Buy to Let Mortgage for HMO Scotland

Buy-to-let mortgages for HMOs in Scotland are available through specialist lenders, but Scottish transactions, licensing rules and lender criteria differ from England and Wales. Knowing those differences before choosing a product helps avoid declines, licensing complications and valuation problems.

Lenders assess a Scottish HMO case on the property's location, the number of tenants, the licensing status, the rental income and how suitable the property is for HMO use.

Mortgage Lane arranges buy-to-let mortgages for HMOs across Scotland, including Edinburgh, Glasgow and Aberdeen as well as rural and island locations, matching each case to lenders whose criteria fit the Scottish property type, the licensing position and the rental structure.

How HMOs are valued for a Scottish buy-to-let mortgage

Three valuation approaches apply to a Scottish HMO, and the one the lender uses determines the borrowing available.

The comparable sales approach values the property against the sale prices of similar properties in the area, with adjustments for bedrooms and shared facilities. It suits smaller HMOs laid out much like a normal family home.

The investment approach values the property on its rental income potential, which often produces a higher figure because several tenants together generate more income. HMO valuations offer two investment methods: a hybrid valuation, which gives some recognition to the HMO layout and adaptability, and a Commercial Market Value 1 (MV1) valuation, which applies a full yield-based method.

Automated valuation models (AVMs) use data analytics to estimate value quickly. An AVM may not capture the unique characteristics of an HMO, so lenders that use one on some products do so alongside traditional methods.

Planning and licensing for a Scottish HMO mortgage

Lenders will require confirmation that any planning permission the property needs and its HMO licence are in place before approving a Scottish HMO mortgage.

On planning, the lender needs assurance that the property has the planning position its HMO use requires, which usually means checking local council records for compliance.

On HMO licensing, section 125 of the Housing (Scotland) Act 2006 makes a property in Scotland an HMO, needing an HMO licence from the council, when it is the only or main residence of three or more persons from three or more families, in a house or, where the accommodation is part of other premises owned by the same person, sharing a toilet, washing or cooking facilities. The licence confirms the property meets safety standards and is suitable for multiple occupants, and lenders will want proof of it before approving the mortgage.

On use class, Class 9 (houses) of the Town and Country Planning (Use Classes) (Scotland) Order 1997 covers a house, other than a flat, occupied by a single person or a family, or by not more than five residents living together. A shared house with more residents, or an HMO in a flat, falls outside Class 9, and the council decides whether the change is a material change of use. Where it is, the HMO use is commonly treated as sui generis, meaning it does not fit a standard category, and needs specific permission. Scotland has no equivalent of England's C4 small-HMO use class, and because the answer depends on the property type, the number of residents and the council's view, lenders want the planning position confirmed on every Scottish HMO, not only the larger ones.

Mortgage options for a Scottish HMO

On the Scottish HMO cases we arrange, lending goes up to 80% Loan to Value (LTV), with the remaining 20% or more provided as a deposit. Each lender sets its own maximum, and the LTV offered on a case depends on the property, the licence position, the valuation method and the borrower. Four product structures are available:

• Interest-only, where the monthly payments cover interest only, which keeps them lower, and the principal is repaid at the end of the term or through a sale.
• Repayment, where the monthly payments cover interest and principal, so the loan is fully repaid by the end of the term.
• Fixed rate, where the interest rate is fixed for a set period, so payments are stable and predictable for that period.
• Variable rate, where the rate moves with market conditions, so payments are potentially lower at first, with the risk of increases over time.

Buy to Let Mortgage for HMO Scotland: frequently asked questions