What is an HMO mortgage?

HMO stands for Habitats in Multiple Occupation, and these properties can range from student houses to multi-occupancy apartment blocks. The property in question is classed as an HMO if three or more tenants live there (in more than a single household) and if the bathroom, toilet or kitchen is shared with other tenants. Large HMOs are defined by the government as having at least five tenants (again, forming more than a single household), who also share those same facilities with their co-tenants. HMOs are attractive to landlords because individual tenants each pay rent – maximising returns on the property and offering a potentially higher yield than a single occupancy property. HMO mortgages can be taken out by individuals and limited companies alike.

 

Points to consider:

• LTV of 75%: For both an individual application or an HMO mortgage limited company, a deposit (or equivalent security/equity) of at least 25% will be required – although some lenders may consider a higher LTV. The lower the LTV, the less interest you are likely to pay for your HMO mortgage.

• Experience in the letting field: HMO rentals tend to be more complex than single-occupancy BTLs and can be riskier as a result. Lenders may want to see a track record or 1-2 years at least from applicants, although other lenders may be prepared to flex on this point. Remember that all mortgage pricing links to risk – so the lower risk you are as an applicant (with experience, a higher deposit etc) the more attractive your loan offer is likely to be.

• Lending criteria: Again, each lender will have its own definition of an HMO for mortgage purposes, but it is likely to include features such as a communal living area/kitchen and bathroom, a certain number of lettable rooms (say, 5-7) and no more than four storeys. A specialist valuation is also required, and at least one tenant – or the tenant’s employer – must be paying rent that meets the lender’s requirements for rental coverage, or yield (typically at 125% to allow full mortgage repayment each month and a contingency fund for repairs, void periods and the other costs of maintaining and operating property of this kind).

• Rental yield: This may be set at 125% minimum and is likely to be assessed on a multi-tenanted basis, in line with the HMO definition. As a rule of thumb, landlords expect to achieve returns of around 8-9% (or even more) for an HMO, compared to perhaps 4-5% on a BTL – although note that these returns vary greatly by region, property type, demand factors and cyclical market events. Rental yield is vital for landlords to understand because the costs of managing an HMO can be significantly higher. Yes, void periods are smoothed out, but the costs of works, upkeep, licensing, safety certificates, management and so forth can be high – especially when combined with the cost of mortgaging and remortgaging. Preparation and experience are key to maximising returns.