Many property investors consider HMOs to be more profitable than a standard rental property. Let’s take a look at what buy-to-let HMO mortgages are and how you can get one.
If you’re a property investor, you might be looking at ways to diversify your portfolio. I popular way to do this is to invest in Houses of Multiple Occupation (HMOs) for the higher rental profits they can offer.
However, with higher potential rental profits comes slightly higher complexities in mortgaging and managing an HMO buy-to-let property. But with expert guidance, you can rest assured knowing you’re well prepared and on your way to investing in an HMO.
What is an HMO?
HMO stands for House of Multiple Occupation, shared housing that accommodates three or more unrelated tenants, sharing a kitchen and a bathroom.
HMOs are popular because they often generate higher yields than standard buy-to-lets because they have multiple tenants.
How many tenants can you have in an HMO?
How many bedrooms you are allowed in one property, and consequently, how many tenants, will depend on your HMO licence. Usually, the limit is one tenant per room.
Many lenders won’t accept HMO properties with more than six bedrooms. You’ll need a specialist lender if you have any more than that. A mortgage advisor experienced in HMO buy-to-let mortgages can help you find one.
What is an HMO licence?
The HMO licence is a license granted by the local council your property is located in and is valid for five years. The type of licence you’ll need will depend on your property and your local council. There are two different types you might need for an HMO:
1. A mandatory HMO licence – needed for any property with five or more unrelated tenants. (Also known as a ‘large HMO’).
2. An additional licence to cover properties with three or more tenants
You need a licence per HMO you own. If you rent out an HMO without a licence you could face some hefty fines. Make sure you have all the information you need before renting out your property.
Is a student house classed as an HMO?
Student lets are often classed as HMOs because many students live in homes of up to six people, occasionally more. But HMOs aren’t exclusive to students, and not all student lets [AW1] are HMOs, either. Some HMO properties are used by young professionals.
Can I invest in an HMO as a first-time landlord?
HMOs are considered a complex investment type. This means that lenders usually prefer to lend to landlords with at least one year’s experience in the buy-to-let market.
There are some lenders who will accept applications from first-time landlords, but you might find that mortgage rates are more expensive and there could be stricter criteria to meet. Lenders might also require that you use a property agent to manage the property to make up for your lack of experience.
Not sure if you’ll qualify for an HMO buy-to-let mortgage? Speak to a member of our team for some advice.
What’s the criteria for an HMO buy to let mortgage?
We’ve mentioned already that an HMO is considered more complex. This means that lenders view it as a higher risk, and to offset that risk, they’ll have their own lending criteria in place. The main things they will be looking at are:
Number of bedrooms
Most HMO mortgage lenders will accept a maximum of five to six bedrooms. Many think that anything larger requires a commercial mortgage, but that’s not true. There are specialist lenders who will consider properties with more than six bedrooms, even 10 or 20!
Type of tenant
We have already established that HMOs are often used for student lets, but it’s not a given that your lender will allow it. Make sure you are fully informed on what kind of tenancy types your lender will accept and speak with your mortgage broker if you’re unsure.
Valuations
Expect valuation methods to differ from lender to lender. Some may use traditional surveyor inspections for their valuations and then compare them to similar properties in the area. If there are no other HMOs in the area, they’ll base the valuation on the price achieved as if it were a single household. But this method doesn’t account for the additional income an HMO can attract, so it could limit the amount you can borrow. You’ll want to be aware of this before picking a lender.
Benefits of HMOs
HMOs make good property investment for two main reasons: they boast competitive rental yields and low void periods.
The competitive rental yields is probably the most appealing benefit for landlords looking to boost their portfolios. On average, HMOs generate a rental yield of 8.8% compared to a standard buy-to-let which generates an average rental yield of 5.8%.
The low void period is also an attractive aspect of HMOs. Since the property houses multiple tenants at once, landlords have less risk of getting stuck with an empty property generating no rental income. This is because if one tenant unexpectedly leaves, the remaining rents usually help cover the reduced income while you find a replacement tenant.
Speak to an experienced HMO mortgage specialist today
While getting a mortgage for your HMO isn’t straightforward, it’s worth the results this investment property can give you. To make sure you get it right, get advice from a specialist mortgage broker who has experience with complex buy-to-let mortgages. Contact us today to explore your options.
FAQs
Are mortgage rates more expensive for HMOs?
Yes, although mortgage rates available for HMOs are similar to standard buy-to-let mortgage rates, they are usually a little more expensive due to their complex nature.
How long does an HMO mortgage application take?
While there’s no standard timeline for an HMO mortgage application, they usually take a similar amount of time to any other buy-to-let mortgage. But don’t forget that each case will differ and obtaining that HMO licence before you begin your application will help the process run faster.
What council tax do I pay on an HMO?
Since December 2023, council tax is now paid on the entire property as a whole rather than on individual rooms.
