House of Multiple Occupation (HMO) properties have emerged as an attractive investment option for landlords and property investors especially with rising interest rates in the UK. As financing costs increase as well as landlord laws, more people are looking to maximise their returns. HMO properties are popular among students and young professionals seeking affordable housing.

HMO mortgages are specifically designed for houses in multiple occupation, and they offer various benefits compared to traditional buy to let mortgages. This article will delve into the world of HMO mortgages, explaining how they work, HMO rental calculations, their advantages, and why R3 Mortgages is the go-to mortgage broker for HMO mortgages.

HMO explained - Key Points

What is a HMO and how do HMOs differ from traditional buy to let properties?

The key difference between a house of multiple occupancy and a traditional buy to let is the number of separate households. Traditional buy to let properties are usually rented to a single person or individual tenants forming a single household. However if you share toilet, bathroom or kitchen facilities with at least three other renters, establishing more than one household then you are living in a hmo.

If both of the following apply, your home is a large HMO:

You share toilet, bathroom or kitchen facilities with at least 5 other renters, establishing more than one household.

A household is either a single person or a group of family members who live together. A family consists of the following individuals:

married or living together - including same-sex relatives or half-relatives such as grandparents, aunts, uncles, and siblings
stepchildren and stepparents
Do I need a license for my HMO property?

If you rent out a large HMO in England or Wales, you must have a licence. If all of the following apply to your property, it is classified as a large HMO:

It is rented to groups of five or more persons who form more than one household.
Some or all tenants share toilets, bathrooms, or kitchens.
At least one tenant pays rent (or their employer does)

Depending on the area, you may still require a licence even if your property is smaller and rented to fewer individuals. If you are not sure if you need a license or not you should consult your local council or local authority. The cost of hmo licence fees varies. In Haringey for example, £550 is paid on application and a further £650 needs to be paid before the licence is issued (correct May 2023). This means the total cost of the licence is £1200.

What if my HMO licence isn't approved or I don't have one?

If you are a landlord and are supposed to have an HMO licence but do not, you may be:

Unable to evict a tenant with a Section 21 notice (unless you have a temporary exemption from the council).
prohibited from renting out properties
compelled to refund up to 12 months rent

The council can potentially even take over property management.

If you own an HMO that requires an additional licence but fail to apply for one, you are committing an infringement punishable by an infinite fine if convicted. Alternatively, the council can levy a civil penalty of up to £30,000.

How can I search the local councils?

If you Google house in multiple occupation and add your location it will usually bring up your council and their requirements.

How much does an HMO cost to run?

There are a number of factors to consider in running a HMO. The landlord or rental agent is typically responsible for providing and maintaining the following in an HMO:

Basic bedroom furnishings, such as a bed, wardrobe, and desk
Maintenance of the communal facilities such as a kitchen and a bathroom
Basic kitchen gadgets such a refrigerator, cooker, and microwave
Maintenance of the heating and hot water
Adequate fire safety precautions, such as smoke alarms and fire extinguishers, must be implemented.
Cleaning of communal areas on a regular basis
Secure locks on all outdoor doors and windows are examples of security features.
A tenancy agreement that spells out your rights and obligations as a renter.

It's worth noting that the specifics of what's included in an HMO rental can vary depending on the landlord or renting agent so landlords should make sure the tenant is aware of what is included before signing a leasing agreement.

Tenant deposits

If you have an assured shorthold tenancy (AST) that began after April 6, 2007 (in England and Wales), the landlord is required to place your deposit in a government-approved tenancy deposit protection scheme.

As a HMO landlord, what are my responsibilities?

Gas security

As a landlord, you are required to:

ensure that the gas equipment they supply is installed and maintained properly by a Gas Safe registered engineer
Have a licenced engineer do a yearly gas safety inspection on all appliances and flues.
provide you with a copy of the gas safety inspection record before you move in, or within 28 days of the inspection

Electrical security

You must ensure that:

The electrical system, such as sockets and light fixtures, is secure.
All of the items they sell, such as cookers and kettles, are safe.
Fire protection

You are also required to:

observe safety regulations
Install a smoke alarm on each floor and a carbon monoxide alarm in any room that contains a solid fuel-burning appliance (such as a coal fire or wood-burning stove).
Make sure you always have access to escape routes.
ensure that the furniture and furnishings they provide are fire resistant

If the home is a large house in multiple occupation (HMO), provide fire alarms and extinguishers.

Financing

What mortgage will I need for an HMO?

You will need a specialist hmo mortgage from one of the many hmo mortgage lenders in the UK for your HMO property. Not all buy to let lenders offer hmo mortgages so it is important to ensure you have the right product.

How do HMO mortgages work?

HMO mortgages work on the same basis and buy to let mortgages. However, when assessing affordability the total rental income for the property will be taken into account.

HMO mortgage lenders

HMO mortgages are available from a variety of lenders, including banks, building societies, and other specialist mortgage providers. Many lenders have recognized the growing demand for HMO properties and have developed mortgage products to cater to this niche market.

Which lenders offer HMO mortgages?

As hmo mortgage specialists we have access to a range of hmo lending options. There are a number of lenders that offer HMO mortgages. These include (in no particular order):-

Paragon
Precise Mortgages
Fleet Mortgages
West One
Kensington
Keystone
The Mortgage Works
The Mortgage Lender
Landbay
LendInvest
CHL Mortgages
Vida Mortgages

How does HMO mortgage affordability work? How much can I borrow?

Different lenders use different methods to determine how much they will lend for each mortgage transaction. Some lenders, for example, may provide more generous loans on 5-year fixed-rate mortgages. Here is some of the information that will be required when speaking with a specialist HMO mortgage adviser at R3 Mortgages.

Loan Size
Loan to Value
Type of HMO (small hmo or a large hmo)
Number of rooms
Rental income: Calculate the property's prospective gross rental income by adding the rental income from each room or unit.

What is the maximum loan-to-value ratio (LTV) on an HMO mortgage?

Firstly, let us look at how to calculate the loan to value (LTV).

Loan to value = (Loan/Property Value or Purchase price) * 100.

Therefore if you are borrowing £300,000 on a property valued at £600,000 the calculation is:-

Loan to value = (300,000/600,000) * 100

Loan to value = 50%

Most lenders will lend up to 75% loan to value but there may be some that will lenders that offer even more.

HMO Mortgage Calculator

In order to calculate how much you can borrow, you will need to know the following:-

Property Value, Total rental income, the Stress test percentage and the Stress test rate.

For example, take the following scenario:

Property Value = £450,000 Rental income = £1,800 per month

Stress test percentage= 125% Stress test rate = 5%

Total loan = £345,600 which is 76.8% loan to value. If the lender caps the loan at 75% loan to value you could borrow £337,500 with the possibility of adding the arrangement fee as well.

We have developed a HMO Mortgage Calculator. This will allow you to calculate your potential HMO mortgage loan size and work out how much you could borrow.

How do you know which stress rates a lender uses?

Stress test percentages are usually different depending if the property is in a personal name or a limited company. Limited companies usually stress at 125% whereas properties owned personally could be 140%.

The stress test rate is dictated by the lender. For many lenders, the stress test rate could be the same as their 5-year fixed rate. This is also referred to as the pay rate.

What fees will I pay on my HMO mortgage?

When applying for an HMO mortgage, you may encounter various fees, including:

Arrangement Fees: Most specialised HMO mortgage lenders charge an arrangement fee for your mortgage deal. This may either be a flat fee (e.g., £1995) or a percentage of the loan (usually 2%) similar to buy to let mortgages.
Application Fees: Some lenders may charge an application fee in order to process your mortgage request.
Valuation Fees: Lenders frequently require a value of the property to calculate the loan amount, and you may be required to pay for this evaluation.
Legal fees: You will almost certainly be required to pay legal fees to cover the conveyancing process and other legal components of the mortgage.
Broker Fees: To arrange a specialist hmo mortgage specialist mortgage brokers would usually charge a fee. Again, this could be a flat fee or a percentage of the loan amount.
Early Repayment Charges: If you repay your HMO mortgage during the penalty period you may be charged early repayment charges.

Do lenders have specific hmo mortgage criteria?

Mortgage lenders have their own criteria. HMO mortgages tend to prefer landlords who have other buy to let properties and the HMO is not their first investment purchase. This is because they consider a hmo property to be more complicated than convention buy to lets.

Are HMOs a good investment

There are several reasons many landlords consider HMO as a good investment. These include:-

Higher rental yields: HMO properties can generate higher rental income due to the increased number of tenants, leading to better returns on investment compared to traditional buy-to-let properties.
Diversified risk: With multiple tenants in one property, the risk of rental voids is reduced. If one tenant leaves, the landlord still receives rental income from the remaining tenants.
Growing demand: With urbanization and the increasing cost of living in cities, HMO properties are becoming more popular among tenants seeking affordable housing solutions.

Best HMO Mortgage Rates

HMO mortgage rates can include fixed rate, variable and tracker rates The interest rate varies depending on the lender and their appetite to lend at that moment in time.

Interest Rates vary based on a number of factors. These include the loan to value of the deal, the loan size, the number of bedrooms in the HMO and if the HMO is held in personal names or a limited company.

Is it all about interest rates?

When you are looking at a hmo mortgage you should not just consider the hmo mortgage rates. You can also factor in other points like the speed and service of the hmo mortgage lender. As a specialist hmo mortgage adviser it is our job to guide you through all your options and find the right mortgage for you.

Can I get a HMO mortgage if I have had previous credit issues?

Potentially but it may have an impact on the interest rate.

Can I convert an existing property into an HMO?

It is possible to convert a standard property into a HMO. Specialist lenders even have products called bridge to let that can assist in the cost of conversion and then refinance onto a term hmo mortgage. You will be charged a higher interest rate while the works are being carried out which you should factor into your finance costs.

Refurbishment buy to let mixes short-term finance with the security of a long-term exit, and it has assisted many landlords in increasing their rental returns and capital value. This could used if you are planning to renovate all the rooms or the whole property. Alternatively, you may want to ensure the property meets the necessary EPC requirements before you consider long term fixed rates.

Can I buy or refinance my HMO in a limited company SPV?

Yes you can and your options depend on the structure. Some lenders may cap the maximum number of directors, other lenders may have no issue and give you unrestricted access to their mortgage products.

Looking for a Specialist hmo mortgage adviser?

R3 Mortgages has established itself as a leading mortgage broker for HMO mortgages due to its extensive knowledge and experience in this niche market. Here's why you should consider R3 Mortgages for your mortgage advice on your HMO mortgage needs:

Expertise: R3 Mortgages' team of experts has a deep understanding of the HMO market and hmo lending. They can provide tailored advice and guidance to help you secure the best HMO mortgage for your needs. Not all mortgage brokers understand the HMO market and the considerations that HMO landlords need to be aware of e.g. hmo licences.
Access to a wide range of lenders: R3 Mortgages has access to an extensive panel of specialist HMO mortgage lenders, including banks, building societies, and niche providers. This ensures that you have a wide range of HMO mortgage options to choose from to ensure you get the best deals available in the hmo mortgage market. Our role is to help find the best hmo mortgage rates for you and the best deal.
Personalized service: R3 Mortgages takes the time to understand your individual circumstances and goals, ensuring that they find an HMO mortgage that aligns with your unique requirements. As a specialist mortgage adviser we are comfortable with complex cases which is one of the key differences between us and other firms.
Support throughout the process: From the initial consultation to the completion of your HMO mortgage, R3 Mortgages provides ongoing support and guidance, ensuring a smooth and stress-free experience. Our team is experienced in processing hmo mortgage applications.

If you're considering investing in an HMO property or looking to refinance an existing one, don't hesitate to contact R3 Mortgages for a free initial consultation to discuss your needs and explore the available options.

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