A Guide to HMO Mortgages for Landlords
What is an HMO?
HMO stands for House in Multiple Occupation. This term refers to a property that is rented to three or more tenants who are unrelated to one another. HMOs are casually referred to as a ‘house share.’ Often there will be allocated bedrooms with communal living areas, kitchens and bathrooms.
In some HMOs, the landlord will pay the utility bills for the property and charge a rental rate to each occupant. The rent can cover a room, independent flat, or section of the property, depending on how the house is set up. This type of tenancy often enables the landlord to charge an increased rental amount compared to a house that is let to a single tenant.
Risk warning: House in Multiple Occupation and some Buy to Let Mortgages are not regulated by the Financial Conduct Authority
How does an HMO Mortgage differ from buy-to-let?
When purchasing a property utilising a buy-to-let mortgage, the landlord intends to purchase the property and let it to a single tenant or household. This often results in a single rent payment from the entire household, either on a weekly, bi-weekly or monthly basis.
Alternatively, HMO mortgages are used when landlords intend to rent the property to three or more separate tenants. As discussed above, several rental payments will be received each month from each individual tenant. When letting a property in this format, it is required that a specific HMO mortgage is taken out to cover the purchase of the property. This is because there are terms and conditions surrounding the use of the property that will be broken if the incorrect type of mortgage is acquired.
What are the earning opportunities from an HMO property?
HMO properties generally provide an opportunity for higher rental income than a typical buy-to-let property. This is because multiple tenants can be charged a significant amount for their space within a larger property, whereas only one rental payment that is relative to the property is generated from a buy-to-let investment.
Buy-to-let property:
4 bedroom house
Rented to two adults and two children
Monthly rental income = £850
Annual rental income = £10,200
HMO property:
4 bedroom house with reception room converted to a bedroom
Rented to 5 working professionals
Monthly rent charged per tenant = £550
Monthly rental income = £2,750
Annual rental income = £33,000
How to apply for an HMO Mortgage
If you intend to let a property as a house with multiple occupants, you will require a HMO mortgage. How you use a property will determine the terms and conditions set by a lender. This will require you to present a summary about the property, before being approved for a loan. Your lender may require details including the number of bedrooms, type of tenants, rental income, and whether or not the HMO has or needs a license.
Many lenders will require that you have previous experience as a landlord. Without prior experience, you may only be eligible for higher rate mortgages. Some lenders will also have preferences over the management style of the property. This will depend on whether you intend to manage the property and the tenants yourself, or whether you will use a letting agency to handle these matters.
The application process for a House in Multiple Occupancy Mortgage can be significantly more complex than that of a traditional residential mortgage or a buy-to-let mortgage. However, the opportunity to generate higher rental income outweighs the endeavour of completing an application.
HMO licenses
Depending on the location of your HMO property in England and Wales, your local council may require you to obtain a license to rent out your property as multiple occupation. You can input your postcode into a government tool to assess whether you require a license and complete the application.
Any property that is considered to be a large HMO property must obtain a license. This is any property that is rented to five or more people and the tenants share communal facilities such as a toilet, bathroom or kitchen. All licenses are valid for a maximum of five years and must be renewed before running out. Failing to do so could be in breach of the law and the conditions of your mortgage.
How can a mortgage broker help you obtain a HMO mortgage?
Obtaining a mortgage for a house with multiple occupancy can be a complex process. The application will require precise details about the property and it’s intended use. Criteria can be far more strict than residential and buy-to-let mortgages, creating a challenge for inexperienced landlords who are completing the application for the first time, or after an extended period.
Eden Hawk Financial Solutions have the unique expertise to help you secure an HMO Mortgage with a minimum of fuss. Not only can we help you identify the financial products with the most suitable rates, but we’ll guide you through the process to ensure that your application is watertight. Contact our mortgage brokers today for bespoke advice and personalised mortgage consultations.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO N