What is a HMO mortgage? – HMOs Explained

The Financial Conduct Authority does not regulate some types of buy to let or commercial mortgages.

It is not unusual for an experienced landlord to want to get involved in HMO mortgages due to the potential higher yields on offer. Not all buy to let mortgage lenders offer these and those that do can sometimes offer different interest rates on HMO mortgages than standard buy to lets. 

A typical definition of an HMO would be a property occupied by 5 or more people, 5-7 lettable rooms and property with more than one tenancy agreement in place. Houses that are subject to selective licencing are only classified as HMO’s where at least one of the above conditions are met.

An in-depth discussion on HMO mortgages

Malcolm

Hi, there it's Malcolm and Wayne. Today we are going to be talking about HMO mortgages. That means a house of multiple occupation. So typically, Wayne, the HMO landlord would have some experience of being a landlord on standard properties first?

Wayne

Yes, lenders would want to see an experienced landlord who has already got maybe a regular buy to let property because it is a more specialist area for the landlord.

Malcolm

What constitutes an HMO mortgage?

Wayne

Basically, it could be any sort of property with however many different letting rooms. If you think of, maybe let's say, a five-bed roomed townhouse, but each of those rooms are let to separate people.

So, it's almost like your own little private bedsit, if you want to think of it that way. All the rooms will have their own lockable doors. Things like local authority rules license HMOs in a different way, than it would be if you were just letting to one family in an ordinary house, so there are different licensing rules with the local authority.

Also, things like different fire regulations and so on. But typically, it would be individual letting rooms with say one kitchen, rather than five rooms with five kitchens, something like that.

The pros & cons of HMO mortgages

Malcolm

In terms of the investment opportunity here, what are the pros and cons of the HMO mortgage over, in comparison at least, to a standard family home buy to let?

Wayne

I think the main thing is the potential revenue able to be generated. If you've got five individuals, each paying you an amount for their room, that would normally add up five different lots of rent.

It would normally add up to more than it would be if you just let to one family in that house, for example. The downside is, you've got five different tenants, with five different needs.

HMO mortgages for student tenants

Malcolm

If it was a student let property, they might not maintain the property as well as other tenants?

Wayne

Exactly. Student let is a good example. It might be party central, for example. You might find that you've got more in terms of repairs and upkeep, just because generally, the individuals are less likely to want to keep it in a pristine manner.

Malcolm

There’s more of a turnover of tenants as well.

Wayne

Yes, especially in student areas, you might be having those tenants for a year and then a whole new set of tenants come in. Whereas, often in a house you might build up a relationship with the tenant that lasts for a long time.

Taking out an HMO mortgage as a landlord

Malcolm

So, it's not just students. You can get these HMO mortgages with young professionals in as well, especially in areas that housing is more expensive to come by.

What about landlords buying in their personal name or through a limited company, through an SPV, both of those options available?

Wayne

Both are available, but as always it all comes down to the individual. Usually, the individual tax situation of the landlord, whether it is more tax advantageous to do it as an SPV or just keep it in your own individual name.

You need specialist tax advice, as to what would be more suitable for you.

HMO mortgage tenancy agreements

Malcolm

Finally, would each tenant within the HMO mortgage, have their own tenancy agreement? Or could it be, for example, if it was a group of friends, one main tenant with the other tenants named on the tenancy agreement?

Wayne

Generally, it can be either and different lenders take different views on that. I guess, there are pros and cons. If you've got five different tenancy agreements, it's quite easy to replace one, without having to get a whole new tenancy agreement signed by all of them.

Some lenders prefer the security of having one single tenancy agreement, with five co-signatures.

But at the end of the day, that's where our job as a dedicated mortgage advisor would come in, is to make sure that what you propose to do is what that lender would accept.

Malcolm

Thanks, Wayne. That's really good. If you're looking for a HMO mortgage specialist, buy to let mortgage broker, we'll be here to help.

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