HMO Mortgages; the Ultimate Guide (2019)
Houses in Multiple Occupation (HMO) are considered more profitable than normal Buy-to-Let residential rental property but here’s the Ultimate Guide to HMO mortgages, to explain what are they, and how to finance them correctly.
1. HMO Definition; What is an HMO?
An HMO or House in Multiple Occupation as defined from a mortgage perspective:
HMO Definition: “A property rented out by at least 3 people who are not from 1 “household” (e.g. a family) but share facilities like the bathroom and kitchen. It’s sometimes called a “house share”.
The government defines a household as either a single person or members of the same family who live together, for example:
- Couples who are married or living together,
- Step-parents and step-children,
- Relatives or half-relatives (siblings, aunts, uncles, grandparents).
Sometimes HMOs need an HMO licence and/or HMO planning permission. Check out our HMO FAQs Section for more details.
HMOs have become popular choices for tenants and landlords alike. For individuals and households, the rent is often more affordable. For landlords, yields are generally higher than those generated by normal (vanilla) buy to let property.
2. What is an HMO Mortgage?
An HMO mortgage is a type of mortgage specifically designed for HMO or multi-let properties. It allows for the letting of the property under multiple tenancies under the terms and conditions of the HMO mortgage.
Normal BTL mortgages do not allow for the letting of a property under multiple tenancies under their mortgage terms and conditions.
Subsequent to this, the letting of any property as a multi-let or HMO, but using a normal BTL mortgage will likely breach the terms and conditions of a normal BTL lender.
If a BTL mortgage lender finds out that this has occurred (via the HMO register for example) the consequences can be severe.
The repercussions can include but are not limited to the lender having the ability and legal right to recall the mortgage with little or no notice.
Your credit rating may also be at risk, and you will unlikely be able to gain any lending with that particular mortgage lender.
3. Types of HMO Mortgage
Mortgage Types – depending on the stage at which the HMO property is at will dictate the type of HMO lending sought.
1. HMO Development Loans: for major build and heavy construction projects.
2. HMO Refurbishment Mortgages: for light to heavy refurb projects.
3. HMO Mortgages & ReMortgages: for existing HMOs and multi-let properties.
Borrower Types – depending on the type of borrower that is seeking HMO funding will dictate the lender that is approached.
Not all lenders cater for all scenarios but typically there are lenders who specialise in HMO lending for each situation.
HMO Mortgage Borrower Types:
4. HMO Mortgage Requirements and Lending Criteria
All HMO mortgage lenders (all lenders in fact) tend to operate to slightly different HMO mortgage criteria or HMO mortgage requirements from a borrower.
What’s important is to make sure that before a lender is approached, the borrowers’ situation and experience is suitably and completely understood. This means that the correct lenders can be identified and communicated with early, which ensures a smooth and successful transaction.
There is normally a solution for most scenarios. It’s just a matter of knowledge and understanding before execution.
Some lenders HMO mortgage criteria might include seeing a minimum of 1-year professional or buy to let landlord experience. Others are happy with no previous buy to let experience at all.
Particular lenders HMO mortgage requirements might include a minimum income of £25,000. Others lenders allow borrowers to have no minimum income requirements.
Certain HMO lenders will want to see a minimum of 2 years of experience specifically as an HMO landlord. Other lenders DO NOT require any HMO experience at all.
To find the most suitable potential HMO mortgage lenders and rates, a great broker will need to fully understand the following;
- BTL Landlord experience of the borrower(s).
- HMO Landlord experience of the borrower(s).
- Current Income level of the borrower(s).
- Credit Rating of the borrower(s).
- Basic Information about the proposed HMO property, including but not limited to; the number of bedrooms, the tenant type, the property address(if a property has already been selected), if there is a license in place already.
- The Borrowing Vehicle, whether that be a personal or individual name, in a Limited Company (LTD), Special Purpose Vehicle (LTD SPV) or a Limited Liability Partnership (LLP).
- The source of the deposit, if a purchase and not an HMO remortgage.
What is important is fully understanding a borrowers full situation and then opening up the lenders and products that are suitable for the specific scenario to allow a smooth and efficient process to occur.
5. HMO Mortgages vs BTL Mortgages: what’s the difference?
HMO Mortgages are similar to standard buy to let mortgages. They carry the same structure and format, and are administered in the same way but have some key differences that allow borrowers to stay compliant and also anticipate the HMO mortgage application and drawdown process.
The main key difference is that HMO Mortgages allow for the use of multiple tenancies against one property, whereas normal BTL mortgage lenders prohibit this in their mortgage terms and conditions.
Average loan processing times tend to be marginally longer with HMO Mortgages compared to normal BTL mortgages.
This is due to the increased complexity in dealing with multiple tenancies, HMO licensing, HMO planning permission and other HMO regulations.
Lenders need to do a few extra, but simple checks surrounding both the property and the (potential) HMO licence holder.
Any good HMO Mortgage Broker will be able to guide you through this process with ease.
6. HMO Mortgage Lenders, Products & Interest Rates
There are currently around 30 HMO Mortgage Lenders operating in the UK residential property market.
They bring some 800+ specific HMO mortgage products to the HMO market along with years of expertise and also mountains of great data.
HMO Lenders provide loans which range from a minimum of £50,000 to a maximum of £15 million, from 4 bedroom multi-let all the way up to 300 unit student and co-living HMO blocks.
To give you an idea of the most popular products currently available on the market across all lenders we have put together the following table which gets updated monthly.
Best HMO Mortgage Rates Table (updated weekly – last 30.10.19)
To see the full range products of See Our HMO Mortgage Interest Rates Table to search and filter up to date HMO mortgage rates.
You can also use our HMO Mortgage Calculator to understand how the size of the HMO deposit will affect your interest rate.
7. HMO Refurbishment Mortgages
Whilst there are mortgages specific to HMO properties there are also HMO Refurbishment Mortgages. They can be used to raise funds in order to complete renovations or construction, including extensions, loft conversions etc.
Lenders generally ask that borrowers have an HMO licence in place and provable rental income before receiving any borrowing. HMO Refurb Mortgages exist specifically for the scenarios when those criteria are not yet met.
With this type of financing, a borrower can raise up to 75% loan to value or either the property end value of the purchase price, depending on the lender.
HMO Refurbishment Mortgages are specific to;
- Existing HMOs in need of refurbishment,
- Residential properties that are yet to be converted to an HMO.
HMO Refurb Mortgages are particularly powerful as they are designed specifically for HMO Refurb Projects and allow for the property, whether it is already an HMO, or it is to be converted to an HMO, to be valued and surveyed accordingly.
Using a normal HMO mortgage product on derelict or un-let HMO will likely cause a lot of headaches and gives the potential for the loan application to be rejected.
This risk is not ideal considering the cost of, a property survey or valuation, which can cost up to £2000 depending on the size of the property.
Typically the refurbishments will need to be completed within a 6-month timeframe of obtaining the loan.
Examples of works included to bring a property up to licensable HMO standards, include
- Fire Doors
- HMO Compliant Fire Alarm
- Door Locks
Finally, HMO refurbishment mortgages can be used for renovating large, multi-unit properties that do not have any tenants or an HMO licence, from 4 bedrooms up to 400 bedrooms or units.
8. HMO Valuations
HMO Valuations are almost always carried out by a Royal Institute of Chartered Surveyors (RICS) Surveyor, who will understand the different valuation methods associated with HMOs. HMOs be valued in 2 ways typically;
- Bricks & Mortar or Residential Value
- Commercial or Income-based Value
What determines the value depends on the size and type of the HMO and also the lenders’ valuation method. If they are known for HMO Commercial Mortgages, then subject to the value and type of HMO they will typically lend on a commercial or income basis.
HMO Valuation Table
9. HMO Mortgage Application Processing Timeframes
Typically HMO mortgage processing times are similar to that of a normal BTL mortgage. What really speeds up the process is;
- Specialist knowledge of the market from a broker who may have knowledge of specific HMO lenders current processing times.
- The borrower having all relevant documents available and ready.
The average HMO mortgage loan completion is 4 weeks. Subject to the borrower having all necessary documents readily available, the time to loan completion and drawdown can be as quick as just 1 week, especially in HMO remortgages cases.
For more complicated portfolio cases this time frame can vary but the more complicated the case to the longer the time frame.
Furthermore, there will be a discussion with most lenders on whether or not a licence exists for the property.
If the current owner or borrower doesn’t have one but one will be applied for, most lenders will make it a condition of the mortgage that the borrow is deemed fit and proper to run an HMO property.
Be aware that currently due to the HMO licensing changes from Oct 1st 2018, some councils are particularly busy.
10. What To Consider When Choosing An HMO Mortgage
11. How to Get the Correct HMO Mortgage for You
With the correct information you absolutely can go directly to some HMO Mortgage Lenders, but one problem is that criteria and requirements change on a daily basis. Due to their nature HMO mortgages are deemed as specialist products and are unregulated in their nature.
The number 1 thing we recommend is that even if you don’t use them, you speak to a specialist HMO broker in order to get the most up to date information and therefore likely the best possible result.
The HMO mortgage market is constantly changing and expanding due to the high demand for HMO mortgage products, and so understanding which lenders are particularly active, fast and favourable is vital
General brokers are poor in our experience because they have to cover every single type of lending out there; commercial mortgages, residential mortgages, Buy to let mortgages, short term finance, land loans, and other types of mortgages finance. They are typically a jack of all trades and therefore a master of none.
HMO specialist brokers are exactly that. 100% Specialists. They get the job done when no one else can and find HMO lenders and solutions to fit all scenarios which speed and ease.
If you would like a free no commitment call then make sure you get in touch. We would be only too pleased to help.