HMO – Understand What They Are & How To Finance Them

Houses of Multiple Occupation (HMO) tend to generate higher yields and income than standard Buy to Let properties.  So what exactly are they and how do you finance an HMO?

Getting an HMO Licence

In order to operate a property as an HMO you might require a licence.  This depends if the area is classed as Article 4.   Licences are issued by the local council in which the property is situated and are valid for five years. A separate licence is required for each property.

HMOs with 5 or more people (from different households) require a licence regardless of location or number of floors.

There is also Selective Licensing areas where you are required to licence all HMOs and Buy to Lets.

Again call us for free help and advice on 01625 548248.

You can apply for an HMO licence by postcode here - https://www.gov.uk/house-in-multiple-occupation-licence

There are many conditions to an HMO Licence such as minimum room sizes.

Click here for a free PDF guide to Room Sizes for HMOs and builds.

>> https://mortgagesavers.co.uk/property-links/

The penalty for renting out a licensable HMO without a licence can be unlimited with £30,000 fines for each and every breach.  

Keeping the peace

When you have a number of unrelated individuals and/or households

living together under one roof you are likely to come across some differences of opinions. It is crucial you set out some “house rules” to stop any conflict. You will also have to consider extra costs such as locks on doors.

Licensed HMO

Finding a lender for a licensed HMO is fairly straightforward although each lender has its own guidelines on:

The number of bedrooms:

Most lenders offering HMO mortgages will go to five bedrooms. If your HMO is much larger your choice of lender will be restricted to the specialists or the high street banks which will price the borrowing on commercial rather than buy to let terms.

Types of tenant:

Lenders are not supposed to discriminate but some lenders steer clear of students or tenants in receipt of benefits because they are perceived to be a higher risk.

How the property is valued:

As you probably know, letting a property to multiple occupants/households usually generates more than rental income than letting to a single household. Some lenders really get this concept and will use the ‘investment value’ when making a lending decision.

Other lenders will only use surveyors that value property on a comparable basis, so if an HMO is located close to other HMOs, an investment value will be given. If, however, a property is the only HMO in the area, the valuation will be based on the price achieved if it were purchased as a single dwelling. This can severely restrict the amount that can be borrowed.

Non-licensed HMOs – also known as multilets

Some lenders prefer to call HMOs which do not require a licence ‘multi-lets’ because the terms ‘non-licensed’ or ‘unlicensed’ carry negative connotations which suggest that the landlord is avoiding getting a licence even though one is not actually required.

Most of the lenders that provide finance for licensed HMOs will also finance multi-lets but will value the property as a single dwelling only as it does not benefit from enhanced planning or an HMO licence.

HMO mortgage availability

According to Mortgage Flow, our bespoke buy to let mortgage sourcing system, around a quarter of all products are available on HMO property (both licensed and multi-let) from around 20 different lenders – that’s nearly half of all buy to let lenders. Most products are available on either a purchase or remortgage basis to both individual and limited company borrowers.

HMO rates 

HMO rates are generally higher than their buy to let counterparts.

Rates and offers can change often and vary between lenders.  Give me a call for the latest rates for your situation.

Will you qualify for an HMO mortgage?

The rent, property, location and tenants may fit the criteria but will you? Many lenders prefer borrowers to have experience as a landlord before they will consider an applicant for an HMO mortgage. There are only a few lenders that accept borrowers without any landlord experience. Lenders will also want to know whether you intend to manage the property yourself or use an agent.

Most buy to let lenders including those offering HMO mortgages can only be accessed via brokers. If you’re interested do get in touch to talk through the options. Be prepared for me to ask you lots and lots of questions; we’ll need as much information as possible to match your circumstances to the right product and lender.

I will ask you about:

• The number of letting rooms
• Location
• Your experience as a landlord including HMO experience
• Whether you’ll be managing the property yourself or using managing agents
• If the property has or needs a licence
• Expected or actual rental income
• If there is one or multiple AST agreements
• Types of tenants
• How much you want to borrow
• Type of rate you prefer (tracker or fixed)
• Your credit rating
• Borrowing vehicle (buying personally or using a limited company)

HMO mortgage application processing times

Processing a buy to let mortgage application for an HMO takes roughly the same amount of time as any other application.. Of course, some lenders are faster, some are slower; often it depends upon the complexity of the application.

Crucially, there will be a discussion with most lenders on whether or not you already have a licence for the property. If you don’t but have applied for one, most lenders will make it a condition of the mortgage that you are deemed ‘fit and proper’ to run an HMO. With the exception of remortgage applications, it is not always practical for lenders to request sight of an HMO licence because some councils simply take too long to grant them.

What to do next if you need finance for an HMO

All in all, finding the right finance for an HMO can be a very complex business. The points above are just the main things to consider, all lenders have their own little quirks, so do get in touch to talk through the options that may work for you.

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