HMO Buy-To-Let Mortgages Explained

What is an HMO Mortgage?

Before we jump into HMO mortgages, let’s clear up what an HMO actually is.

An HMO or Houses in Multiple Occupation is a property rented out by at least 3 people who aren’t from the same household (like a family) but share basic amenities like bathrooms, toilets, or kitchens.

With an HMO mortgage, you can purchase this type of property as a buy-to-let investment. It’s a secured loan where the property itself acts as security. 

This means lenders need to be confident you can cover the repayments. If you miss payments, they could repossess the property to recoup their money. 

Unlike residential loans, HMO mortgages aren’t usually regulated by the FCA, so it’s extra important to choose a reputable lender.

How Is It Different From A Buy-To-Let Mortgage?

Regular buy-to-let mortgages are designed for single households renting out an entire property. So, you’d have one set of tenants on one tenancy agreement. 

HMO mortgages, on the other hand, are built for the higher potential income that comes with multiple tenants.  

Because of this, HMO mortgages consider factors like the number of tenants you can house and the potential income you’ll earn from each one. 

This can influence things like the interest rate you’re offered and the size of the mortgage you can get.

Can I Get an HMO Mortgage?

Yes, you can. 

Owning an HMO can be a great way to boost your rental income, but there are specific criteria you’ll need to meet to secure a mortgage for one. Here’s an overview:

• You must meet the minimum experience as a landlord with HMOs
• Have an HMO licensing depending on your property and local council rules
• A strong business plan outlining your potential rental income and management strategy.
• Some lenders have restrictions with the number of bedrooms and communal areas.

This isn’t an exhaustive list, but it gives you a good starting point. Later on, we’ll discuss this further.

Another thing to remember is that interest-only mortgages are quite common with HMO purchases. This means you’ll only pay the interest on the loan each month, not chipping away at the actual loan amount.

What Rates Can I Expect?

HMO mortgage rates can vary depending on the lender and your specific situation.  There’s no one-size-fits-all answer, and rates can change over time.

But, expect higher mortgage rates than standard buy-to-lets. There are a few reasons for this. 

Firstly, with multiple tenants, there’s a slightly higher risk of vacancies or rent arrears for lenders. 

Secondly, managing an HMO often involves more work than a single-occupancy rental property. 

Finally, HMO mortgages are a specialist product, and their lower availability can sometimes translate to slightly higher interest rates.

Generally, putting down a larger deposit can lead to a better interest rate on your HMO mortgage. The more skin you have in the game, the more attractive you appear to lenders.

Lending Criteria for HMO Mortgages

HMO mortgages have some key differences compared to standard buy-to-let mortgages. 

Here’s a breakdown of what lenders typically look for:

• Landlord Experience. Many lenders prefer landlords with at least 2 years’ experience. However, some may consider first-time landlords with a strong plan.
• Management Arrangements. Some lenders, especially for first-timers, prefer you to use a letting agent to manage your property.
• HMO Location. Lenders often favour HMOs in areas with strong rental markets, like city centres. Some may even have restrictions based on postcode.
• Number of Storeys/Bedrooms/Kitchens. There can be variations depending on the lender. They might limit the number of floors, bedrooms, and kitchens in an HMO property. In some cases, lenders may allow multi-occupancy in rooms, but you’ll need to follow local regulations and get their approval first.
• Tenants. Some lenders might have preferences for certain tenant types, such as young professionals compared to students.
• HMO Licence. Depending on your property and local council, you might need an HMO licence. Lenders will usually require you to have the necessary licence (if mandatory) or be prepared to get one.

What is an HMO Licence?

An HMO Licence is essential for landlords who rent out Houses in Multiple Occupation. It ensures the property is safe and well-managed for tenants who share facilities like kitchens and bathrooms but come from different households. 

Not all HMOs need a licence, but there are two main situations when you must have one:

• Mandatory Licencing – This is for large HMOs across England and Wales. Your property falls into this category if it’s rented to five or more people from more than one household, sharing common facilities, with at least one tenant paying rent.
• Additional Licencing – Some local councils have introduced extra rules. They might ask for HMO licences for smaller properties or all HMOs in a certain area, even if they don’t meet the large HMO criteria.

As of writing, the standard fee for a new HMO licence is £1,886 and £1,564 for renewal. This licence needs to be renewed every 5 years with a renewal fee amounting to  £1,564.

To be sure if your property needs a licence, your first step should be to talk to your local council. They’ll guide you on the rules specific to your area.

>> Learn more: House in multiple occupation licence and HMO standards.

What Size Mortgage Can I Get?

For HMO mortgages, the typical LTV range is between 65% and 75%. There can be exceptions for high-value properties, but generally, you’ll need a decent deposit saved up. 

Some lenders might even base the property valuation on its potential rental yield, rather than just its market value.

Another factor lenders consider is your rental income. This should cover 100% of your mortgage, with 25% to 45% on top. To put it simply, here’s an example:

If your mortgage payments are around £1,000, your potential rental income should be at least £1,250 – £1,450.

Which Lenders Offer HMO Mortgages?

The good news is that many lenders in the UK offer HMO mortgages, so finding the right one for you shouldn’t be too difficult. 

There are specialist HMO lenders who focus on this type of property investment, along with some high-street banks like Barclays.  

Examples of lenders offering HMO mortgages include Aldermore and Leeds Building Society, but it’s always best to shop around for the best deal or consult a mortgage broker to save time.

How To Get Approved For An HMO Mortgage?

Getting approved for an HMO mortgage isn’t rocket science, but there are a few steps you can take to simplify the process. Here’s a breakdown:

• HMO Regulations.  Check with your local council about HMO licensing requirements. There might be costs involved, so factor that into your plans. A specialist broker can help you navigate these regulations.
• Business Plan.  Lenders will often ask for a business plan outlining your income projections and management strategy. This shows you’ve done your research and are serious about the investment.
• Finding the Right Lender.  Not all lenders offer HMO mortgages. Look for specialist lenders with experience in the HMO market. They’ll understand your needs and can offer more competitive rates.

A specialist HMO mortgage broker can be a valuable asset throughout this process. They can guide you through the steps, ensure your application is strong, and help you find the best possible deal.

What If I Am A First Time Landlord?

While uncommon, HMOs can be your first property investment. But getting a mortgage for this might not be easy. 

Because HMO mortgages are considered as high-risk investments, therefore fewer lenders are willing to lend to first timers. 

But, don’t lose hope. Here’s what you can do about it:

• Aim for a large deposit amount usually at least 25% to 45% to show your financial commitment.  
• Gather proof of your income and ensure your existing outgoings won’t hinder affording the mortgage repayments.
• Craft a compelling business plan, presenting your HMO strategy, estimated rental income, how you’ll manage the property (consider using a letting agent), and any potential renovations needed. 
• Get a good mortgage broker specialising in first-time HMO mortgages.They can navigate the application process, find lenders suitable for your situation, and negotiate the best possible deals.

Is There A Commercial HMO Mortgage?

Yes, there are commercial HMO mortgages.

Similar to HMO mortgages, these loans are specifically designed for properties with multiple tenants who aren’t part of a single household. 

But there’s a key difference: the scale of the operation and the borrower.

Standard HMO mortgages apply to individual or small investors who buy, or convert their property into HMOs with multiple tenants.  

On the other hand, commercial HMO mortgages are more suited for larger or complex commercial operations that involve HMO properties. 

This could include:

• Larger buildings converted into HMOs.
• Purpose-built student accommodation blocks.
• Blocks of flats designed for multiple tenants.
• Even portfolios of HMO properties under one owner.

The borrowers for commercial HMO mortgages are often different as well.  They might be corporate entities, professional landlords who manage multiple properties, or investment companies specialising in real estate.

Since commercial HMOs involve more complexity and potential risks, expect the lending criteria, interest rates, and terms to be different from standard HMO mortgages.  It’s a different game altogether.

Who Is Eligible For Commercial HMO Mortgages?

Commercial HMO mortgages cater to specific properties, so eligibility differs slightly from standard buy-to-let mortgages. Here’s a breakdown:

• Business Track Record. There will likely be some standard business mortgage criteria, like showing healthy finances. Check our separate guide for business mortgages to learn more.
• HMO Property Type. The key difference is the property itself. These mortgages are for HMOs that don’t meet the criteria for standard lenders. This can include large converted houses with many flats (exceeding council limits), student accommodation blocks, or even pubs or hotels with living space above.
• Occupancy and Facilities. The property must be designed for multiple occupants who aren’t relatives and share amenities like kitchens and bathrooms.
• Lender Limitations. Some lenders might restrict the number of rooms in your HMO. Additionally, depending on your local council rules, you might need a specific HMO licence to operate.

While less common than standard HMO mortgages, some lenders do offer them. Landbay and Precise Mortgages are a couple of options.

The Bottom Line

HMO mortgages can be trickier than standard buy-to-let deals. Each lender has specific criteria for HMO properties, and applying to the wrong one can lead to rejection.

Here’s where a specialist HMO mortgage broker steps in. They understand the intricacies of the HMO market and can match you with the lender that best suits your situation. 

This saves you time, avoids application dead ends, and increases your chances of securing the right mortgage for your HMO property.

Need a broker? Simply reach out to us, we’ll connect you with a good mortgage broker specialising in HMO mortgages.