Do I Need an HMO Mortgage?
If you are a landlord and want to rent out your property to three or more tenants who are not part of one family, then you will need a special mortgage to do so. Here we will be discussing the specifics of HMO mortgages and whether you need one as a landlord.
Firstly, a quick disclaimer – while it is important to note the standard requirements for an HMO mortgage, the reasons you may need one and the lending criteria, it is also important to note that some councils will set up bespoke rules and some lenders will have exceptions to the traditional rules.
The easiest way to review what is and isn’t possible is to speak to us directly. However, this article will cover the way most lenders in the UK view things.
What is an HMO?
HMO stands for a House in Multiple Occupation and defines a property that is let out to three or more tenants who are not from the same household. A household is defined as members of the same family living together, including couples, half-relatives, foster children and domestic staff who live rent-free such as an au pair.
In these properties, each tenant or household rents a private bedroom, but share communal areas such as the lounge and kitchen. These types of properties are commonly sought out by renters such as students and young professionals who cannot yet afford to rent a property on their own.
Do you need an HMO mortgage?
If you want to rent out a property to three or more tenants from different households, then legally you will need to apply for an HMO mortgage specifically for that purpose, as a standard buy-to-let mortgage will not cover it.
Whether you are buying a new HMO property or converting an existing property into an HMO, you will need an HMO mortgage. If you have a buy-to-let mortgage on a property, but you want to start renting out to 3 or more tenants from different households, then you will need to have it re-mortgaged as an HMO.
As mentioned in our disclaimer above, there are a few exceptions that may enable us to bend these rules, such as groups of unrelated individuals on a single tenancy agreement (traditionally how student lets may be set up), or lenders who may allow over three unrelated tenants so long as it is less than five. Individual lender criteria can be ever-changing, so please speak to us about your specific needs.
Why would you choose an HMO over a traditional buy-to-let?
As a landlord, the main reason you may choose to let out an HMO is that you can make a greater profit, as you can charge individually per tenant/bedroom, rather than charging for the whole property, as you would with a family.
If a tenant leaves, you can find a new tenant for that room without anyone else having to move. HMO mortgages do tend to be more expensive than buy-to-let mortgages in terms of interest and fees, but you should still be able to make more profit.
The risk of this type of renting is that you are likely to have a higher tenant turnover, as the group of tenants won’t necessarily all come and go together, which requires management on your part as the landlord to advertise the free room and make sure you aren’t without a tenant (and income for that room) for too long. You will also be responsible for vetting each new tenant and making sure they have the means to pay the rent and are likely to pay it on time.
What are the property requirements for an HMO mortgage?
Lenders of HMO mortgages may also have property-specific requirements before they approve an HMO mortgage, regardless of the landlord’s affordability, and each lender will have specific criteria.
Some HMO mortgage lenders will specify that the property can only have one kitchen, others will specify a maximum number of bedrooms or storeys that the property can have, and some may specify that there needs to be communal seating for all tenants. If you have a property that you intend to renovate or convert into an HMO before you let it out, then the lender will also need to agree to this.
HMO mortgage lending criteria
First-time landlords may struggle to be approved for an HMO mortgage, as some lenders will only accept HMO mortgage applications from landlords who have been renting out property for two years or more and can provide proof of this. If you are a first-time landlord, you may have to get a traditional buy-to-let mortgage for your property first and let it to a single household/family.
Some lenders may offer HMO loans to first time landlords who don’t have any experience, but you will need to use a specialist mortgage broker to find these and there will be other eligibility criteria in order to be approved.
Typically, for an HMO mortgage, you will need at least a 25% deposit and the lender will step in to fund the other 75% of the property. Some lenders may be able to stretch this up to as much as 85% lending, enabling you to only have 15% equity held within the property. However, this will come with more strict requirements and is subject to availability.
Using a specialist mortgage broker such as Opie & Associates will give you access to the full market of lenders. This way, you can make the most of the higher profits you can earn from your rental income on an HMO.