What is a HMO mortgage broker?
A HMO mortgage broker is a mortgage broker who advises clients on “House in multiple occupation”. A HMO broker will advise you on the viability of your HMO mortgage investment and will guide you through a list of HMO lenders who will be likely to fund your HMO project.
HMO mortgages aren’t particularly straightforward as different mortgage lenders have different classifications as to what they will call a HMO and even more frustrating this seems to be the case with different local councils. A HMO mortgage broker will be able to guide you through this sometimes confusing maze with their experience in dealing with HMOs.
HMO investors will also need to familiarize themselves with the HMO legislation.
The definition of HMOs as a distinct type of property letting was outlined in the Housing Act 2004 – and by the Housing (Scotland) Act 2006 in Scotland. The HMO legislation is there to outline protections and safeguards for tenants living in multi-unit properties, which had historically shown to put tenants at greater risk, either due to the actions of other tenants or as a result of inadequate safety precautions, regulatory requirements or property maintenance by the landlord. The licensing was a way for local councils to ensure that landlords were adhering to the rules. Whilst this has greatly worked, not all HMOs require licensing.
What is a HMO mortgage?
A HMO, or a house in multiple occupation mortgage, is a mortgage which has been given out on a HMO. A HMO is a property that has been rented out by at least three unrelated people who share common living facilities such as a kitchen and bathroom, but do not make up a single household.
In contrast, a single household will be a single person or members of the same family living in the same house.
Not all HMO properties are the same or at least seen as the same by the HOMO mortgage lender.
- If a multi-let property is occupied by five or more people it will be classified as a large house in multiple occupation by most mortgage lenders.
- If a HMO property is three storeys high or more it will be classed as a large house in multiple occupation.
If any of the above is true then most mortgage lenders will be unwilling to offer a mortgage in these circumstances.
HMO mortgage lenders will usually have a minimum mortgage of between £50,000 to £150,000 but there are a handful or HMO mortgage lenders who have no minimum requirement.
HMOs have become more favourable by both tenants and landlords as the rents are more favourable and landlords ten to see a better return for their money than investing in a standard buy to let property.
HMO properties can be a handful and they are known to have high running costs.
What are the lending requirements for a HMO?
Almost all HMOs will lend under these three requirements and your HMO mortgage broker will likely not be able to assist you if your HMO property does not fall under the HMO mortgage lenders criteria.
Most HMO mortgage lenders will analyse your case based on the below:
- The number of rooms a HMO property has
- The number of stories the property has
- The credit score of the applicant
- The applicant’s personal income
- The applicants’ age and other personal details
- Does the HMO property require a license from the council and does the borrower have this license
- How much experience does the HMO borrower have
- Is the applicant based in the UK or overseas
Do you need a license to become a HMO landlord?
Unfortunately, the rules here are pretty strict regardless of what your HMO mortgage broker tells you.
You will need a HMO license if:
- You have more than 5 people from two different households living in the property
- Your rental property has more than 3 storeys
If your home property meets this you will have to register it as a HMO and get a HMO license from the local council. Most HMO mortgage lenders will require you have a HMO license before they will give you a HMO mortgage. There are some mortgage lenders who will give you a HMO mortgage without a HMO license but you will have to get your HMO license within a given timeframe after you get your HMO mortgage.
Do I need experience to become a HMO landlord?
As with most things a little bit of experience is always handy but with HMO mortgages there are a few HMO mortgage lenders who may be willing to give you BTL HMO mortgage without much experience but you will have to rely on your HMO mortgage broker to find lenders who fit your needs and don’t seek much HMO experience.
Typically a HMO mortgage lender will insist that the mortgage applicant has 2 or more years of experience dealing with HMO property before they will lend to them.
Can you get a HMO mortgage as a limited company?
Yes, you can get a HMO as a limited company. Most investors see the tax benefits in structuring their HMO like this. The only problem with this structure is that mort HMO mortgage lenders may not deal with limited companies. This means your HMO mortgage broker will need to find specialist HMO lenders who deal with limited companies and meet your needs.
What are the tenant requirements for HMOs?
There aren’t really any tenant requirements, HMOs could be for students, staff, army etc Most mortgage lenders will have no preference on the tenants who occupy the property. You can also occupy your HMO property without breaching any rules.
Remember your property will only be referred to as a HMO when you have more than 5 people in total from at least 2 different households living in your property. At this point, you will need to go register your property with your local council as a HMO.
You will also have to inform your mortgage lender as soon as possible as you could now be in breach of your mortgage agreement.
What are HMO mortgage rates like?
HMO mortgage rates are of course much more than a standard mortgage but in comparison with buy to let mortgage rates they are surprisingly competitive.
Hmo mortgages will usually require between a 65% to 75% loan to value(LTV) but your HMO mortgage broker may be able to find you a handful of HMO mortgage lenders who are willing to go as high as 85% Loan to value(LTV).
HMO mortgage lenders will also usually lend between £500k to £1.5m but your HMO mortgage broker may be able to find you mortgage lenders who are willing to lend you as much as £3m.
Using a Buy to let mortgage for a HMO property
Most HMO mortgage lenders will not be to keen on offering a buy to let mortgage on a HMO property for up and coming HMO investors and will require that the mortgage applicant has sufficient experience of HMOs before even applying for a buy to let or HMO mortgage.
There are however a few HMO mortgage lenders who will offer you a Buy to let mortgage on a HMO property allowing you to slowly get to grips with HMOs before moving on to a HMO mortgage.
Some HMO lenders might offer you a buy to let mortgage but they will come with strict restrictions on the property. These are usually specialist mortgage lenders and your HMO mortgage broker will be able to point you in the right direction.
Most HMO properties will also require a license from the local council before you can run them and your HMO mortgage lender may require to see the license prior to giving you a HMO mortgage. Failing to get a HMO license is a criminal offence and can results of fines up to £20,000 in England and £50,000 in Scotland.
Can you get a secured loan on a HMO property?
Yes you will be able to get a secured loan on your HMO mortgage property without any restrictions and you could choose to go this route if you need immediate access to funds and do not want to wait for a remortgage or maybe they remortgage rates are way beyond what you are currently paying and you do not want to pay more in your monthly mortgage repayments. It could also be the case that your credit score may have diminished and you will not be eligible for a remortgage or your current HMO mortgage lender has reached its lending limit to you or simply does not want to lend more to you. Whatever the reason is, rest assured you can get a secured loan on your HMO property.
What is a HMO secured loan?
A HMO is a second charge HMO mortgage which is secured against the equity in your HMO property. It is basically a second mortgage.
Do you need planning permission to convert a house to a HMO?
You generally don’t need planning permission when converting from a house (or flat) to an HMO property.
A change of use made from C3 Dwelling House to C4 HMO will require planning permission if your council decides to remove these rights by enforcing an Article 4 Direction. Article 4 Directions do not stop development. Rather, under these directions, you must pursue Planning Permission for HMOs.
Are HMOs a good investment?
HMOs can be a good investment opportunity as there is less risk of tenant arrears and the yields are good. It is, however, a very operational investment and you will need suitable experience to succeed in it.
Do I need a HMO mortgage?
You will likely need a HMO mortgage if your home fits into the category of HMO properties. You may have to switch from a residential mortgage to a HMO mortgage if you convert your home to a HMO.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.