HMO buy-to-let mortgage
Investing in a House of Multiple Occupation (HMO) can be a lucrative opportunity in the buy-to-let market.
HMOs have the potential to maximise rental income by accommodating multiple tenants within a single property.
To make the most of this investment strategy, it is important to understand the ins and outs of HMO mortgages. We will explore together the key aspects of HMO buy-to-let mortgages, from qualification criteria to property considerations and rental income potential.
What is an HMO buy-to-let mortgage?
An HMO buy-to-let mortgage is specifically designed for properties classified as Houses in Multiple Occupation. These are properties rented out to three or more tenants who are not from the same household but share common facilities, such as bathrooms and kitchens.
As a buy-to-let (BTL) investor looking to purchase a house in multiple occupation (HMO), you need a specific HMO mortgage for this type of rental arrangement. Standard mortgages are not offered by lenders for HMO properties. Instead, HMO mortgages are a financing option tailored to the unique needs of landlords investing in HMO properties.
Criteria for an HMO buy-to-let mortgage
Qualifying for an HMO buy-to-let mortgage typically requires meeting specific criteria set by lenders. Factors that can influence eligibility are:
- The property’s location
- Size of the property
- Number of lettable rooms
- Licensing requirements
- The landlord’s experience
Lenders may assess the potential rental income, property valuation, and the landlord’s financial standing to determine the loan amount and terms.
Property considerations for HMO
When investing in HMO properties, certain considerations come into play. These include:
- Selecting properties in high-demand areas,
- ensuring compliance with local regulations,
- assessing the property’s suitability for multiple tenants, and
- optimising the layout for privacy and convenience.
Additionally, it is important to understand HMO licensing requirements by checking with the local authority as to how to obtain the license, how long it takes to issue, the cost and the expiration date.
Rental income potential
One of the significant advantages of HMO properties is their potential for higher rental income compared to standard buy-to-let properties. By accommodating multiple tenants, landlords can generate more cash flow and maximise returns.
However, it is essential to conduct thorough market research and analyse rental demand in the target area to estimate the potential rental income accurately.
How is an HMO different from standard buy-to-let
HMO properties differ from standard buy-to-let properties in several ways. The main two are:
- HMO properties house multiple tenants who may have individual tenancy agreements, whereas standard buy-to-let properties are typically rented to a single household.
- HMO properties often require additional licensing, compliance with specific regulations, and management considerations due to the shared facilities and higher tenant turnover.
To illustrate the potential income difference between a standard buy-to-let property and an HMO, let’s consider a property with four bedrooms. In a standard buy-to-let scenario, a family might rent the entire property for £2,500 per month. However, in an HMO setting, renting out each room individually for £950 per month per room will total £3800 rent per month.
|4 bedrooms property||Standard BLT property||HMO|
|Monthly rent||£2,500||£950 x 4 = £3800|
|Total annual income||£30,000||£45,600|
Selecting the best lender for your HMO buy-to-let mortgage
Choosing the right lender can make a big difference when securing an HMO buy-to-let mortgage. We advise on lenders specialising in HMO mortgages and understand the unique requirements of this type of investment.
We consider factors such as:
- Overall rental income generated
- interest rates,
- loan to value ratios,
- fees, and
- flexibility in repayment options.
Our mortgage brokers are experienced advisors and will quickly identify suitable lenders for your HMO investment. Give us a quick call and receive a quote for your HMO project today.
How much does an HMO buy-to-let cost to manage?
Running an HMO property involves various costs, including mortgage repayments, property management fees, licensing fees, maintenance and repairs, insurance, and utilities.
The exact costs will depend on factors such as property size, location, the level of services provided, and the average of void periods per room per year. It is essential for landlords to carefully budget and account for these expenses to ensure profitability.
Putting together a spreadsheet and running a cash flow forecast is a good idea when assessing the viability of a new HMO purchase.
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Should HMO landlords provide furniture?
Furnishing an HMO property is a decision that landlords need to make based on their target market and rental strategy.
While providing furnished accommodation can attract tenants and potentially command higher rental income, it also entails additional costs and responsibilities related to furniture maintenance and replacements. Landlords should weigh up the pros and cons and consider the demand in their local rental market.
What are the tenant criteria to rent one of the HMO bedrooms?
The tenant criteria for renting a bedroom in an HMO property can vary depending on the landlord’s preferences and any specific regulations in place.
Common requirements may include proof of employment or income, references from previous landlords, and satisfactory credit checks. Landlords often seek tenants who can demonstrate responsible tenancy and the ability to meet their financial obligations. It is worth consulting a letting agent with experience in HMO properties when looking for a tenant.
What is a large HMO?
While HMO properties refer to houses with three or fewer tenants from different households sharing facilities, a large HMO property typically refers to properties with five or more tenants forming two or more households. The property is classified as a large HMO if it meets the following three criteria:
- The property is rented to 5 or more people who form more than 1 household.
- Some or all tenants share toilet, bathroom, or kitchen facilities.
- At least 1 tenant pays rent (or their employer pays it for them).
Large HMOs are subject to additional licensing requirements and specific regulations to ensure the safety and welfare of tenants. Landlords of large HMOs must adhere to specific guidelines and may be required to obtain additional certifications and comply with fire safety regulations.
Will I need an HMO license?
Whether you need an HMO license depends on the local regulations and the specific property you own. Properties that meet the HMO definition and accommodate a certain number of tenants from different households may require a mandatory HMO license depending on the local authority guidelines.
Licensing requirements may vary across different regions, so do your research and comply with the regulations specific to your area.
How much can I borrow on an HMO buy-to-let mortgage?
The amount you can borrow on an HMO mortgage depends on several factors, including the rental income potential of the property, your financial standing, and the lender’s criteria. Generally, lenders offer HMO mortgages with loan to value (LTV) ratios up to 80%, although it differs from lender to lender.
The key figure in calculating your maximum mortgage amount for an HMO is knowing the rental income achievable per lettable room.
Take the next step to invest in HMO properties with confidence. Call us today and let our specialised brokers guide you towards your HMO buy-to-let mortgage quote.
What are the types of HMO?
HMOs can take various forms, each with its own characteristics and rental strategies. Some common types of HMOs include:
Student HMOs: Properties rented to students attending universities or colleges.
Professional HMOs: Properties rented to working professionals, often located in urban areas close to employment areas.
Serviced Accommodation HMOs: Properties offering short-term accommodation to business travellers or tourists.
Investing in a buy-to-let HMO property can bring higher rental potential than a standard buy-to-let property. If you have a higher risk tolerance and are looking for more diversification in your investments, an HMO is a good option. By aligning your investment strategy with market demands, you can start with HMO buy-to-let investments and maximise your returns in the world of property investment. Speak today with a knowledgeable Home of Mortgages broker, ask them for a mortgage quote, and have them address any queries you may have.
What are the advantages of buy-to-let HMO mortgages?
Buy-to-let HMO mortgages can offer several advantages for investors, including higher rental income potential, diversification of income sources through multiple tenants, and the opportunity to maximise property value through efficient use of space. HMO properties can provide greater cash flow and potentially higher returns compared to traditional buy-to-let investments, but they demand more effort to manage more than one tenant and also to maintain the property and furniture.
How do I choose the right lender for a buy-to-let HMO mortgage?
There are a few things to consider before choosing the right lender for your buy-to-let HMO mortgage. Look for lenders with experience in financing HMO properties, competitive interest rates, flexible terms, and a strong reputation. Consulting with a Home of Mortgages broker who specialises in HMO mortgages can give you the confidence to have a mortgage advisor by your side and identify lenders that align with your investment goals.
What is an HMO mortgage stress rate?
An HMO mortgage stress rate refers to the minimum interest rate used by lenders to assess the borrower's affordability during the application process. It is typically higher than the actual mortgage interest rate to test the borrower’s affordability in that case. This way lenders will ensure that borrowers can comfortably fulfil their mortgage repayments even if interest rates increase in the future.
Lenders will calculate affordability by requiring a percentage of either 25% or 45% more rental income than the monthly payment when using the stressed interest rate.
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Remember | Your home may be repossessed if you do not keep up repayments on your mortgage.
Not all Buy to Let Mortgages are regulated by The Financial Conduct Authority.