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

An HMO mortgage is not simply a conventional buy-to-let mortgage for a property with more bedrooms.

The property, tenancy structure, licensing, planning position, landlord experience, rental assessment and valuation can all influence the finance available.

That means a lender perfectly comfortable with a standard single-family buy-to-let may not necessarily lend on an HMO.

What Is an HMO?

HMO stands for House in Multiple Occupation.

Broadly, an HMO involves people from more than one household occupying a property and sharing facilities.

However, the legal definitions governing HMO licensing and planning can be more detailed.

Whether a particular property requires an HMO licence or specific planning permission should be confirmed with the relevant local authority and, where appropriate, a suitable professional adviser.

Do not rely upon the mortgage lender to establish your planning or licensing obligations.

Why Do Mortgage Lenders Treat HMOs Differently?

An HMO can have a different risk profile from a conventional buy-to-let.

A lender may consider:

• Number of bedrooms
• Number of occupants
• Number of households
• Shared facilities
• Property layout
• Licensing
• Planning
• Article 4 restrictions
• Fire-safety requirements
• Tenant profile
• Rental structure
• Landlord experience
• Property value
• Marketability

Criteria can differ considerably between lenders.

What Is Article 4?

In some areas, local planning authorities use Article 4 directions to remove certain permitted development rights.

This can affect the ability to change a property's use to an HMO without a planning application.

For an investor, this can be extremely important.

A property being physically suitable for HMO occupation does not automatically mean the proposed use is permitted.

Planning and mortgage finance therefore need to be considered separately.

HMO Licensing

Depending upon the property, occupancy and local authority rules, an HMO may require a licence.

Local authorities can also operate additional licensing schemes.

A mortgage lender may require evidence that appropriate licensing is in place or can be obtained.

Again, lender acceptance does not replace the landlord's legal obligations.

How Is HMO Rental Income Assessed?

An HMO can generate rent differently from a standard buy-to-let.

Instead of one household paying one monthly rent, several occupants may each pay for individual rooms.

For example:

Room 1: £700 Room 2: £700 Room 3: £750 Room 4: £750 Room 5: £800

That creates a different rental model from a conventional single tenancy.

Lenders can differ in how they assess the rent and the amount of borrowing it supports.

How Is an HMO Valued?

This is an important specialist issue.

Depending upon the property and lender, valuation approaches can differ.

Potential concepts include:

Bricks-and-mortar value

Broadly, the value of the physical property based upon comparable residential transactions.

Investment or commercial-style valuation

In appropriate circumstances, greater consideration may be given to the property's income-producing characteristics.

Not every HMO qualifies for an investment-style valuation.

Do not assume that converting a property to an HMO automatically increases its mortgage valuation because the room rents are higher.

Landlord Experience

Some lenders are comfortable with first-time landlords purchasing certain HMOs.

Others may require previous landlord or HMO experience, particularly for:

• Larger HMOs
• Complex properties
• Multi-unit structures
• Higher bedroom numbers

The applicant's experience can therefore affect lender choice.

Limited Company HMO Mortgages

Many property investors choose to hold investment property within a limited company.

Mortgage lenders can offer HMO finance to qualifying limited companies, but the company structure must fit the lender's criteria.

Considerations can include:

• Company type
• SIC codes
• Directors
• Shareholders
• Personal guarantees
• Existing portfolio

Whether purchasing through a company is appropriate is a separate tax and legal question requiring appropriate professional advice.

Portfolio Landlords

Where an applicant already owns several mortgaged investment properties, the lender may assess the wider portfolio as well as the proposed HMO.

That can involve:

• Total borrowing
• Portfolio value
• Rental income
• Overall leverage
• Background properties

A single attractive HMO investment therefore cannot always be considered completely in isolation.

Refurbishing a Property Into an HMO

Sometimes the property is not ready for immediate letting.

For example, an investor may purchase a house intending to:

• Reconfigure rooms
• Install bathrooms
• Upgrade fire precautions
• Complete structural work
• Obtain licensing
• Create an HMO

A standard HMO mortgage may not necessarily be appropriate from day one.

Depending upon the works and property condition, short-term finance such as bridging may potentially form part of the strategy before refinancing onto longer-term HMO finance.

That introduces additional cost and risk and requires careful planning.