of an administrative burden, with individual deposits to be collected and protected.
• As a landlord, you will be liable for council tax and usually utility bills as well, though you can include this cost in the rent that you charge 

How profitable is an HMO?

Prospective landlords may see HMO properties advertised for sale offering “100%+ gross yields,” but you’ll need to be aware that the costs of setting up and running HMO properties are considerable, so the key figure is net yield.

HMO landlord costs include:

• conversion costs, including installing extra bathroom(s) and kitchen(s), fitting fire doors, door closers and locks
• finance costs
• council tax (usually paid by the landlord)
• utility bills
• insurance
• repairs and maintenance
• management costs
• rent arrears
• voids

Profits may be maximised by running the property through a limited company structure: you’ll need advice from an accountant / financial adviser.

How to finance an HMO

Nearly 40 lenders operate in the buy-to-let mortgage market, offering approximately 1,500 different mortgage products. Many can only be accessed by a broker engaged to act on your behalf.

See HMO Mortgages - How To Finance An HMO Property

What kind of finance do you need?

• An HMO mortgage to buy a property already converted and operating as an HMO
• A specialised bridging loan to cover the cost of purchasing and converting a property to an HMO (usually to a maximum of 75% LTV)
• Refinance in the form of an HMO mortgage or Large HMO mortgage to pay off your HMO bridging loan

Lenders will have different criteria for the number of rooms in an HMO they will consider, and how they calculate the value of the property (usually as a combination of Bricks & Mortar and Investment value).

HMO borrowing stress test calculation

Lenders commonly apply a slightly higher “interest coverage ratio” (currently around 1.7%) to HMO mortgages, compared with standard BTL mortgages (usually 1.25%), to cover the perceived high risk of a multi-tenanted property.

An experienced broker will be able to identify the most appropriate – and cheapest – finance for you in this specialised area of the buy-to-let market and will package your application to ensure it meets the lender's criteria.  

Why Become an HMO Landlord?

HMOs offer landlords the potential for excellent returns:

• Higher rents: Instead of renting to one family for £800 pcm, you could rent to 4 tenants at £400 pcm each.
• Fewer voids: Finding a replacement tenant is easier when others remain. There are no long gaps with zero rent coming in.
• High demand: Tenants such as students, young professionals and housing benefit recipients rely on HMOs for affordable access to the rental market.

However, costs are also greater, mainly due to:

• Council tax
• Utility bills
• Management fees
• Insurance
• Maintenance and repairs 

Types of HMO Mortgages

There are several types of HMO mortgages to choose from. Here’s a brief run-down of each type and some of the pros and cons between them:

• Fixed Rate - Interest rate stays the same for 1-5 years typically. Fixed rates are usually higher than tracker or variable rates initially. However, they protect you in case variable rates rise significantly in the future.
• Variable Rate - Interest rate changes in line with market rates. There is no fixed term - your interest can change at any time. Variable rates are the most unpredictable option. However, many lenders let you switch to a fixed rate later on if needed.          
• Tracker Rate - The interest rate is linked to the Bank of England base rate. When the base rate rises or falls, your mortgage interest rate adjusts accordingly. Trackers can start cheaper than fixed rates, but you risk rates increasing over time.
• Interest-Only – With interest-only HMO mortgages, you only pay the interest each month, not the capital. This maximises cash flow benefits for landlords. However, you must have a plan to repay the full mortgage lump sum at the end of the term. This could be through selling the property, savings, or another repayment vehicle.
• Capital Repayment - You repay interest + part of the capital each month. Over the full term, the entire mortgage principal gets paid off through these instalments. This provides certainty that the debt will be repaid, but reduces cash flow available.

Interest-only HMO mortgages are more common for HMOs as they allow landlords to maximise cash flow. However, it is important that you plan a robust strategy when repaying the full mortgage at the end of the term.

Understanding the different options available allows you to pick the HMO mortgage type that aligns with your investment strategy and goals. At Clifton Private Finance, we can provide guidance on the pros and cons of each and point you in the right direction, and the right product for your situation. 

How to Get an HMO Mortgage 

Fewer lenders offer HMO mortgages due to the higher risks, some of these risks include:

• More frequent voids and rent arrears
• Increased wear and tear
• Difficulty tracing damage to individual tenants

However, specialist brokers like us can help you identify suitable lenders based on:

• Your experience as a landlord
• The property value
• Amount required
• Expected rental income
• Number of lettable rooms
• Whether you'll use a letting agent
• Your credit rating
• Limited company or personal ownership

Applications can then be tailored to meet each lender's criteria, streamlining the process. 

Finding the Right HMO Mortgage Lender

With HMO financing being a specialist area, it's important to understand the different types of lenders offering these mortgages:

High Street Lenders - Some major banks and building societies are starting to offer HMO mortgage products. This includes the likes of NatWest, Barclays and Nationwide.

The advantage is they often have the most competitive interest rates available. However, their criteria is often strict - they'll usually only lend up to 65% LTV and a maximum of 4 bedrooms.

Specialist HMO Lenders - There are a handful of niche lenders that focus specifically on HMO and multi-let properties. They can provide mortgages for larger HMOs and higher LTVs. But their rates are slightly higher than the high street.

Commercial Lenders - A few commercial and business mortgage lenders are open to complex HMO properties that don't fit the criteria of other providers. They offer the most flexible terms for unusual or high-risk propositions. But their interest rates tend to be the highest.

Bridging Lenders - Short-term bridging loans can provide finance to convert a standard property into an HMO. Once refurbished, longer-term HMO finance can be arranged. Bridging rates are substantially higher than mortgages. But the loans can be secured much faster. 

Using a Broker for HMO Finance

With limited lender options, a broker is invaluable for accessing HMO mortgages:

• Can source exclusive products not on the high street
• Will identify your most suitable lender(s)
• Assists with tailoring your application
• Navigates complex affordability and criteria
• Access to bridging loans for renovations
• Property, tax and legal planning advice 

In Need of an HMO Mortgage? We Can Help

While requiring more work, HMOs can bring impressive returns from higher rents and optimising space. However, the financing and management involve tackling additional complexities.

Understanding the costs, risks and responsibilities is essential. With the right research and specialist support, HMOs can be a lucrative investment for landlords. HMO mortgages require specialist knowledge – and that’s how we can help at Clifton Private Finance. Get in touch today to discuss your investment plans with an expert broker.

We'll assess your personal situation and property financing needs, providing tailored advice and access to exclusive HMO products. One of our specialist HMO mortgage advisors will be happy to discuss your requirements with you:

Call us on 0203 900 4322 to discuss your requirements or request a call-back:

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Through our specialist market knowledge we can deliver enhanced, bespoke or exclusive terms based on your requirements.  

Call our HMO mortgage team on  0203 900 4322 to discuss your requirements or book a call-back below: