Houses in Multiple Occupation (HMO) are usually considered more profitable than standard rental properties, but what exactly are they, and how easily can you finance them?
What is an HMO, and what does HMO stand for?
A House of Multiple Occupation (HMO) is defined as a property where three or more unrelated occupants share bathroom or kitchen facilities. To ensure they meet regulatory standards, properties require a specific HMO licence from the local authority.
Why consider investing in an HMO now?
As ongoing market uncertainty creates further challenges for landlords to navigate, finding ways to boost your property investment portfolio is essential. An investment such as an HMO could be a great way of increasing your rental income at a time when interest rates are likely to continue rising. Despite being a more complex property investment type, HMOs are still easy to finance with the help of an expert mortgage broker.
Why are HMOs good property investments?
Two primary benefits make HMOs an excellent property investment for landlords looking to boost their portfolios: competitive rental yields and low void periods.
The main draw is the more competitive rental yields compared to vanilla buy to lets. On average, HMOs generate a yield of 8.8%, although this can be much higher for some properties, whereas a standard buy to let would generate an average yield of 5.8%.
Similarly, with multiple tenants at one property, landlords are less at risk of void periods with no rental income. If one tenant leaves unexpectedly, the remaining rents should help you to cover the reduced income whilst you find a new tenant to fill the property.
What makes HMOs so popular?
Often referred to as a house-share, these homes are a popular solution for students and young professionals, where rent is typically more affordable than a studio or small flat. Property investors and landlords also benefit from owning an HMO, as rents from multiple bedsits usually produce higher rental yields than a stand buy to let.
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Average Gross Yields
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Q1 2022 | Q2 2022 | Q3 2022 | Q4 2022 | Q1 2023 | Q2 2023 |
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HMO
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7.57% | 7.75% | 9.12% | 8.46% | 9.06% | 8.87% |
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Vanilla BTL
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5.35% | 5.25% | 5.84% | 6.24% | 6.04% | 5.88% |
What do lenders look for on HMO mortgage applications?
Lenders typically prefer to see a more experienced landlord when reviewing an HMO application. This is because, despite the attractive yields on offer, this type of complex property demands more time for management and will also incur higher running costs.
How much experience do I need for an HMO?
Due to the more complex nature of HMOs, most buy to let lenders only offer to experienced landlords. As always, criteria vary from lender to lender, but one to two years of previous landlord experience is typically sufficient.
Some lenders will accept first-time landlords, but this will usually be caveated by requiring you to use a property agent to manage the property. If you’re unsure whether you’ll qualify for an HMO mortgage, your broker can discuss your options with you.
What is an HMO licence?
You will need to acquire an HMO licence from the local council where the property is located. This licence will be valid for five years. It’s important to inquire about the policy for your area of interest with the relevant local authority. While the general rule applies to properties with five or more occupants, smaller properties with fewer tenants can also require a licence. As it varies dependent on the area, getting all the information in advance will put you in the best position for application.
How much do HMO licences cost?
The costs associated with gaining an HMO licence will vary depending on location. Some councils will charge based on the number of bedrooms in a property, and others will have a fixed fee of anywhere between a couple of hundred pounds to over a thousand.
How long do HMO licences take to be issued?
Lenders will be well aware of the time it takes for a licence to be issued and, therefore, may accept proof of application during the underwriting of the mortgage. Despite this, being well-prepared in advance will prevent any unnecessary hold-ups at this stage.
Some legal conditions associated with HMO licences include:
- The applicant must be deemed as ‘Fit and Proper’ for the role of managing the HMO (i.e., no criminal record or breach of landlord laws or codes of practice)
- The property must be suitable and fit for purpose and the proposed number of tenants (i.e., the right facilities and not over-crowded)
- An up-to-date Gas Safety Certificate, ready to provide to the relevant council on an annual basis
- Appropriate smoke alarms installed and maintained, and all electrical appliances tested with certificates that can be produced upon request.
- The bedrooms must meet the minimum size. These regulations may vary depending on the council (this is important to be aware of when considering converting a property into an HMO)
Individual councils may have other conditions for HMO licences, but you should understand all the requirements when you apply.
Do I have to have an HMO licence?
When required by the local authority, HMO licences are non-negotiable; the penalty for renting a licensable HMO without a licence is a fine of up to £20,000.
Read our guide, New HMO Legislation: An Essential Update for Landlords, to find out more.
Buy to Let Lender HMO Criteria
As a complex property type, more risk-averse lenders won’t be willing to offer to these cases, and those that do will undoubtedly each have their own individual criteria. However, here are some general points when it comes to HMOs:
- Bedrooms: Most lenders accept a maximum of five to six bedrooms for one property. There’s often a misconception that anything larger than this will require a commercial mortgage, but this is not the case. We have access to specialist lenders comfortable with up to 20 bedrooms for one HMO.
- Tenant type: While HMOs are frequently used as private residences for students, it’s not a given that a lender will include both on the criteria, so it’s always worth checking the details and speaking to your broker. While lenders have become much more accepting of different tenancy types, some have tighter restrictions than others.
When it comes to valuations, lender methods can differ slightly here too. Some lenders use the traditional surveyor inspection combined with comparing it to like-for-like properties in the same area. If there aren’t any other HMOs in the area, the valuation will be based on the price achieved as if it were a single household. However, this method doesn’t account for the extra income HMOs generally attract by having multiple rental incomes, which could drastically limit the amount you can borrow.
What’s the Difference Between an HMO and a Multi-Let?
Multi-lets are much like HMOs in that they are rented out to unrelated tenants that share communal facilities within the properties. However, the main difference is that multi-lets are unlicensed. This is usually because they are small, or down to the relevant local authorities licencing guidelines.
What information do I need to provide on an HMO mortgage application?
Some useful details that will help to progress your application quicker are:
- The number of bedrooms to be let
- The property’s location
- Your experience as a landlord (including HMO experience)
- Whether you’ll be managing the property yourself or using managing agents
- If the property has or needs an HMO licence
- Expected or actual rental income
- If there is one or multiple AST tenancy agreements
- Types of tenants
- How much you want to borrow
- Type of rate you prefer (tracker or fixed)
- Your credit rating
- Whether you’ll be investing via your personal name or a Limited Company
How Long Does an HMO Mortgage Application Take?
Whilst every case will differ, generally speaking, HMO mortgage applications take a similar amount of time for lenders to process as any other buy to let mortgage.
Lenders may accept evidence of an application for an HMO licence in lieu of the actual licence itself, as this can take longer and isn’t always practical. As such, you may be deemed as ‘fit and proper’ to run an HMO on the condition of having the licence. However, if at all possible, having the licence readily available will facilitate the underwriting process at the application stage.
How to Apply for an HMO Mortgage
Finding the right HMO finance for you can be tricky, and there’s a lot to consider, especially with each lender varying on criteria requirements. For help sourcing the most suitable HMO mortgage for you or general property finance advice, our experienced buy to let team will be more than happy to help. Call us on 0345 345 6788 or submit an enquiry here.
