HMO Mortgages
A House of Multiple Occupancy mortgage can vary from product to product, just like a House of Multiple Occupancy (HMO) property can vary in size, tenant type and configuration, therefore, mortgage products for a HMO can also vary. The most competitive HMO mortgage lenders will have key criteria that borrowers will need to hit to be eligible for lending, so it is important to know what mortgage products are available for you and what valuation method would be used. In our guide below we will explain what products are available to new investors and what products are available to existing HMO owners looking to re-mortgage, including what valuations those products come with.
HMO Mortgages
A House of Multiple Occupancy mortgage can vary from product to product, just like a House of Multiple Occupancy (HMO) property can vary in size, tenant type and configuration, therefore, mortgage products for a HMO can also vary. The most competitive HMO mortgage lenders will have key criteria that borrowers will need to hit to be eligible for lending, so it is important to know what mortgage products are available for you and what valuation method would be used. In our guide below we will explain what products are available to new investors and what products are available to existing HMO owners looking to re-mortgage, including what valuations those products come with.
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PROCESS BREAKDOWN
Information gathering and advice
The first process in your HMO mortgage application will be gathering or updating information before making a product recommendation:
- Property details
- Tenant type
- Contract type
- Borrowers information
- Valuation method required
- Rate preferences
Credit approval
Once you are satisfied with the product recommended and have confirmed to proceed, this will usually be submitted the same day to give you a decision, until this point there is still nothing to pay! As long as the Agreement in Principle (AIP) is approved, we can move to application stage where fees become payable.
Application, valuation & underwrite
Once the application is submitted, your valuation will be paid. Depending on which lender you go with, the valuation will then be instructed right away, or after the underwriting has been completed. Once the valuation is returned, if acceptable, the lender would then look to make a formal offer. You can then move to the legal stage.
Offer and completion
Once you have had your HMO mortgage offer, you will require legal advice, your solicitor can draw down the loan once the legal requirements are satisfied. Your broker at Mortgage Lane will always be checking in on the application post offer, so we are chasing your completion for you too!
Types of Multiple Occupancy HMO Mortgage
We assist both first time investors and portfolio landlords with House in Multiple Occupancy (HMO) mortgages. Every HMO property is different, some can be small properties that most lenders will approve with conditions around tenant types, yet others can be larger and may have additional complications around tenant types or valuations, such as social housing HMOs, or Sui Generis HMOs which are usually 7 room and above. Below we explain all the types of variations you might come across such as HMO sizes, planning compilations, tenant types and so much more!
Many student let properties are classed as a Houses in Multiple Occupation (HMOs), opting for this type of letting can considerably enhance a property’s rental yield by converting individual rooms into separate rental units. Additionally, properties with this setup may attract a higher valuation, especially if applying for a mortgage product that provides a hybrid or commercial HMO investment valuation.
An important consideration is the HMO licensing requirement. Properties let to three or more separate tenants, or those spanning at least three stories, typically require an HMO licence. This licence is essential when securing a mortgage for a HMO property. It’s worth noting that licensing requirements can vary based on local housing regulations, and some HMO properties in selective licensing areas may not require a licence, this will be important to consider with mortgage lending as you will be required to either provide a licence, or to evidence that you do not need one.
In the UK, student HMOs (Houses in Multiple Occupation) are typically occupied for the duration of the academic year. The academic year usually lasts around 9 to 10 months, from September or October until June or July, depending on the university, this can impact revenue and may also impact your valuation and HMO mortgage affordability.
However, the exact length of occupancy can vary based on several factors:
- University Terms: Some universities operate on a three term system, while others use a semester system. This can slightly alter the duration of the academic year and therefore the income you might receive on the student HMO.
- Rental agreements: The standard rental agreement for student HMOs often spans 10 to 12 months. Some landlords offer 12-month contracts, which include the summer months, while others may offer shorter contracts that align more closely with the academic year.
- Summer Lettings: In some cases, students may choose to stay in their HMO over the summer for work, internships, or to avoid the hassle of moving twice. Landlords may also rent out the property to other tenants during the summer if the students vacate.
Large HMOs are those exceeding 7 bedrooms and sometimes as large as 50 rooms.
Clients looking for a large HMO mortgage usually will require a lender using a local commercial valuer to commission a Market Value 1 (MV1) investment valuation report. This will provide the most accurate and appropriate valuation for this asset type as it will value the property on a yield based model that can significantly increase the valuation when comparing to a comparable bricks and mortar valuation method. For experienced applicants there are many options for lending on these property types for a range of loan to values between 60-75%. There are still lending options on HMO mortgages with no experience but rates are just slightly higher and may require a larger minimum income to qualify.
At Mortgage Lane, we offer bespoke mortgage solutions specifically designed for social housing Houses in Multiple Occupation (HMOs). Our expertise extends to accommodating properties leased to a wide range of social housing entities, some of which manage complex care scenarios. We frequently assist clients in securing mortgages for properties dedicated to providing both short and long-term care within the social housing sector.
Given the diverse nature of social housing, it is crucial for clients to provide Mortgage Lane with the lease details of the property they intend to purchase or re-mortgage. This information allows us to effectively identify a lender who is receptive to the specifics of the lease, including the social housing provider involved, the lease term, break clauses and the type of tenants expected.
The tenant types we commonly see in social housing HMOs include:
- Individuals requiring assisted care
- People at risk of homelessness
- Care leavers
- Ex-offenders
Understanding these tenant types helps us align mortgage products with the unique use of your social housing HMO property, ensuring a tailored and effective mortgage product solution, with an appropriate valuation method.
With House of multiple occupancy mortgages, lenders can also have limitations on what lease lengths they will permit between the borrower and the housing association, some have maximums of 5 years.
Any lease with a term of more than seven years must be registered with HM Land Registry to ensure legal protection and transparency. For property investors, this is not just a legal formality but a crucial step in safeguarding their investments and ensuring smooth property transactions in the future. so for specialist lenders that permit leases for 7 years and above will require it to be registered prior to mortgage.
Social housing can sometimes allow licencing and planning exemptions for social housing properties, however larger social housing HMOs may still require it and lenders may also insist on this regardless of exemption.
Purpose Built Student Accommodation (PBSA) is often the name given for student halls. This can be student apartment blocks with shared facilities such as a gym, games room and WIFI, however they come will all sorts of configurations.
Whist PBSA properties are not HMOs by classification, occasionally we are able to secure the same HMO mortgage products as long as the property is residential by facilities and configuration, of course larger schemes including gyms would be more suited to commercial mortgage lending.
Purpose Built Student Accommodation (PBSA) in the UK generally falls under the “Sui Generis” use class. “Sui Generis” is a Latin term meaning “of its own kind” and is used in the UK planning system to categorise uses that do not fall within any of the specific use classes defined in the Town and Country Planning (Use Classes) Order 1987 (as amended).
However, there can be variations and exceptions depending on the specific characteristics of the development and local planning policies. Some PBSAs, especially those with elements such as commercial spaces, gyms, or other amenities, might require additional considerations in their planning applications.
Where the PBSA is in a high rise block, that can also make your avenue of lending more specialist. Whilst many of these blocks are privately owned, these units are rarely up for sale and therefore lending hasn’t been well designed for these units or blocks. At Mortgage Lane our specialist team understand this asset type and can recommend those mortgage lenders that are out there lending on a PBSA.
You may also require a commercial investment HMO valuation, which should include a valuation method based on the properties yield, as a PBSA is a Commercial asset class, a hybrid valuation or residential comparable valuation may not be suitable.
Not all Houses in Multiple Occupation (HMOs) necessitate planning permission or licensing, and for such properties, there are a select few lenders who might consider Buy to Let mortgage for HMO, which can offer more attractive interest rates when compared to specialist buy to let or commercial mortgage products for HMOs. When it comes to limited company lending, the options are relatively fewer.
Alternatively there are many HMO mortgage products on a small HMO, comparing against all rates on the market to provide you with the most cost effective option.
Which ever mortgage option is the most cost effective, must include a suitable HMO valuation method for the property being offered as security, to make sure adequate mortgage funding is provided.
There are usually a lot of options for a HMO mortgage with no experience in property, on small HMOs lenders often do not require experience and therefore mortgage products are competitive for applicants.
PLANNING PERMISSON ON HMOs
Any HMO with 7 or more rooms will require planning or a certificate of lawful use in order to be a compliant dwelling. HMO mortgage Lenders will want to see this, so for purchases it is best to get this in advance. As well as planning you will require HMO licensing, this will usually be reviewed on valuation and at legal stage. This decision notice is essential when securing a mortgage for an HMO property.- For HMOs with fewer than 7 rooms, check the local Article 4 map. This will indicate if you need planning permission to operate as an HMO, as some areas may restrict conversions. Lenders will require proof of planning permission or a certificate of lawful use when considering mortgage applications for HMO properties.
- For HMOs with more than 7 rooms, you will either need new planning permission or to evidence a certificate of lawful use when considering mortgage applications for HMO properties.
Certificate of Lawful Use
A Certificate of Lawful Use (COLU) is a document issued by a local planning authority in the UK that confirms a property's existing use is lawful under planning legislation. This certificate is important for properties that have been operating in a particular manner, such as a House in Multiple Occupation (HMO), but where planning permission may not have been formally granted for that specific use.HMO LICENCING REQUIREMENTS
In the UK, Houses in Multiple Occupation (HMOs) must adhere to specific licensing requirements to ensure they meet safety and living standards. Here’s an overview of different licences offered in England and Wales and how they impact HMO mortgage lenders:-
- Mandatory Licensing: Required for all HMOs occupied by 5 or more individuals forming 2 or more households. This includes shared houses and flats.
- Additional Licensing: Some local authorities may require additional licensing for smaller HMOs (for example, those with fewer than 5 occupants) or for specific types of properties. This can vary by region.
- Selective Licensing: This applies to all privately rented properties in designated areas, aimed at improving housing conditions and landlord standards.
Variability by Local Council
It’s important to note that all local councils have different criteria regarding HMO licensing. Some may implement one or more of the licensing options (mandatory, additional, or selective) based on local housing needs and conditions. Therefore, landlords must check with their specific local council to understand the licensing requirements applicable to their property. The license must be obtained from the local council and is typically valid for a period of up to 5 years.HMO valuation methods
At Mortgage Lane, our brokers well understand what these products are set to achieve. For HMO properties, they are all different in use class, size, configuration and tenant type. Valuations for an HMO can vary between:- C3 residential valuation (for small HMOs). These valuations are Bricks and Mortar, comparable based valuations suitable on small HMOs will be the same method as on residential property using 3 comparable, sold within the last 6 months and ideally within a quarter of a mile, these valuations are typically not preferred on large HMOs of 6-7+ rooms.
- Hybrid valuation (for C3 or C4 properties used as a HMO). Hybrid valuations recognise if a property has been adapted to be a HMO and therefore carries some additional bricks and mortar valuation, as it is suitable for adapted investment use. But it is usually vacant possession and is therefore not a yield based report.
- Market Value 1 (MV1) Commercial valuations (For adapted HMOs, usually 6+ rooms). MV1 is a true commercial investment valuation that will value a HMO on a yield based model.
House in Multiple Occupancy Mortgage Topics
- HMO mortgages for first time property investors
- Why do mortgage companies not like HMO
- Mortgage on a tenanted HMO property
- Buy to let mortgage for HMO Scotland
- When do you need a HMO mortgage
- Best buy to let mortgages for HMO
- HMO mortgage for ltd company
- HMO valuation based on rent
- HMO mortgage no experience
- Buy to let mortgage for HMO
- HMO Mortgage Valuations
- HMO Mortgage London
- Expat Mortgage HMO
- Large HMO mortgage
- DSS HMO mortgage
QUESTIONS ABOUT HMO MORTGAGES
HMO mortgage lenders will use the rental income of the security property, which is the property you are buying or remortgaging.
If you’re purchasing a property as an individual, the financial stress test applied by lenders might be more stringent compared to basic rate taxpayers. For instance, a basic rate taxpayer could be assessed at 125%, whereas a higher rate taxpayer might be evaluated at 145%. For five-year fixed mortgages, lenders often use the pay rate of the product for stress testing, say 5.89%. As an example, for a basic rate taxpayer earning £600 per month in rent, the calculation would be: £600 x 12 / 1.25 / 0.0589, resulting in a maximum loan of £97,792.
Interestingly, limited companies usually undergo stress testing at a rental coverage of 125%, except some HMO products may use a higher rate, others follow the above. This implies that if you’re a higher rate taxpayer facing challenges with stress testing and achieving desired loan sizes, opting for a limited company mortgage might allow you to borrow more.
Absolutely, securing an HMO mortgage for a block of flats that possesses an HMO licence is feasible. It’s important to recognise, however, that such a property is typically classified under a Multi-Unit Freehold Block (MUFB) mortgage. This is especially true if the block operates on a single utility connection.
For blocks of flats with an HMO licence, HMO mortgage solutions are sought from specialist lenders. These lenders are experienced in dealing with the unique aspects of HMO mortgages for such properties. HMO mortgages cater to a variety of property types within the HMO spectrum. This includes complete HMO setups with individual rooms, combinations of rooms and flats, and even studio apartments under HMO licensing, irrespective of their size.
There is technically no set minimum property value universally applied on HMO mortgages. However, when delving into the specifics of HMO mortgage offerings, you’ll find that market-leading lenders typically set a minimum HMO property value at or above £75,000.
Each lender in the HMO mortgage sector has their own benchmarks and requirements, contributing to variations in the minimum property value for an HMO mortgage. Prominent lenders in the HMO mortgage market often establish a minimum value threshold to manage risk effectively. Properties valued at £75,000 or higher are commonly seen as a starting point for these HMO mortgage providers.
Yes, there are mortgage lenders that will lender on HMOs near or above commercial property.
Sometimes HMO mortgage lenders, or valuers may not provide a mortgage or valuation where a property is within the close proximity of a commercial property that may reduce kerb appeal or “resaleability demand”
Sometimes, it will depend on how invasive the commercial property is, this can be for a variety of types such as:
- Takeaways
- Restaurants
- Hotels
- Pubs
- Petrol Stations
- Light industrial
Depending on the above, the options may be more expensive, but HMO properties near or above commercial properties can still find great mortgage products with flexibility on their close proximity.
An interest only HMO mortgage is a mortgage, where you will only repay the interest on the principle amount borrowed. This can be useful for investors on HMO mortgages, whereby they build this into their cashflow. However, for residential mortgages it requires more planning as “sale of security” isn’t so much of a widely accepted exit strategy for mortgages on primary residence.
A HMO mortgage is used to purchase a property that you intend to rent out to a residential tenant on one tenancy agreement. Usually people take Interest only but capital repayment HMO mortgages are also available
Many HMO mortgages operate on an interest-only basis. This implies that when the mortgage term concludes, the initial amount you borrowed remains unpaid. Therefore, a repayment strategy for this principal amount is essential. While you can always make extra payments alongside your interest during the loan’s tenure, it’s vital to have a game plan for settling the rest. Repaying the HMO mortgage can be achieved through channels like drawing from other investments, utilising savings, or opting to remortgage the property.
Yes, some lenders offer a 10% overpayment facility, per annum.
This means that if your principal loan was £125,000 then you could repay £12,500 per annum as an overpayment without incurring a penalty within your fixed term.
However, it is important to note that many lenders are stripping this from their product ranges, so it is always worth checking to avoid paying exit fees on amounts repaid.
Just like standard HMO mortgages, there are also HMO mortgage lenders that allow for applicants with adverse credit. So whether you have missed payments, CCJs, defaults or even an IVA, we can still source you with a suitable HMO lender. If you have discharged from bankruptcy then your options will become better after 3 years and also subsequently 6 years.
Most HMO mortgages operate outside the umbrella of the financial services compensation scheme, meaning they’re unregulated. If you’re contemplating temporarily residing in your HMO property, even temporarily, a shift in your mortgage product may be necessary. If your HMO mortgage lender became aware of you residing in the property, they could ask you to remortgage immediately and or request the loan to be repaid in full.
Yes.
Some lenders who offer HMO mortgages to first time buyers may limit the loan size to their maximum residential mortgage affordability. This will help the lender reduce any “back door HMO buy to lets” this term is used by lenders for applicants looking to exploit the HMO mortgage affordability rules to gain a higher loan size than they would otherwise be able to.
There is a way around being limited on loan size, you could buy on bridging first, refurb and refinance as a “property owner” rather than a first time buyer.
Usually the most competitive HMO mortgages require property letting experience, but it is possible to get a HMO mortgage with no experience.
Yes. However, it is not advised, especially if you are buying in a traditional auction with just 28 days to complete. Traditional auctions are more generous on time, but if you are buying via the traditional auction route then it is unlikely you will get a HMO mortgage offer and subsequently, legal searches of which some councils are taking over 6 weeks to return.
We arrange cost-effective HMO mortgages for:
- Individuals
- Special Purchase Vehicles/Limited Companies
- Limited Liability Partnerships (LLP)
- Trading companies
- Charities
- On/Offshore Trusts
Yes.
It is important for HMO buyers that they arrange or sight a copy of the Fire Risk Assessment for a HMO, this is usually requested at legals.
As these fire risk services usually take 2 weeks to return a report, this can hold up your completion if it is not arranged sooner.
Yes.
Usually mortgage products are more competitive with experience, but for those borrowers without property letting experience, you can still get a HMO mortgage. Without experience in property, mortgage options are more competitive when the rooms in the HMO are 6 or less. But even with large HMOs of over 10 rooms, you can still get a HMO mortgage with no experience.
If the property is inside the Article 4 map (please refer to your local council for this), securing planning permission is vital before applying for an HMO mortgage. For those exploring the HMO mortgage market, it’s crucial to understand that lenders mandate planning permission for HMO properties. This is a fundamental step in the HMO mortgage application process.
Planning Permission in HMO Mortgage Applications
Lenders require planning permission to ensure that the HMO property adheres to local authority regulations, a critical factor in approving an HMO mortgage. However, if the property is situated outside of article 4, then your mortgage lender may not require this as it will be exempt.
Impact on property valuation for HMO mortgage terms: For HMO mortgage considerations, the presence of planning permission significantly influences the property’s valuation. Lenders assess this in determining the loan-to-value ratio of the HMO mortgage. So properties with planning permission are more likely to be eligible for investment valuation methods.
Mortgage strategy for HMO mortgage buyers
Ensuring Compliance for HMO Mortgage Eligibility: Before seeking an HMO mortgage, ensure your property has the necessary planning permission before committing to purchases. This is not only a lending requirement but also a legal necessity for operating an HMO.
Yes.
It is important to let the mortgage broker know this information early on to avoid any declines, some lenders may reduce the loan to value after valuation if they were not aware of it; however, there are plenty of lenders that will lender up to 75% Loan to Value on a HMO mortgage near a power station or powerlines.
When it comes to obtaining an HMO mortgage, the minimum loan size typically starts at £25,001. However, it’s important to note that this figure can vary significantly from one lender to another in the HMO mortgage market.
While £75,000 serves as a general baseline, each lender in the HMO mortgage sector has its own set of criteria and thresholds. This means the minimum loan size for an HMO mortgage can differ based on the lender’s policies and risk assessments.
It’s crucial for potential borrowers to evaluate their specific financial requirements and compare them against various HMO mortgage products. This includes understanding the minimum and maximum loan amounts available in the HMO mortgage landscape before committing to a purchase.
Whilst some HMO mortgage lenders do enforce a minimum income requirement (often £25,000), the majority of lenders do not have a minimum income requirement, as long as some level of an income can be evidenced.
A “day one mortgage” allows you to remortgage your property without the traditional waiting period. Historically, many buy-to-let lenders adhered to a “six month rule”, which posed challenges, particularly for investors employing the Buy, Refurb, and Refinance (BRR) strategy. If you’re an investor looking to capitalise on this approach, the good news is you no longer have to wait 6 months to remortgage the property based on its updated post-refurbishment valuation!
HMO mortgage lenders will usually want at least 20-25% of the property’s value because of the increased risks linked with these properties. In simple terms, they’re typically willing to lend you up to 75% of what the property is worth. We’re connected with other specialist lenders who might entertain a loan at an 80% Loan to Value ratio. However, such offers are generally earmarked for borrowers with a background in property rental. But lets not forget, whatever the maximum loan to value is, the property will need to “stress up” to be eligible for the loan size and therefore it will need to be affordable on its producing rental income.
Some investors may be making 15-25% returns on money they are investing into property, therefore having the option to defer capital payments can be advantageous to cash flow. If for example the interest rates are 7% and you choose to continue to borrow at that rate, you will need to make at least a 7% return, per annum to break even on your cost of borrowing. For investors able to make higher returns, there is a possibility of making profit whilst taking interest only HMO mortgages.
Most HMO mortgages are unregulated, which means it is not covered by the financial services compensation scheme. Therefore if you indent to live in your HMO, you will need to change the product.
When securing an HMO mortgage for a new build or a converted House in Multiple Occupation (HMO), the requirements can vary. For conversions, a Professional Consultant’s Certificate (PCC) is often preferred due to its cost-effectiveness. However, for new build HMOs, some lenders may still require a new build warranty.
Professional Consultant’s Certificate for Converted HMO
A PCC is commonly used for HMO mortgage applications on conversions, offering a more affordable option than a new build warranty. It provides assurance that the conversion adheres to building regulations, a key concern for lenders.
Lenders specialising in HMO mortgages typically accept PCC for converted properties, recognising its role in verifying compliance and structural integrity.
New Build Warranty for New Build HMO
For new build HMO properties, a new build warranty is often a requisite. This warranty offers a guarantee against structural defects for a defined period, usually 10 years, and is a critical element for lenders in mitigating risk.
Some lenders insist on a new build warranty for HMO mortgages on new constructions, considering it a necessary safeguard.
We guide borrowers through the process, ensuring they connect with lenders offering the most suitable and cost-effective HMO mortgage options for their specific property type, whether it’s a new build or a conversion. Understanding the distinct requirements for HMO mortgages on new builds and conversions is crucial. While a PCC is often sufficient for converted HMOs, new builds may necessitate a new build warranty. Mortgage Lane stands ready to assist borrowers in navigating these requirements, ensuring they find the right HMO mortgage solution for their property.
Sometimes HMO mortgage products allow for small HMOs, however, larger HMOs in the realms of 5 bedrooms plus may require a specific HMO product. Large HMOs again, 6 rooms and about that have been configured to be “fit for purpose” as a HMO, namely with En-suites etc, those assets usually seek a hybrid valuation to appreciate the investment bearing on the valuation, alternatively we can also seek commercial mortgage lending on the properties where necessary.
If your HMO does not need a licence and is not inside Article 4 and your mortgage lender has declined your application due to lack of living space under HMO guidlines, this may be because of uncertainly due to a cross over in advice.
At Mortgage Lane we have seen this scenario a lot of times. Sometimes you just can’t convince the valuer or the real estate team within the lenders underwriting team that you therefore don’t need to comply with the specific councils requirements on living space sizes. Rest assured we do work with lenders that have understood this property type.
Buying an old HMO can indeed come with its challenges. Article 4 came into effect in different areas at different times and for HMOs that were created prior to this, when evidence they may be eligible for a Certificate of Lawful Use (COLU). Without this a HMO mortgage lender will not be able to be sure that your HMO is a lawful dwelling so it is important you get this from your vendor when purchasing. If you haven’t got this and you are struggling to remortgage you may be able to gather evidence of your HMO being in place since before the directive was introduced and apply for a COLU on the planning portal. We can’t given planning advice so we recommend you speak to a planning consultant regarding your HMO.
We assist our clients with HMO mortgages in England, Wales, Scotland and Northern Ireland.
It is important to note that HMO mortgages are not covered by the Financial Services Compensation Scheme, so borrowers should ensure they are dealing with a reputable lender.
TITLE RELATED TO BLOGS ON MORTGAGES
At Mortgage Lane, we see the most complex of HMO mortgage applications, some of which make a good read for investors looking to learn from other applicants challenges, or for those effected by the topics! See more HMO mortgage topics covered in our blog here.
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