HMO Mortgages

What does HMO stand for?

HMO stands for ‘A House of Multiple Occupation’, which means that you’ve got more than one tenant (from different families) living in a property. An HMO mortgage is essential for these types of properties.

What are the benefits of an HMO rental

As rent is often more affordable for those renting an HMO property, they tend to be popular with both tenants and landlords. The tenant benefits as they are able to more easily afford the property.

For landlords, the rental yield or ‘return on investment’ is generally higher than a standard buy to let property where you’ve got one tenancy agreement in place.

Is anyone with an HMO licence able to obtain an HMO mortgage?

Obtaining an HMO mortgage is not as straightforward as just getting a license. Lenders all have their own slightly different criteria for acceptance. Many prefer to offer HMO mortgage finance to experienced landlords. 

A lack of experience isn’t always a barrier, however. Lenders will look at all different aspects of the application. The value of the property, the loan amount, the rental income potential, how many rooms are going to be let and whether you’re going to manage the property yourself, will all be considered. 

It will also make a difference whether you borrow through a limited company or as an individual. Of course, your own financial circumstances are always part of the equation too.

How does a broker go about arranging an HMO mortgage?

It’s important to have a constant line of communication between the mortgage broker and the applicant. Once the applicant’s basic details have been established, the broker will advise you on the best lender for you. They can also give advice about what licenses you may or may not need.

How does the mortgage work?

An HMO mortgage is very similar to a buy to let mortgage in that the loan is generally set up on an interest only basis. This means you pay just the interest on the loan each month with the rental income from the property. Most landlords will then repay the capital by selling the property.

How does it differ from a BTL (Buy to Let) mortgage?

The main difference between the mortgage types is that the landlord needs to obtain a license from the council to operate an HMO rental property. For a BTL mortgage this is not required.

HMO mortgage lenders also apply strict lending criteria to these properties, more so than for standard buy to let properties. Some impose a cap on the number of bedrooms, others base their lending decisions on whether the borrower has experience as a landlord. Most lenders will require twenty five to thirty percent deposit on the property. 

Properties classed as small HMO have interest rates similar to a buy to let mortgage, whereas large HMO, have a slightly higher rate because they’re classed as more of a commercial entity. A Small HMO is a property with a maximum of three tenants from different households and a large HMO is generally a property with five rooms or more, being let separately.

What is an HMO license and who can get one?

The government defines that a House of multiple occupation (HMO) is a property that’s rented out by at least three people who are not from the same household, but share facilities like a bathroom and kitchen. 

If you want to rent your house as an HMO property in England and Wales, you should contact your local council to find out if you need a license. You then apply through them directly if you do. The local authority will do checks on your background, such as whether you’ve had any complaints as a landlord. 

Your local council website will have an HMO licensing page. This should show how much they are currently charging for a license.The cost usually varies depending on the amount of legible rooms. It should also list the requirements they will want you to fulfill in order to gain a license. Sometimes there may be planning restrictions that prevent HMO licenses being granted by the council.

Is there anything else I should know about an HMO mortgage? 

You should bear in mind that if you operate a property as an HMO without a licence and a tenant reports you, various fines are applicable. You could also be asked to repay the rent already paid by all tenants in the property. 

An HMO mortgage application is quite a complex process and it’s always best to contact a mortgage broker for advice, prior to your application. On the Ideal Home Loans website you will find lots of helpful information in the dedicated mortgages section. Otherwise, just send an enquiry via the contact form on the website.