HMO Mortgages

First-time investors and experienced single-tenant landlords may be attracted by the attractive returns offered by a property with multiple tenants – also known as a multi-let, or a house in multiple occupancy (HMO).

HMOs range from a house-share arranged by a group of friends, to a house or flat provided for a group of students sharing, to high-spec accommodation for young professionals or low-cost housing for shift-workers or housing benefit recipients.

The projected annual returns of 4-5% for a straightforward buy-to-let (BTL) can be doubled for a multiple-occupancy letting. Which is more than enough to persuade many landlords to tackle the additional licensing and finance requirements. But the finance issues may be more complex, and require specialist advice.

What is an HMO?

A house in multiple occupation (HMO) is any rental property with shared facilities (such as bathrooms and kitchens) which is rented out to three or more people who aren’t part of a single "household" (usually a family). They’re what’s often known as a "house share".

What many people refer to as an HMO is actually a Large HMO, which is a rental property with five or more tenants, where the tenants share toilet, bathroom or kitchen facilities.  

Do I need a licence to run an HMO?

You don’t need a licence to run a standard HMO with four or fewer occupants. Landlords do need an HMO licence to operate a Large HMO, which will usually be valid for five years - which is why they are sometimes referred to as Licenced HMOs.

Smaller HMOs, which don't need to be licensed, have commonly been referred to as "unlicensed HMOs," but the term can seem to suggest that they are somehow illegal or fly-by-night. Some owners, local authorities and lenders refer to these smaller HMOs as multi-lets, "HMOs Not Required To Be Licensed," or "non-licensable HMOs".

The different mortgage lenders for these specialist buy-to-let mortgages may have different definitions and requirements for their HMO lending.

Tenants to target for HMOs

With the cost of buying a home still rising, the demand for affordable rented accommodation remains very strong. Local listing sites (Gumtree, Zoopla, Rightmove…) will help first-time landlords to assess the strength of demand from prospective tenants:

• Low-cost / affordable housing / housing benefit tenants: some landlords decide to let their whole properties to local authorities for use as low-cost housing, at a discount but gaining an assured, continuous income.
• Students: can have their rent guaranteed (often by parents) and usually have a natural study-course limit to the length of their tenancy.
• Working professionals: increasing numbers are renting into their late 20s and 30s, looking for higher-spec properties (often with more bathrooms) but they are usually more stable, less party-lifestyle tenants.

What kind of tenancy agreement do I need to run an HMO?

Landlords can manage their HMO property by setting up one "joint and severally liable" agreement covering all the tenants, or using an individual contract for each tenant.

Joint contracts

• Suitable for a group of students or friends moving in together
• Usually require less administration: one overall agreement with one single rent payable (and one deposit to protect, should you decide to take a deposit).
• Tenants are jointly liable for both the rent and the care of the property, and are responsible for the bills and council tax themselves.

Individual contracts

• More common for large, low-cost HMOs, or inner-city HMOs designed for young professionals
• Each tenant pays his or her own rent separately
• If one tenant fails to pay, the others don’t have to make up the shortfall
• Individual tenancies are more of an administrative burden, with individual deposits to be collected and protected.
• As a landlord you will be liable for council tax and usually utility bills as well, though you can include this cost in the rent that you charge

How profitable is an HMO?

Prospective landlords may see HMO properties advertised for sale offering “100%+ gross yields,” but you’ll need to be aware that the costs of setting up and running HMO properties are considerable, so the key figure is net yield.

HMO landlord costs include:

• conversion costs, including installing extra bathroom(s) and kitchen(s), fitting fire doors, door closers and locks
• finance costs
• council tax (usually paid by the landlord)
• utility bills
• insurance
• repairs and maintenance
• management costs
• rent arrears
• voids

Profits may be maximised by running the property through a limited company structure: you’ll need to take advice from an accountant / financial adviser.

How to finance an HMO

There are nearly 40 lenders operating in the buy to let mortgage market, offering approximately 1,500 different mortgage products. Many of them can only be accessed by a broker engaged to act on your behalf.

What kind of finance do you need?

• An HMO mortgage to buy a property already converted and operating as an HMO
• A specialised bridging loan to cover the cost of purchasing and converting a property to an HMO (usually to a maximum 75% LTV)
• Refinance in the form of an HMO mortgage or Large HMO mortgage to pay off your HMO bridging loan

Lenders will have different criteria for the number of rooms in an HMO they will consider, and how the calculate the value of the property (usually as a combination of Bricks & Mortar and Investment value).

HMO borrowing stress test calculation

Lenders commonly apply a slightly higher “interest coverage ratio” (currently around 1.7%) to HMO mortgages, compared with standard BTL mortgages (usually 1.25%), to cover the perceived high risk of a multi-tenanted property.

An experienced broker will be able to identify the most appropriate – and cheapest – finance for you in this specialised area of the buy to let market, and will package your application to make sure it meets the lender's criteria. 

Call Clifton Private Finance

One of our specialist HMO mortgage advisors will be happy to discuss your requirements with you: