An HMO mortgage is a type of specialist mortgage that is used to finance house in multiple occupations (HMOs). HMO mortgages work in a very similar way to buy to let mortgages, often being taken on an interest-only basis on a fixed or variable interest rate. Specialist HMO mortgages are offered by specialist HMO mortgage lenders and best offered by brokers who specialize in HMO mortgages. As you can see, HMO mortgages are a specialist subject! In this guide, we break down the key points regarding HMO mortgages including what they cost, how much you can borrow, and how to get an HMO mortgage.
What is an HMO?
HMO (House in Multiple Occupation), is a term used to describe a property rented out to at least three people who are not from one household but share communal areas, such as the bathroom and kitchen. When borrowing against an HMO, a specialist HMO mortgage is required.
The key term here is ‘household’. A single household is classed as a property used by couples who are married/living together, a single person, families or relatives. These do not fall under HMO landlord laws. Another term often used to describe this type of property is a ‘house share’. This could be students renting one house or workers sharing a house.
Typical houses in multiple occupation (HMOs) include:
- A property that has more than three tenants (with each on a separate contract)
- Bedsits
- Shared housing
- Hostels
- Privately run halls of residence
- Employee housing
How do HMOs differ from traditional buy to let properties?
A buy-to-let or single let property is, for example, a house rented out to a single-family unit. An HMO property, however, is let to multiple (three or more) tenants, such as students. This will require a specialist HMO mortgage. There are advantages and disadvantages to both HMOs and buy to let properties. A single buy-to-let is simpler to manage but if the tenant moves out, there could be a rental void, meaning you lose your entire rental income. As HMOs have multiple tenants, and the rental income from each tenant is separate, this rental income void is less likely.
How do HMO mortgages work?
HMO mortgages work by allowing you to take a mortgage deal against a property, which is then repaid through regular monthly payments. HMO mortgages are offered through specialist lenders and are usually taken on an interest-only basis and may be subject to a minimum HMO property value, early repayment charges, and other product arrangement fees. Buy-to-let mortgages for HMO properties are simply referred to as HMO mortgages. A specialist HMO mortgage is used to purchase an HMO, with the property used as security for the debt. Affordability calculations on a specialist HMO mortgage are calculated based on your rental income. HMOs should always be funded using HMO mortgages. Using a standard buy-to-let mortgage product may result in you breaking your mortgage conditions and could result in your lender requesting full repayment. If you’re unfamiliar with HMO lending, then consider working with a specialist HMO mortgage broker.
Should I invest in an HMO?
The decision to invest in an HMO is an important one, especially buying your first HMO. This section covers some of the most important things that you should consider before taking out an HMO mortgage.
Are HMOs a good investment?
HMO landlords are attracted as they often offer greater rental yields and, in the right location, it can be easier to find tenants. Students, young professionals, companies, and housing associations are all good examples of likely tenants. Tenants are attracted to HMO properties due to the low cost of living compared to letting a full property. They are popular in high-value rental income areas as the cost is shared by more paying residents. Take the example of an HMO property used to provide housing temporary workers (e.g. contractors). Good rental income will likely be received and there will be a steady stream of tenants. Even better, the company may pay the rent regardless of whether they have put a worker in there or not. This saves you the hassle of having to find new tenants every time someone moves out.
As HMO mortgage rates are generally lower than the available yield from HMOs, they can be very profitable. As the structure of the tenancies differs from that of a simple buy-to-let, HMO mortgages can be a little more complex to arrange. An experienced specialist mortgage broker can guide you through complex HMO mortgage criteria with ease.
Types of HMO mortgages
There are several different types of HMO mortgages. Below we break them down.
Fixed, variable, and tracker rates
Like with residential and BTL mortgages, house in multiple occupation (HMO) finance products can also be offered on fixed, variable, and tracker rates.
Fixed rate HMO mortgages are usually offered for periods of 2 to 15 years, with your monthly payments remaining the same during the fixed rate period.
Monthly payments on variable and tracker rate HMO mortgage products increase and decrease in line with interest rate changes each month. You can work out your likely monthly payments using our HMO mortgage calculator.
Interest-only or capital repayment HMO mortgages
Most HMO mortgages tend to be interest-only, meaning only the interest is paid each month and your full balance would remain outstanding at the end of the term. As this is considered the ‘standard’ way to do things, you won’t usually pay higher HMO mortgage rates for interest-only loans. In this regard, HMO mortgages are very similar to buy-to-let mortgages.
How much can I borrow?
How much you can borrow on an HMO mortgage is based on the loan-to-value (LTV), purchase price, rental income, and in some cases, your personal income.
What is the maximum loan-to-value ratio (LTV) on an HMO mortgage?
The maximum loan-to-value ratio (LTV) on an HMO mortgage vary from lender to lender as it usually depends on the type of HMO property, your experience as a landlord, and how you intend to repay the mortgage. For most HMO lenders, the maximum LTV is between 70% and 85%.
How is the rental income calculated for an HMO mortgage?
How the rental income is calculated for an HMO mortgage depends on the lender. Most lenders require a rental income of at least 125% of the monthly mortgage payment, although some may require more. Some lenders may use your personal income to supplement the rental income received from the property when calculating affordability. This is particularly the case if you have a portfolio of properties or if you have a HMO mortgage on a house in multiple occupation.
What are the HMO mortgage rates like?
HMO mortgage rates are typically higher than standard buy-to-let mortgage rates. This is because there is a higher risk to the lender associated with lending on a HMO property. The interest rates that you are offered will depend on several factors including your personal circumstances, the type of HMO property, the loan-to-value (LTV), and the rental income. Our seasoned experts are highly experienced in the challenges of the property market, and here’s the best part – our services are completely free! Yes, you read that right. We’re committed to making your homeownership dreams a reality without any fees. Reach out to us to know more.
