BTL mortgage for HMO properties

by Charleston Financial

What does HMO property mean?

An HMO, or a house of multiple occupations, is a property that has been rented out by at least three unrelated people. To be classed as an HMO property the people renting rooms in the house would share facilities, such as a kitchen or bathroom. But they don’t make up a single household in the way that family relations living together would.

This is the definition provided by the UK government, which classes a household as either a single person or members of the same family living under one roof.

If a multi-let property is occupied by five or more people or stands at three stories high, most UK lenders will class it as a large house in multiple occupation.

Some mortgage lenders do not offer buy to let mortgages on HMO properties, so you will need to speak to a specialist HMO mortgage adviser in order to get the right mortgage advise and the best product available.

Why HMO’s are a popular form of property investment?

HMOs have become a popular choice with both tenants and landlords alike. From a tenant perspective, the rent is lower, usually covers all the running costs, and therefore makes it more affordable than having to let out a whole property.

From a Landlords perspective, the property will provider a greater yield as the rooms are let individually, and this will also provide a greater protection against any vacant periods as voids will generally be covered by the other rooms should a tenant leave.

Houses in multiple occupation, are not without their challenges as operating one can be hard work due to the time demands they place on landlords, however as with any buy to let property, you can get professional agents to manage the property for a more “hands off” approach.

If you’re wondering whether an HMO mortgage might be a sound investment, you should discuss the mortgage implications with a specialist mortgage adviser as not all lenders in the UK, would provide BTL mortgages for HMO properties.

Do you need a special mortgage for HMO property?

Some lenders do not lend on HMO properties as they deem them to be higher risk investments.

However as an area that has becoming increasingly popular, there are more lenders who are happy to lend on HMO properties. Our buy to let brokers are experienced in working with specialist lenders who cater to landlords with HMO property, and as there are different types of HMO’s it is imperative you get the right advise before committing to any property.

Many of the UK’s biggest lenders are unwilling to deal with aspiring HMO borrowers, but there are specialist HMO mortgage lenders out there who may be happy to offer you a buy to let agreement for a multi-let property, we can even arrange HMO mortgages for first time landlords.

Most HMO mortgage lenders in the UK apply strict lending criteria to these properties. Some impose a cap on the number of bedrooms, while others base their lending decision on whether the borrower has experience as a landlord. Aspiring HMO landlords should also be aware that some of these properties require a license from the local council which is becoming more common with the increase in HMO’s on the market to ensure the standard of property offer is maintained.

When is a commercial mortgage needed for an HMO?

A pure commercial mortgage is not required for an HMO property as a number of buy to let lenders offer favourable rates in this sector. That said, it may be the case that a commercial lender is offering better rates for somebody in your circumstances, and for particularly large HMO units, a commercial mortgage may be the most suitable option available.

A commercial lender would also be required if the property includes a commercial element, such as a downstairs shop, which is listed on the mortgage.

Are there HMO mortgages for limited companies?

In a word, yes! And if you’re set up as a limited company, it may be more tax-efficient to apply for your HMO mortgage through the company.

Not all lenders, specifically those on the high street, cater for limited companies, but ours advisers can discuss all options available to you when arranging HMO mortgages under these circumstances.

Lending criteria for buy-to-let HMO mortgages

Most HMO mortgage lenders base their eligibility criteria on factors including…

  • The number of rooms the property has
  • Whether the borrower has experience as an HMO landlord
  • Whether the property requires a license from the local council
  • How many rooms can an HMO have?

Each HMO mortgage lender will have their own criteria in respect to the maximum number of bedrooms the property can have, but most lenders in this sector will go up to a minimum of five.

When a property has more than 5 bedrooms this does change the nature of the HMO as you will generally require a change of use planning class for 6 rooms and beyond.

It isn’t just about bedrooms, of course. Some providers place a cap on the number of kitchens, with a number of them unwilling to offer mortgages on HMO properties with more than one. Others allow as many as six, and some lenders have no restrictions whatsoever.

At certain lenders, the number of stories the property has may be an issue. You might find ones who are wary of buildings with more than four, while others are happy to deal with more than that and others have no limits.

Whilst the complexities of HMO properties and HMO mortgages can seem daunting and may put investors off, our HMO mortgage team can ensure that the path to success is clear, and will be able to offer the benefit to you of our years of experience in this sector.

Minimum property value

There are also UK lenders who list a minimum property value in their HMO mortgage requirements and this can range between £50,000 and £150,000. However, it is possible to find a provider with no minimum requirement.

Do I need experience to become an HMO landlord?

There are HMO mortgage providers out there who are only willing to deal with established HMO landlords, insisting that the applicant has two or more years’ experience in this capacity. With others, one year will do and we can also offer HMO mortgages for first-time landlords.

Do I need a license to become an HMO landlord?

If the rental property you own has three or more habitable stories or is occupied by five or more people from at least two households who share facilities, you must register it with the local authority to obtain a license. A number of UK lenders tie their HMO mortgage criteria directly into this as some are unwilling to offer unlicensed HMO mortgages.

The above is only a guide for licensing for HMO’s, as more and more local authorities now run a selective licensing scheme and Article 4 areas will also require licensing regardless of size so it is of vital importance that you check with your local planning office before proceeding with any HMO conversions, or HMO purchases.

If you’re in the market for an HMO property which requires a license, but you don’t hold one, there are lenders out there who will give you a limited time frame to apply for one while the application is being processed.

If you have any questions regarding this article, would like to review our HMO Mortgage Guide or would like to speak to one of our specialist HMO mortgage team, then please contact us on +441908972491.

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