HMO Mortgage Guide

Mortgages for Houses in Multiple Occupation

Houses in Multiple Occupation, commonly known as HMOs, can offer landlords a different type of property investment from a conventional Buy to Let.

Instead of renting the entire property to one household, an HMO is typically occupied by multiple people who may rent individual rooms while sharing facilities such as the kitchen, bathroom or communal areas.

From a mortgage perspective, this can make the property more specialist.

The lender may consider not only the purchase price, deposit and expected rental income, but also the number of occupants, property configuration, licensing requirements, landlord experience, valuation method and proposed tenancy arrangements.

An HMO should therefore not automatically be approached in the same way as a standard Buy to Let property.

This guide explains some of the main mortgage considerations.

What Is an HMO?

HMO stands for House in Multiple Occupation.

Broadly, it describes certain properties occupied by people who do not form a single household and who share facilities within the property.

However, the legal and licensing definition of an HMO is more detailed than the mortgage-market terminology.

Whether a particular property requires an HMO licence can depend on the property, occupancy and applicable local authority requirements.

Landlords should therefore establish the regulatory and licensing position separately rather than relying solely on the mortgage lender's classification.

How Is an HMO Mortgage Different From a Standard Buy to Let Mortgage?

A conventional Buy to Let property may be rented to a single household under one tenancy arrangement.

An HMO can involve multiple occupants, individual rooms and different tenancy structures.

This can introduce additional considerations for a mortgage lender.

The lender may want to know:

• how many bedrooms the property has;

• how many people will occupy it;

• whether rooms will be rented individually;

• what facilities are shared;

• whether an HMO licence is required;

• whether the property already has the appropriate permissions;

• the expected rental income;

• whether the applicant has landlord experience; and

• how the property will be valued.

Not every Buy to Let lender accepts HMOs.

Those that do can also have significantly different criteria.

Do I Need a Specialist HMO Mortgage?

Potentially.

If a property will be operated as an HMO, it is important that the mortgage lender is aware of its intended use.

A standard Buy to Let mortgage should not simply be arranged on the assumption that the property will be let to one household if the actual intention is to operate it as an HMO.

The proposed letting arrangement needs to fit the lender's criteria.

Some lenders specialise in more complex landlord and HMO lending, while others may restrict or exclude this type of property.

Does an HMO Need a Licence?

Some HMOs require licensing, while others may be subject to different local requirements.

The licensing position can depend on factors including the number of occupants, number of households, property configuration and the rules applying in the local authority area.

Local authorities can also operate additional or selective licensing schemes.

It is therefore important to establish the requirements applying to the specific property and location.

A mortgage lender may want evidence that the appropriate licence is already in place or that the property is capable of obtaining the required licence.

Mortgage approval does not replace the landlord's responsibility to comply with applicable licensing and housing requirements.

Check the Property Before Making an Offer

If you are specifically looking for an HMO, the legal use and physical configuration of the property should be investigated early.

Questions worth considering can include:

• Is it already operating as an HMO?

• Does it have an HMO licence where required?

• Is the existing licence transferable?

• Will a new licence be required?

• Does the property have the necessary planning position?

• Have previous alterations received the necessary approvals?

• Does the layout satisfy applicable requirements?

• Are fire and safety measures appropriate?

• Will the intended number of occupants be permitted?

Your solicitor, local authority and other relevant property professionals should be involved where appropriate.

A mortgage offer alone does not confirm that the property can legally be operated in the way you intend.

Does Planning Permission Matter?

It can.

Planning requirements and HMO licensing are separate considerations.

A property could potentially require attention from both perspectives.

The planning position can also depend on the type of HMO, previous use of the property and local planning rules.

Some local authorities may have additional restrictions affecting changes of use.

It is therefore important not to assume that obtaining an HMO licence automatically means all planning requirements have been satisfied, or vice versa.

Appropriate planning and legal advice should be obtained where necessary.

Do I Need Previous Landlord Experience?

This depends on the lender and the property.

Some lenders may consider first-time landlords purchasing an HMO, while others may prefer applicants with previous Buy to Let or HMO experience.

Lender appetite can also depend on how complex the property is.

For example, a relatively straightforward smaller HMO may be viewed differently from a large property with numerous letting rooms and more complex management requirements.

If you are a first-time landlord considering an HMO, establishing lender criteria before committing to a property can be particularly important.

How Much Deposit Is Needed for an HMO Mortgage?

There is no single deposit requirement that applies to every HMO mortgage.

The amount required depends on factors including:

• lender;

• property;

• mortgage product;

• applicant experience;

• rental income;

• property value;

• number of letting rooms;

• ownership structure; and

• overall circumstances.

The relationship between the mortgage and property value is known as the loan-to-value, or LTV.

For example, if an HMO were valued at £300,000 and the mortgage were £225,000, the mortgage would represent 75% of the property's value.

That would be a 75% LTV mortgage.

A larger deposit reduces the LTV and can potentially increase the range of available mortgage options, although this is not guaranteed.

How Do Lenders Assess HMO Rental Income?

Rental income can be particularly interesting with an HMO because several rooms may generate separate rental payments.

However, lenders do not all assess HMO rent in exactly the same way.

The lender's valuer may be asked to provide an assessment of the property's rental value.

Depending on the lender and property, the valuation may consider the expected income generated by the HMO.

The lender can then apply its own rental affordability calculation.

This may involve an Interest Coverage Ratio and a mortgage stress rate.

The fact that the combined advertised room rents appear to comfortably exceed the mortgage payment does not automatically mean the property will satisfy a lender's affordability requirements.

What Is an Interest Coverage Ratio?

An Interest Coverage Ratio, commonly called ICR, is used by many Buy to Let lenders to assess rental affordability.

In simple terms, the lender wants the expected rent to provide more than enough coverage for the mortgage interest figure used in its calculation.

The lender may also calculate this using a stressed interest rate rather than simply the actual initial mortgage payment.

Different lenders can apply different calculations.

This means exactly the same HMO could potentially support different mortgage amounts with different lenders.

How Is an HMO Valued?

HMO valuation can be more complicated than the valuation of a conventional residential property.

Depending on the lender, property and circumstances, the valuation approach can differ.

Some properties may be considered largely by reference to comparable residential property values.

More specialist properties may require a different approach where factors such as rental income and the property's operation as an investment become more relevant.

You should not assume that the value of an HMO will automatically be calculated by taking its annual rent and applying an investment multiplier.

The valuation methodology ultimately depends on the property and lender requirements.

Purchase Price and Mortgage Valuation Are Not Always the Same

This is particularly important for investors.

You might agree to buy an HMO for a particular price based on its existing rental income and perceived investment value.

The mortgage lender's valuer may reach a different figure.

If the lender's valuation is lower than the agreed purchase price, the lender may base its mortgage calculation on the lower valuation.

This could mean that you need to contribute a larger deposit than originally expected.

A strong rental income does not guarantee that the lender's valuation will match the purchase price.

Can I Convert a Normal House Into an HMO?

Potentially, but the financing needs to reflect what you are actually planning to do.

If you purchase a conventional house with the intention of carrying out works before operating it as an HMO, there may be several stages to consider.

These can include:

• purchasing the property;

• funding renovation or conversion works;

• obtaining relevant planning permission;

• obtaining building regulation approval;

• satisfying licensing requirements;

• meeting safety requirements; and

• arranging suitable long-term finance.

A standard Buy to Let mortgage may not necessarily be appropriate where substantial work is required before the property can be rented.

The funding strategy should therefore be considered before the purchase.

What If the Property Isn't Mortgageable in Its Current Condition?

Some properties require significant renovation or conversion before they are suitable for conventional mortgage lending.

In these circumstances, alternative short-term property finance may sometimes be considered.

For example, a landlord might use appropriate short-term finance to acquire and improve a property before refinancing onto a longer-term HMO mortgage once the work has been completed.

This type of strategy carries additional risks and costs.

The exit strategy is particularly important because the ability to refinance later is not guaranteed.

Any proposed refurbishment and refinancing strategy should therefore be assessed carefully before committing to the purchase.

Can I Buy an HMO Through a Limited Company?

Potentially, yes.

Many property investors consider purchasing HMOs through limited companies.

The lender may assess both the company and the individuals behind it.

This can include:

• directors;

• shareholders;

• personal credit history;

• landlord experience;

• property;

• expected rent;

• deposit; and

• wider property portfolio.

Personal guarantees may also be required.

Whether company ownership is appropriate should not be decided solely on mortgage availability.

Tax, accounting and legal implications should be discussed with appropriately qualified professionals.

Can a New Limited Company Buy an HMO?

Potentially.

Some lenders may consider newly established property companies, while others may have additional requirements.

However, HMO lending can involve two separate considerations:

the experience and structure of the borrower, and
the complexity of the property.

A new company does not necessarily prevent HMO borrowing, but the directors' personal experience and wider circumstances can become particularly relevant.

Can a First-Time Landlord Buy an HMO?

Potentially, although lender choice may be more restricted.

Some lenders may want previous landlord experience before considering HMO finance.

Others may consider first-time landlords depending on the property and overall circumstances.

The more complex the proposed HMO, the more likely experience can become an important underwriting consideration.

For a first-time landlord, it can therefore be useful to establish the mortgage position before making an offer.

What About Portfolio Landlords?

Existing portfolio landlords may have access to lenders comfortable with experienced property investors and specialist property types.

However, the lender may also assess the wider portfolio.

This can include:

• existing property values;

• mortgage balances;

• rental income;

• portfolio loan-to-value;

• existing mortgage commitments; and

• ownership structures.

The HMO being purchased may therefore satisfy its own rental calculation while the lender still needs to consider the wider portfolio.

Interest-Only or Repayment?

HMO mortgages may be available on an interest-only or capital-and-interest repayment basis, depending on the lender and product.

With interest-only, monthly contractual payments generally cover the mortgage interest rather than reducing the original capital balance.

The original mortgage debt therefore remains outstanding and must eventually be repaid.

With a repayment mortgage, the monthly payment includes both interest and capital, so the mortgage balance should reduce over the term if the required payments are maintained.

Cash flow is often an important consideration for property investors, but the repayment structure should also fit the longer-term investment strategy.

Don't Judge an HMO Only by the Headline Rent

One attraction of an HMO can be the potential to receive rent from several rooms.

However, gross rental income is not the same as profit.

An HMO may also have significant running costs.

These could include:

• mortgage payments;

• letting and management fees;

• utilities where included in rent;

• council tax where applicable;

• insurance;

• repairs;

• maintenance;

• cleaning;

• gardening;

• licensing;

• safety requirements;

• compliance costs;

• replacement furniture;

• service charges where applicable;

• accounting costs; and

• taxation.

The level of management can also be greater than with a conventional single-let property.

The overall investment should therefore be assessed using realistic costs rather than headline rental income alone.

Allow for Empty Rooms

An HMO does not necessarily need to be completely empty before rental income falls.

Individual rooms can become vacant at different times.

For example, a six-room HMO could temporarily have only five paying tenants.

Mortgage payments and many other expenses continue regardless.

When assessing the investment, it can therefore be sensible to consider how the property would perform if occupancy were lower than expected for a period.

Consider Management Costs

HMOs can require more active management than conventional Buy to Let properties.

More tenants can mean more:

• tenancy changes;

• communication;

• maintenance;

• inspections;

• cleaning;

• administration; and

• compliance responsibilities.

Some landlords manage HMOs themselves, while others employ specialist letting or management agents.

Management costs should be considered when assessing whether the investment works financially.

HMO Insurance

A standard residential insurance policy may not be appropriate for an HMO.

The insurance needs to reflect how the property is actually being used.

Mortgage lenders can also have requirements relating to buildings insurance.

Depending on the property and operation, landlords may consider different forms of landlord and property-related insurance.

The precise cover required should be discussed with an appropriate insurance professional.

Fire and Safety Requirements

HMOs can be subject to specific property safety requirements.

These may involve areas such as:

• fire detection;

• escape routes;

• fire doors;

• electrical safety;

• gas safety;

• room sizes;

• communal areas; and

• property condition.

The exact requirements depend on the property and applicable regulations.

These responsibilities sit outside the mortgage itself but can have a major impact on whether the property can be legally and safely operated as intended.

Does the Location Matter?

Location matters for both the investment and the mortgage.

From an investment perspective, landlords may consider tenant demand, achievable room rents, local employers, universities, transport and competing accommodation.

From a regulatory perspective, local authority requirements can also differ.

A strategy that works for an HMO in one location may not work identically elsewhere.

Local research is therefore particularly important before purchasing.

What Documents Might Be Required?

HMO mortgage requirements vary between lenders, but information requested may include:

• proof of identity;

• proof of address;

• bank statements;

• evidence of income;

• evidence of deposit;

• existing mortgage information;

• property portfolio details;

• evidence of landlord experience;

• company information where applicable;

• expected rental income;

• tenancy information;

• HMO licence details where applicable; and

• information about the property.

The lender may request additional documentation depending on the transaction.

Remortgaging an HMO

An existing HMO may potentially be remortgaged, subject to lender criteria.

Reasons might include:

• an existing mortgage deal ending;

• changing lender;

• raising capital;

• refinancing previous short-term borrowing;

• restructuring the mortgage; or

• releasing equity for another property investment.

The lender may reassess the property, rental income, licensing position and applicant circumstances.

For portfolio landlords, the wider portfolio may also be considered.

Releasing Equity From an HMO

If an HMO has increased in value or the existing mortgage balance has reduced, there may be equity in the property.

Subject to lender criteria, it may be possible to raise additional borrowing against that equity.

However, available equity does not automatically mean the full amount can be borrowed.

The lender will still consider factors such as:

• maximum LTV;

• rental affordability;

• property value;

• existing mortgage;

• purpose of funds;

• applicant circumstances; and

• wider portfolio.

Increasing borrowing also increases the financial commitment attached to the property.

The HMO Mortgage Process

Although every case is different, an HMO mortgage application may involve the following stages.

1. Understand the Property

Establish whether the property is already an HMO or will be converted into one, together with the proposed number of rooms and occupants.

2. Establish the Regulatory Position

Investigate licensing, planning and other property requirements with the relevant professionals and authorities.

3. Review Your Circumstances

Consider deposit, income, credit history, landlord experience, ownership structure and existing property portfolio.

4. Assess Rental Affordability

Expected rental income and lender stress-testing requirements can be considered.

5. Research Suitable HMO Lenders

Potential lenders can be assessed against the property, applicant, experience and ownership structure.

6. Submit the Mortgage Application

The application and supporting documentation are provided to the lender.

7. Property Valuation

The lender arranges an appropriate valuation.

For an HMO, this can be particularly important because both property value and rental assessment may influence the application.

8. Underwriting

The lender assesses the applicants, property, rental income, licensing position and other relevant information.

9. Mortgage Offer

If the lender is satisfied, a formal mortgage offer may be issued.

10. Legal Work and Completion

Your solicitor completes the legal work required before the transaction completes.

HMO Property Checklist

Before purchasing an HMO, consider investigating:

• purchase price;

• available deposit;

• source of deposit;

• number of bedrooms;

• intended number of occupants;

• expected room rents;

• realistic occupancy;

• HMO licensing;

• planning position;

• building regulations where relevant;

• property condition;

• fire and safety requirements;

• landlord experience requirements;

• mortgage availability;

• ownership structure;

• management costs;

• utility costs;

• insurance;

• maintenance;

• financial reserves; and

• your longer-term exit strategy.

For a conversion project, the cost and funding of the required works should also be considered carefully.

Speak to Cambs Ely Mortgages About HMO Mortgages

Whether you're purchasing your first HMO, expanding an existing property portfolio, refinancing an HMO or considering a property that needs conversion, we can discuss your circumstances and help you understand the mortgage and property finance options available.

Cambs Ely Mortgages provides Buy to Let and specialist property finance advice to landlords and property investors in Ely, Cambridge, Cambridgeshire and across England, with remote appointments available.

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Important Information

The information contained in this guide is intended for general educational purposes and does not constitute personalised mortgage, investment, financial, legal, planning, accounting or tax advice.

HMO mortgage availability, rental affordability calculations, loan-to-value limits, property requirements, landlord experience requirements and lender criteria depend on individual circumstances, the property and the relevant lender.

HMO licensing, planning and regulatory requirements can vary according to the property and local authority area. Appropriate checks should be made with the relevant local authority and professional advisers before proceeding.

Property investment involves risk. Rental income, occupancy levels and property values are not guaranteed, and you remain responsible for mortgage payments during periods when a property is not generating the expected rental income.

Your property may be repossessed if you do not keep up repayments on your mortgage.

The Financial Conduct Authority does not regulate some forms of Buy to Let mortgage.