HMOs and How to Finance Them
Want to invest in an HMO but not sure where to start? We spoke to a mortgage broker to gather all the information you need to know. Paul Martins, head of buy-to-let at Mortgages for Business shares his knowledge.
What is an HMO?
According to Gov.uk, a property is classed as a House of Multiple Occupation if it is lived in by at least three tenants, forming more than one household AND the tenants share a toilet, bathroom or kitchen facilities.
The property is classed as a large HMO if it is at least three storeys high, has at least five tenants forming more than one household AND the tenants share a toilet, bathroom or kitchen facilities. A household can be a single person or members of the same family who live together.
Typically, HMOs can be shared houses, blocks of converted flats, hostels, bedsits or privately operated halls of residence. HMOs are also commonly known as multi-lets and student lets.
Crucially, if a property is classified as an HMO, special legislation applies and it may need a licence from the local authority/council to operate.
From a lender’s perspective, HMOs can be let on a single Assured Short-hold Tenancy (AST) agreement, which includes all of the tenants. Or each tenant can have their own AST.
What are the maximum rooms allowed in an HMO?
As far as I am aware, in theory, there is no limit. But the more rooms (normally more than 6/7), the more niche/expensive the mortgage products become.
How many rooms does a house need to have before it is classed as an HMO?
I think that legislation determines HMOs on the number of households, not the number of rooms. However, from a lender’s perspective, it’s normally 3-5+ bedrooms, but this does vary.
What is the optimum number of people needed in an HMO to realise a good ROI?
Each HMO is different but as a guide, probably 4+ tenants will generate a good return on investment.
Do you need a licence to own an HMO?
Not necessarily. Every local authority has its own licensing rules; however, new legislation/rules are expected to be introduced at some point in 2018, so this could all change.
Who is the typical owner of an HMO?
Generally, an experienced residential landlord because HMOs can be more time-consuming and challenging to operate. I wouldn’t recommend starting with an HMO if you are new to buy-to-let. Some lenders will only lend on HMOs to experienced landlords. Only a few will consider lending to a first-time landlord looking to buy an HMO.
Who is the typical renter in an HMO?
Traditionally, HMOs have been inhabited by young professionals or students, although the shortage in housing generally has meant that people of all ages and walks of life are becoming HMO dwellers.
What typical yields can you expect from an HMO?
According to the Complex Buy to Let Index published by Mortgages for Business, average gross yields for HMOs stood at 9.2% in Q3 2017, compared to just 5.5% for standard buy-to-let property.
How do lenders and valuers assess HMOs?
How much you can borrow will depend upon which valuation the lender uses to determine affordability. Many lenders offer specific buy-to-let mortgage product ranges for HMOs and they often require HMOs to be valued in two ways:
1. On a bricks and mortar basis, so that in the event of repossession they know how much they might realise in a quick, forced sale.
2. On an investment basis, i.e. based on the rental income generated by all tenants assuming full occupancy
Is mortgage funding for HMOs easy to secure?
Borrowers and properties are subject to the same scrutiny as those looking to take on a standard buy-to-let mortgage. However, most lenders prefer borrowers to have some landlord experience before they will lend on an HMO.
What types of funding are available?
Depending on the property and the circumstances, HMOs can be financed with buy-to-let mortgages, bridging loans and commercial mortgages.
With a buy-to-let mortgage you can borrow up to 85% loan to value, although up to 75-80% is more achievable realistically. There are both variable and fixed rates available to personal borrowers and those who are looking for finance through a limited company.
Are there as many mortgage products available for HMOs as standard houses?
No. A quick search on our Buy to Let Mortgage Calculator and Rate Finder shows that around 15% of buy-to-let mortgages are available on HMOs. But don’t despair, that’s in excess of 200 products, which represents plenty of choice.
Do rates tend to be higher, lower or the same as they are for ‘normal’ properties?
Pricing tends to be a bit higher because many mainstream buy-to-let mortgage lenders, which offer some of the very cheapest rates will not lend on HMOs. This is because they take more time, knowledge and skill to underwrite. Mortgages for HMOs tend to be the preserve of the specialist lenders such as Keystone Property Finance, Paragon and Kent Reliance – all of which can only be accessed via a mortgage broker.
What happens when it comes to re-mortgaging an HMO?
Remortgaging an HMO is the same process as remortgaging any other buy-to-let property. Your broker will recommend rates that may be with your existing lender or a new one. If you stay with the same lender you may find that the process is quicker and involves less paperwork.
Where are the best performing areas in the UK for HMOs?
I wouldn’t measure in areas per se, instead we find that landlords tend to target towns and cities, often with large student populations.
Anything else owners need to think about when looking at HMOs?
Always do your homework regarding location, legislation and regulations. Following a consultation in 2016, the licensing of HMOs is soon to undergo reforms, so make sure you keep abreast of developments. Take professional advice, particularly on the tax implications of operating buy-to-let property. Make sure you factor in all costs. Talk to other landlords with HMO experience. Use a specialist buy-to-let mortgage broker so you get the right finance for your specific circumstances.
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(Photo by Brian Sugden on Unsplash)