HMO Finance

Investing in an HMO property might seem like an attractive option yielding a higher rental income than standard buy-to-lets.

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HMO Finance

What to know about investing in an HMO property?

Profits can reach up to three times as high as single lets and the average yield in 2018 was 8.6% compared with 5.6% for vanilla buy-to-lets according to the latest index. And as the population increases the demand for more affordable accommodation is at an all-time high.

But the added income comes with more responsibility and hefty penalties for getting it wrong. We take a look at what being an HMO landlord entails, and how to go about getting a mortgage for this type of property.

What Do I Need to Know About Investing in an HMO Property?

According to the latest index, profits can reach up to three times as high as single lets, and the average yield in 2018 was 8.6% compared with 5.6% for vanilla buy-to-lets.

And as the population increases, the demand for more affordable accommodation is at an all-time high.

But the added income comes with more responsibility and hefty penalties for getting it wrong. We look at what being an HMO landlord entails and how to get a mortgage for this type of property.

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.

What Information Do I Need to Get Started With an HMO Mortgage Broker?

The mortgage process is pretty comprehensive and lenders will ask for more information than for standard mortgage assessments. Some or all of these things may be requested:

  • Landlord experience
  • Personal or limited company mortgage
  • Location of the HMO
  • Whether or not it needs a licence
  • Credit report
  • Loan amount
  • Type of rate preferred
  • Number of AST agreements in property
  • Number of rooms to be let
  • Proposed/actual rental income
  • HMO licence
  • Client profile: as the licence process can take a long time and lenders will make it a condition of the mortgage that the landlord is deemed fit and proper to manage an HMO
  • Types of tenants (students, professionals, housing association). While lenders are not meant to discriminate some lenders perceive people in receipt of benefits or students as high risk.

Property Valuations for an HMO Mortgage Calculator

HMO buy to let mortgage lenders have their own sets of criteria for HMOs including how the property is valued. The rental income generated from a house with multiple tenants is generally higher than a single dwelling and this can work in the buyer’s favour as the lender will look at the investment value of the property when making a decision. Some HMO buy to let mortgage lenders, on the other hand, will do the valuation based on similar properties in the area.

But, if the property is the only HMO in the area it will be valued as if it were a single household which will seriously reduce the loan amount.

Some HMO buy to let mortgage brokers will restrict the size of the property to five bedrooms and investors will have to go to a specialised lender for bigger houses, or a high-street bank, which will value the property on commercial, rather than buy-to-let terms.

Finding the Best Rates on an HMO Buy to Let Mortgage

Until recently these mortgages were only provided by specialists but in February 2019 a major high street bank added an HMO mortgage product to its portfolio proving that demand is on the increase. Around half of all buy-to-let lenders will provide financing for HMOs. There are currently 11 providers of HMO-specific finances.

Rates start at similar levels to other buy-to-lets but are typically higher due to the number of different factors such as the client’s letting experience credit history the property itself and the number of tenants.

Loan to Value Ratios on a Buy to Let Mortgage HMO

Rates are also affected by the loan-to-value (LTV) ratio. The LTV is the percentage of the property owned outright about the amount borrowed. If a £100,000 property is bought with a deposit of £40,000, then the LTV is 60%. Low LTV rates at 60% or less tend to offer the best rates. But it’s best to look at all the costs involved as ones with lower rates might have higher fees or vice versa. Lenders will offer either variable or fixed rates.

Other costs to consider with HMO finance are broker fees, valuation fees, assessment fees, telegraphic transfer (TT) fees, any early repayment charges and solicitor fees.

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An HMO mortgage is a loan secured against a property, just like you might take out a mortgage to purchase your residential home.

However, HMO mortgages work differently, as they are designed specifically for rental properties, where the accommodation is let out to multiple tenants.

HMO stands for houses in multiple occupation, so properties in this category house three or more people who aren't a household in common such as a family.

Mortgages for HMOs are suitable for residences with multiple occupants that share facilities such as a kitchen or bathroom, so they are typical in student lets or shared housing rentals.

Interest rates on HMO mortgages tend to be a little higher than a conventional buy-to-let mortgage product, and there are costs such as licensing fees to incorporate into your budget.

An HMO mortgage commands higher interest rates because there aren't as many lenders offering this product, and therefore less competition to appeal to landlords and property investors seeking financing.

Lenders also charge higher interest rates and arrangement fees on HMO mortgages because they're seen as slightly riskier than a standard buy-to-let investment property.

Working with an experienced HMO mortgage broker is undoubtedly the best way to reduce the cost of your HMO mortgage and have a specialist negotiate rates with your lender.

It isn't possible to finance any rental property on a residential mortgage unless you have express permission from your mortgage provider, called content to let.

Renting out a home with a residential mortgage secured against it can cause severe difficulties since it might constitute a breach of your mortgage agreement. In that situation, the lender could potentially require repayment of the outstanding mortgage in full immediately.

Suppose you become an accidental landlord, i.e., end up letting a property you used to live in. In that case, it's essential to seek advice from an HMO or buy-to-let mortgage broker straight away to ensure you look into remortgaging options.

Investing in an HMO rental property, applying for a license (where applicable), and getting a mortgage is certainly a little trickier if you're a first-time buyer.

Lenders prefer to approve applicants with a minimum number of years of landlord experience. Local authorities are more likely to grant a license if they can see a track record of responsible rental management.

However, it isn't impossible! Support from the independent experts at Revolution Brokers is a great place to start since our consultants can recommend lenders who will consider first-time HMO applicants.

Yes! Demand for large family properties is strong in the UK rental market, and you can convert an HMO back into a standalone house if you wish.

Depending on the nature of the property, you may need planning permission, depending on the level of structural work required.

Most HMOs are house shares, meaning you can often renovate the building without making any significant changes.

Note that HMO licensing cannot obligate a landlord to keep the property as an HMO, although you might also need change-of-use permission from your planning authority to switch an HMO to a single dwelling.

Deposit requirements vary between lenders and depend on several other factors, such as:

  • The anticipated rental income from your HMO.
  • Your income and credit score.
  • The market value of the property.
  • Other risk factors such as the property type and your landlord experience.

As a rough guide, most HMO mortgage lenders look for somewhere between 25% and 40% as a deposit, with lower deposit levels usually reserved for experienced landlords with a solid business case.

If you have an attractive HMO investment opportunity but don't have a sizable deposit, please give the Revolution team a call for further guidance around the available options.

As an HMO landlord, there are several rules and regulations you'll need to comply with, whether or not the property requires a license, such as:

  • An electrical safety certificate (EICR).
  • Gas safety certificates for any gas appliances.
  • The manager or letting agent must be 'fit and proper' - without a criminal record or any breaches of landlord laws.
  • Smoke alarms and regular maintenance.
  • Safety certificates for all appliances included.

Some regions have additional requirements, but any HMO must be suitable for the number of tenants in residence, with minimum bedroom sizes.

There are a few steps to purchasing an HMO, so timeframes depend on whether you need to apply for an HMO mortgage or are ready to move with a cash purchase.

Typically, the licensing application process takes about three months, although it can be longer if you need to make any adjustments to the property.

HMO mortgages can be in place in as little as two to four weeks, and you can apply before receiving your license, provided you can demonstrate that you have applied.

A standard HMO license costs £1,100, paid in two instalments - £500 on application, and then £600 before the license is issued.

If you have a more extensive HMO with over ten accommodation units, the license costs an additional £50 for every unit above ten.

For example, if you have an HMO property with 15 accommodation units, the license will cost £750. HMO licenses are capped at £6,000.

You'll need an HMO license if you rent out a property with:

  • Five or more tenants from more than one household.
  • A shared toilet, bathroom or kitchen.
  • Rental income from at least one tenant.

Specific rules vary between local authorities, so some require licensing on smaller properties, and others don’t, so it's worth checking before applying for your HMO mortgage.

Once granted, an HMO license is valid for up to five years, and you need a separate license for each HMO you rent out.

Fire doors are an essential safety feature for any HMO, and landlords need to implement other fire safety provisions such as protected escape routes from the property.

You'll need fire doors for each bedroom, living room and entry point to the kitchen.

There isn't a universal maximum number of tenants you can have, provided your HMO property can comfortably house each person.

Rental properties with three or more tenants from different households are considered an HMO, and you'll need a license if you have five tenants from two or more families - note that some councils require licensing even on smaller HMOs.

The licensing process includes looking at bedroom sizes, whether the bathroom and kitchen facilities are sufficient, and ensuring the property is safe and not overcrowded.

Therefore, you may find that the physical size of the property, and the number of viable bedrooms, is the primary limiting factor as to how many tenants you can accommodate within one HMO.

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The content included in our articles, blogs, web pages and news publications is based on information accurate at the time of writing. Note that policies and criteria can change regularly throughout the UK mortgage lending market, and it remains essential to contact the consultation team to receive up to date guidance. The information included on the Revolution Brokers site is not bespoke to any circumstances or individual application scenarios and therefore is not intended to be used as financial advice. The content we share is designed to be informative and helpful but cannot be relied upon to provide individual advice relevant to your mortgage requirements. All Revolution team members are fully qualified, trained and experienced to provide mortgage advice of an independent nature. We collaborate with lenders and providers who are regulated, authorised and registered with the Financial Conduct Authority (FCA). Should you require specific mortgage borrowing types, some products such as buy to let mortgages may not be FCA regulated. The Revolution team can provide further information about regulated and unregulated lending as required. Please remember that a mortgage is a debt which is secured against your home or property. Your home can be at risk of repossession if you do not keep up with the repayments or encounter any other difficulties in managing your mortgage borrowing responsibly. This also applies to any remortgage or home loan secured against your property, including equity release products.

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