HMO mortgages

House-in-multiple-occupation mortgages (HMO mortgages) are designed for landlords renting out a property to a group of tenants who are not part of the same family or household. Typically, you need an HMO mortgage if you’re planning on renting the property you’re buying to three or more individuals. 

Here’s how HMO mortgages work, where to get one, and the risks of this type of loan.

What is an HMO?

An HMO is a house in multiple occupation – that is, a property shared by three or more tenants who are not part of the same household. It will often be a flat or house shared by students or working people who can’t afford to rent a whole property on their own.

Each unit within an HMO is rented by a  household, which can be a single person, couple or family. The households have their own private space but share other spaces, such as cooking areas, living rooms or bathroom facilities. Each usually has its own tenancy agreement, although there may be one between them in the case of students.

Some landlords like having HMOs because they tend to be more profitable. Because you can charge per room, you usually make more cash overall. However, if you are planning to buy a house to rent out in this way, you’ll need a specialist HMO mortgage. 

When do you need an HMO mortgage?

If you’re planning to buy a property that will be let to three or more people who are not part of the same household, you’ll need a specialist mortgage.

The mortgages may be advertised specifically as HMO mortgages or regular buy-to-let mortgages that allow you to borrow on HMOs. 

In Scotland and Northern Ireland, you need a licence to rent out an HMO. In England and Wales, you only need one in certain circumstances, such as a large HMO – that is more than three storeys high or let to five or more people. To get a licence, you must ensure the property meets certain standards and the manager of the house, either you or an agent, must be considered “fit and proper”. This means the manager must not have a criminal record or have breached landlord laws or code of practice. 

HMO mortgage criteria

Often, you’ll need to meet additional criteria to get an HMO mortgage. This could apply to you as a borrower or to the property you’re purchasing. Conditions could include:

• a minimum property value - often between £75,000 and £100,000

• a minimum level of experience as a standard or HMO landlord, usually 1-2 years

• a maximum number of storeys in the property – you may not be able to get a mortgage on one with more than four

• a maximum number of bedrooms in the property – often either 6 or 8

• no more than one kitchen in the property

• a communal seating area in the property 

You will also have to meet the lender’s usual buy-to-let lending criteria on aspects such as your age, income and credit history.

The maximum percentage of the property’s value you can borrow (known as the loan-to-value or LTV) is usually 75%, although it is possible to find HMO mortgages up to 80% LTV.

As with buy-to-let mortgages, loans for HMOs are usually taken out on an interest-only basis, so the rent you expect to get must be more than the interest payments. Rental income must usually be at least 125% of the interest. 

Lenders also often use a higher interest rate – 5.5%, for example – when calculating this to make sure you would still be able to afford the repayments if rates rose. 

These calculations are known as stress tests and determine how much you can borrow. The lender will also look at your income and outgoings to ensure you can afford to pay back the mortgage.

Buy-to-let for HMO

Although mortgages for HMOs work in a similar way to conventional buy-to-let loans, there are some key differences. Lots of lenders are wary of HMO borrowers, particularly if you’ve never been a landlord before. However, it is possible to find specialist lenders that will offer you a loan. 

Most will have strict lending criteria, including the total number of bedrooms or the maximum storeys that the building can have. You may also need to show your experience as a landlord, and there could be rules around shared spaces.

Don’t make the mistake of simply applying for a standard buy-to-let mortgage and hoping for the best. You could find that you breach the terms and conditions.

With an HMO, you’re likely to have a higher turnover of tenants than with a single-household property. Every additional tenant comes with the risk of causing problems, including not being able to pay their rent. That’s why HMO mortgages tend to be more expensive than buy-to-let mortgages. 

Other downsides are that properties with multiple tenants may need more repairs and maintenance, and it might take more work to fill all the rooms. And, as you usually need to draw up a separate contract for each tenant and vet each one separately, it can be more time-consuming to manage than a regular buy-to-let investment. 

HMO licence costs vary depending on your local authority, but they can cost anywhere from £500 to over £1,000. You should work out whether the extra costs involved make it worth investing in an HMO before you do it.

What HMO mortgage rates can you get?

While regular five-year fixed rate buy-to-let mortgages start at around 2%, you would pay at least 3.5% for an equivalent HMO mortgage. Most deals are two or five-year fixes, although some variable and tracker rates are available. 

When taking out any mortgage, you should look at the set-up fees and interest rate to compare the total cost of the deal over the initial period, after which you can remortgage without paying early repayment charges. Mortgages with the lowest interest rates won’t necessarily be the cheapest overall. A mortgage broker can help you with this.

The total mortgage fees could range from zero to £4,000 or more as product fees may be charged as a percentage of the loan amount. For example, if you had to pay a 2% fee on a £150,000 loan, you would pay £3,000. 

As with regular buy-to-let mortgages, you can also take out HMO mortgages as a limited company. Owning rental property within a limited company can give you tax benefits. However, income tax relief on finance costs, such as interest payments and mortgage fees, has become less generous in recent years. Since the 2020/21 tax year, relief is only available at the basic rate. 

Which lenders offer HMO mortgages?

A relatively small number of lenders offer HMO mortgages, and they are mostly niche providers rather than mainstream banks. Many only offer their deals through brokers. You may be able to find HMO mortgages through the following lenders:

• Aldermore

• Foundation Home Loans

• Kent Reliance

• Landbay

• Leeds Building Society

• LendInvest

• The Mortgage Works

• Paragon Bank

• Precise Mortgages

However, this list is not exhaustive. Speak to a broker to get a full rundown of what’s available on the market today.

Using an HMO mortgage calculator

To find out how much you could borrow, what your repayments would be and the deals you might be able to get, you can use an HMO mortgage calculator. These are often found on brokers’ websites and ask you to enter details such as the property price, how much you want to borrow and the mortgage term you’re after.

It’s good to use a few as they may give you different results. Some show you specific deals available for your needs, while others will just show you monthly repayment amounts.

The benefits of mortgage advice

As HMO mortgages are complex, you should speak to a specialist HMO mortgage broker to find the best deal for you. They will be able to look at all the products available to find the best-value options that are most suitable for your needs. Some deals are only available through brokers, so you won’t see them at all if you do the research yourself. Another benefit is that you may be able to claim compensation if you’ve been given bad advice.