What Are HMOs, and How Do HMO Mortgages Work?
The recent regulatory changes for buy-to-let property investors have been challenging for landlords perhaps even more so for those with multiple occupants. When the definition of ‘large HMO’ changed more landlords were faced with taking out mandatory licences.
However, the licensing system is designed to ensure that authorised HMO investors provide quality accommodation and uphold all the essential safety standards in a property with multiple tenants.
A house in multiple occupations (HMO) is a house rented to three or more people from more than one household who share basic amenities. A home is a couple either married living together or relatives living together. Two friends sharing would be considered two houses.
The property is an HMO if both of the following apply:
- At least three tenants live there forming more than one household
- Toilet, bathroom and kitchen facilities are shared.
New Buy to Let Mortgage HMO License Rules
Previously properties with three or more storeys were defined as large and landlords had to possess an HMO licence if they had a three-storey property or more significant. But when the legislation changed in October 2018 the definition of ‘large HMO’ changed to any property with five or more tenants.
However, some local authorities require landlords with fewer than five tenants to have licences so it’s important to check with the council issuing the licence. It is what’s known as selective licensing.
This variance between local authorities can mean it's much easier to invest in an HMO in one area than another, given the disparity between the licensing requirements.
Applications for HMO licences can be made through this government website: gov.co.uk
The cost of the licence is set by the local authority and varies depending on factors such as house size and a number of rooms.
Costs of Licensing to Achieve the Best HMO Mortgage Rates
There’s no set rate: for example, in London, you could be charged £2,500 for a licence in Lewisham or £120 in the City of London. Most licences throughout the country are somewhere in between.
It can take many months for the application to be processed by the local authority and the council will scrutinise both the property and the landlord for suitability. The landlord will need a licence for each HMO property they rent out, and there are discounts given to multiple HMO properties within the same council.
The licence must be renewed every five years and there are legal conditions attached to licences which are outlined here:
- An HMO landlord must be considered a fit and proper person with no unspent convictions verdicts of unlawful discrimination or breaches of housing law
- Landlords must provide the council with annual gas safety certificates
- Electrical appliances and furniture must be in a safe condition – the landlord may be asked for safety certificates for furniture and appliances
- Smoke alarms are installed and kept in proper working order
- Tenants must be given a written statement of the tenancy agreement
- Bedrooms must be of a minimum size
- Landlords must cooperate with the council’s demands on waste disposal
- If a landlord is found to be in breach of any of these conditions they risk a fine of up to £20,000.
Other Considerations for HMO Mortgage Rates
- The desirability of location: Houses in urban areas or those near universities or hospitals. For example, are more likely to be filled than properties in out-of-the-way areas. It’s important to conduct proper research into the area. Is there demand? What are competitors charging?
- Condition of property: The market is competitive and if you are renting to young professionals with high standards the property will need to be maintained to the highest standards including the gardens outbuildings and boundaries which are all the landlord’s responsibility.
- Council tax: This is payable by the landlord in an HMO.
- Tenant disputes: The landlord may be contacted due to a disagreement within the property and the role may extend to one of a mediator. If one tenant is unhappy and wants to leave early it’s worthwhile being open to negotiation rather than penalising the tenant.
- Fire safety: More tenants mean an increased risk of fire so fire safety must be paramount. There must be adequate escape routes and a fire extinguisher might need to be provided with larger properties.
- Comings and goings: There could be a high turnover of tenants who will need to be checked and referenced each deposit collected and returned which can make keeping up with cash flow confusing. Many landlords will opt to use an estate agent or a property management company as self-managing an HMO can be extremely time consuming.
Finding HMO Mortgages Through an HMO Mortgage Broker
Most lenders prefer to grant loans to seasoned landlords who have owned an investment property for at least one year. While it’s not impossible to find a mortgage for someone with no experience of being landlord rates tend to be higher than average on loans and lenders will usually ask for larger deposits.
If the investor owns no other properties in the UK, they will be classed as a first-time buyer for mortgage purposes. In this case, there are fewer lenders that will agree to an HMO finance and the criteria will be stricter and rates will be higher. To say that a profit still can’t be made on such an investment.
Smaller HMOs that do not require a licence are often called multi-lets by lenders rather than non-licensed as the latter can imply that the landlord has not got a licence even though they don’t need one. Because there is no licence required they are valued as single properties. Many of the same lenders that provide finance for licensed HMOs will also provide finance for multi-lets.