If your buy to let has multiple tenants from different households you may require an HMO mortgage. If you don’t have one, there could be serious consequences.
What are HMO mortgages and do I need one?
A HMO (House in Multiple Occupation) is any property that has multiple tenants from different households. For example, one house split into separate rooms or flats. If this is you, you may need a HMO Mortgage. See the Government website for the full definition: https://www.gov.uk/house-in-multiple-occupation-licence
Contact Us to discuss a mortgage for HMO.
If you are looking for a standard buy to let mortgage, please see: Buy to Let
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In what circumstances
do I need an HMO mortgage?
You will require an HMO mortgage if you’re considering purchasing an HMO property. If you have a buy to let (BTL) mortgage, the terms will not allow for you to let the property as an HMO.
It’s important to note that lender criteria for accepting an HMO mortgage will differ. Some will only offer mortgages on HMO properties with a maximum number of bedrooms. Others will only consider licensed HMO properties or those intended for private tenants.
Most lenders will consider an application for a property that has up to five bedrooms. If you are planning to purchase a large property, it’s likely that you’ll require commercial finance.
Contact Us to assess which HMO mortgage is best for you.
Read about commercial mortgages here: Commercial mortgages
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Things you should know about a HMO mortgage
There are three different types of HMO mortgage and which one you need depends on the property:
- Mortgages and remortgages – for existing HMO properties
- HMO refurbishment mortgages – for properties that require renovation.
- HMO development loans – if you are building a property from scratch.
- Not all lenders offer all three mortgage types. Mortgage brokers will be able to advise you which lenders offer which type.
Whether you apply for your mortgage as an individual, a limited company, or an LLC will affect the amount and type of tax you are liable for on your rental income.
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Who is able to obtain an HMO Mortgage?
Mortgages for HMO have seen a rise in popularity in recent years, however, are still difficult to obtain. Usually mortgage providers will prefer an applicant to be an experienced landlord. Often they will prefer one to three years background experience. As a first time landlord you may be accepted, although this could be at the cost of higher interest rates.
A landlord will not usually be offered an HMO mortgage directly from the lender. Lenders usually prefer to use a qualified mortgage broker with specialist HMO knowledge as an intermediary. They also sometimes require that the rental of the HMO property is managed by a letting agent, rather than the individual landlord.
It’s worth considering that lenders will require additional information from the applicant than for other mortgage types. Of course, affordability checks and credit checks and evidence of your income will be required. Additional information requirements can include any or all of the below:
- Evidence of prior landlord experience
- Whether you will be taking out the mortgage as an individual or LLC
- The location of the HMO property and how many rooms you will be letting
- Whether AST agreements are in place for each room
- What type of tenants you will accept (i.e private or local authority)
- Who will be managing the letting of the property
- An HMO licence from the local authority (if required)
- Evidence of or estimate of the total rental income expected
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How are HMO mortgages
different to a standard BTL mortgage?
Lenders will often see HMO rental properties as high-risk investments. Therefore, interest rates and fees tend to be higher than on a standard buy to let mortgage.
The potential rental yield will be considered when calculating the maximum loan you can borrow. Similarly to a BTL mortgage application.
The deposit required will depend on the LTV (loan to value amount) desired by each specific lender. Most lenders will require between 60-75% LTV, therefore at least 25% deposit.
HMO mortgage rates and fees
Due to the niche nature of HMO mortgages, there’s very little competition in the market. This means HMO mortgage rates are generally higher. HMO mortgage lenders are also likely to charge higher arrangement fees.
Much like a standard mortgage, a mortgage for HMO can be taken on either fixed or variable terms. They can also be repayment or interest-only. Given the higher rates associated with an HMO mortgage, it’s wise to consider your options before deciding on a fixed rate term.
Contact Us to find out what type of HMO mortgage is available to you.
What is a HMO licence and how is it obtained?
In some circumstances, you’ll require a license from the local authority to let out a multiple occupation HMO property. This usually applies to larger properties; specifically those which meet the following criteria:
- More than five residents (unless they’re from the same family)
- Being three stories or higher
- Having shared bathroom and kitchen facilities
Licences are obtained from the local council and are required per HMO property rather than per landlord. Each local authority has their own criteria for awarding HMO licences As such, it’s important that you seek information on this before deciding to apply for a mortgage.
It’s important to be aware that licences can be refused. Each local authority will assess both the property and the HMO landlord’s suitability. They can also withhold the licence until you meet their acceptance criteria.
If you require a licence for your HMO property, then renting it without one is a serious offence. It’s also unlikely that any lender will accept your mortgage application until the licence is in place.
Contact Us to discuss your HMO licence.
How can a broker help with an HMO mortgage application?
HMO mortgages are a highly specialist product. Therefore, it is strongly advisable to apply through an authorised and regulated mortgage broker. They will be able to advise you which lenders are most likely to accept your application, based on your individual circumstances.
As well as the application process being tricky to navigate without professional help, ensuring you find the right mortgage product for you is essential. This is especially true if you are looking to maximise your profits from an HMO property.
If you already have a buy to let mortgage in place and are looking to expand into HMO letting, then it may be possible to have it transferred to an HMO mortgage. This is also something that a specialised mortgage broker will be able to advise you about.
Contact Us to obtain specialist HMO advice.
If you are looking for a standard buy to let mortgage, please see: Buy to Let
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