In This Article
What is an HMO?
An HMO stands for House of Multiple Occupancy. This is when a landlord rents the property out on a room-by-room basis rather than letting the property out on one tenancy agreement.
An example of this is when a landlord buys a property such as a student house and rents out each room individually to each student.
The reason a landlord may do this is to generate more rental income from the property. For example, a terraced house with five bedrooms in Portsmouth may generate £1,500 pounds per month if left on a single tenancy agreement.
This same property, if in a good enough condition may get £500 per bedroom each month. If this was the case, this means that the property will generate £2,500 per month which is an extra £1,000 every month.
Over a year, especially if you have multiple investment properties, this may equate to a lot more income coming in.
There are of course many other things to consider when considering whether you should be renting out your property as an HMO. For instance, many HMO properties require you to have a licence. there can also be other red tape involved when letting out an HMO property.
It is always best to take professional advice when you are considering whether to buy a property to let as a single-occupancy let or an HMO property.
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What is an HMO mortgage?
An HMO mortgage is a mortgage that is secured against properties rented out on a room-by-room basis.
Most buy to let lenders will not consider HMO properties unless a particular HMO mortgage is taken. Generally, buy to let mortgage products are for properties that have just one tenancy agreement in place. An example of this is a standard house or flat rented to one family.
An HMO mortgage allows you to buy or refinance a property with a large number of rooms, for example, this could be 10 bedrooms. The Lender looks at the total amount of rent that will be generated from all of the bedrooms and uses this to assess the maximum loan amount available to you up to a certain loan to value advised by the lender.
HMO mortgages are usually more expensive than standard buy to let mortgages as the lender considers the properties to be higher risk and harder to run than general buy to let properties.
Is an HMO mortgage more difficult to get than that of a standard buy to let mortgage?
If you fit the lender’s criteria, it is not necessarily more difficult to get an HMO mortgage than a standard buy to let mortgage.
One of the challenges, however, would be the amount of HMO mortgages that are available in comparison to standard buy to let mortgage products. The single-occupancy buy to let market is larger than the HMO market therefore there are fewer lenders and products available for HMO properties.
This does not mean that there is a shortage so if you meet the lender’s criteria for an HMO mortgage, there should be options available to you.
There can be restrictions such as HMO experience and some lenders do not allow first time landlord HMO mortgages, so best to speak with an experienced mortgage adviser who can guide you.
Would an HMO mortgage mean I earn more money from the rental income?
Generally speaking, an HMO would result in more monthly income than a single-occupancy rental property. This is because, when a property is rented out on a room-by-room basis, it is usually done so at a premium compared to the whole property on one tenancy agreement.
Landlords that rent out HMO properties usually make more use of redundant space too. This could mean using dining rooms and studies as extra bedrooms if they qualified in terms of size and living requirements.
If you have a property and are wondering how you could utilise the space if you were to let it as an HMO, you should speak with an HMO Architect.
In addition to more rent that can be generated by HMO properties, there are also more costs too. These could be things such as council tax, internet for your tenants, licencing fees, and utility bills that add extra interest that you will likely pay on your HMO mortgage.
To find out whether you really would earn more money from an HMO in the long run compared to a standard buy to let property, you should take professional advice from an accountant.
How is the maximum loan amount assessed for an HMO mortgage?
When a lender assessed how much they may lend to you on an HMO mortgage, they use a combination of the loan to value of the property and the rental income it would generate from all the bedrooms (using the lender’s own individual stress test).
For instance, if the HMO was a six-bedroom house valued at £500,000 and the maximum loan to value was 80%, this would mean that subject to the rental income, the lender could consider a mortgage of up to £400,000.
If each bedroom was expected to get £500 per month, the total rent of the house would be £3,000 per month.
Each lender has their own stress test for the rental income but for illustrative purposes, let’s say this one was 145% @ 5.5%.
The lender would calculate what rent is required by the following calculation:
Mortgage £400,000 x 5.5% = £20,000 / 12 months = £1,666 x 145% = £2,416 rent per month needed.
This is only an example so always talk with a professional mortgage adviser when trying to work out what rental income is needed to get a mortgage.
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Do I need a certain level of income for an HMO mortgage?
Every lender has their own criteria when it comes to the amount of income that is needed by an applicant to qualify for an HMO mortgage. For instance, some lenders may require you to earn £30,000 exclusive of your rental income to qualify for one of their HMO products.
The good news is some lenders do not have a minimum income criteria at all so can consider applicants with any level of income. The lenders who offer this will still want peace of mind that the landlord is in an acceptable financial position and will be able to make their mortgage payments.
This will mean that the underwriter assesses the application as a whole before agreeing to lend to the individual.
A mortgage adviser’s job is to get an understanding of the applicant’s scenario to then make a recommendation for a lender and mortgage product accordingly.
Do I need clean credit for an HMO mortgage?
Many lenders that offer HMO mortgages will require applicants to have a clean credit file. This could mean no adverse events in the last six years such as defaults, county court judgments, bankruptcies, property repossessions or individual voluntary arrangements.
There are, however, some lenders that can offer adverse credit HMO mortgages to people that have low credit. You are able to check your credit profile with Check My File, who offer a free trial.
Depending on the level of adverse credit, this may affect the lender that is willing to offer the mortgage and the interest rate of the product.
You should take professional advice to find out whether you would qualify for a clean credit HMO mortgage or whether you would need a Specialist Lender. An experienced mortgage adviser will be able to confirm this.
Should I use an HMO mortgage broker to get an HMO mortgage?
You may not necessarily need an HMO mortgage broker to give you advice on these products, however, it would be strongly recommended to talk to a mortgage adviser with the correct buy to let background including HMO mortgage products.
Some mortgage advisers may not regularly deal with HMO properties so best to find out their experience when you talk to them to make sure you are comfortable that they often arrange transactions similar to your own.
Conclusion
Renting out a property as an HMO can be more lucrative than renting one out on a single occupancy basis. The extra income however comes at a cost.
This is because HMO properties require more work than single occupancy properties due to there being more tenancy agreements in place. They also often require licenses, and the landlord has to provide additional items (such as fire doors) to keep the properties legal.
You will likely be marketing the property more frequently as tenants come and go and there are usually more outgoings for the monthly bills and mortgage interest.
Taking the correct professional advice is fundamental when considering an HMO mortgage.
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They are experienced, which can boost your chances of being approved.
