HMO Mortgage Guide

We source and arrange HMO mortgages for first-time and experienced HMO landlords. 

With access to hundreds of HMO products from the whole market and with no broker fees to pay, you can be sure we’ll find the best HMO mortgage for you.

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We find the best HMO Mortgages from the UKs leading lenders

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and many more…

HMO Mortgage Update – as of 01st May 2024.

Following the latest Bank of England base rate review on the 21st March 2024, the base rate is maintained at 5.25%, with a potential base rate reduction expected mid-year. Next Bank of England base rate review is due 9th May 2024.

Author: Darren Ferguson – HMO Specialist

First Published: 04th May 2023

Last Updated: 01st May 2024

Read Time

Read Time – Approximately 8 Minutes

Our HMO mortgage guide should be helpful, but it’s always best to speak with an adviser to discuss your own personal circumstances and to get the best advice. Call us on 01604 212879 should you have any questions.

HMO Basics

What is a HMO Property?

A HMO, or House of Multiple Occupation, is a property that is let to multiple tenants, typically 3 or more, that form at least 3 separate families or households and share common facilities, such as a bathroom and kitchen, but each tenant or ‘household’ has their own bedroom.

Each tenant may have their own AST, or in certain scenarios, such as a student let, all the tenants might be named on the same AST.

What is a HMO Mortgage?

It’s a buy-to-let mortgage but specifically designed for properties with multiple tenants. As the property is a HMO rather than a standard buy-to-let, there will be more stringent criteria a borrower will need to meet, and affordability could also be stressed more harshly. Mortgage lenders have specific mortgage products designed for HMO properties.

What is the difference between a normal buy-to-let property and a HMO?

A standard buy to let property will have one tenancy agreement, typically let to one family unit and the tenant will occupy and have use of the full property.

A HMO property will have multiple, typically unrelated tenants, who each have their own bedroom, and will share the common facilities of the house, such as the kitchen and bathrooms. Each occupant will be charged a separate amount of rent. 

Lenders offer specific HMO products for HMO properties, typically with different products for small and large HMO’s.

Why are HMOs a popular type of investment property?

There are a number of reasons why HMOs are popular with landlords, the main reason being the greater amount of rent and, therefore, the higher yield that can be achieved with having multiple tenants.

With higher interest rates and increasing costs, the margins on standard buy-to-let properties are squeezed tighter and tighter and many landlords are moving over, or converting existing properties to a HMO set up to benefit from the increased level of income these types of property can offer.

Other reasons might include:

 

  • Reduced impact from rental voids – losing one tenant won’t have the same impact on your income
  • In the right location, demand could be high, reducing the risk of rental voids.

HMO mortgages

Can I qualify for a HMO mortgage?

To qualify for a HMO mortgage you’ll typically need to meet 2 key criteria:

  • Be a homeowner (known as an owner-occupier)
  • Have a minimum of 12 months landlord experience with an existing buy-to-let property

Experience is the key factor with HMO lenders, however, there are now a good number of lenders that can offer HMO Mortgages to applicants or first-time landlords without the required experience. You can find out more by reading our HMO guide for first-time landlords. The same experience criteria typically applies to multi-unit block properties.

For first-time buyers, the options are a little more restrictive with perhaps one or two lenders at best who will lend on a HMO property.

With regard to income, many lenders also now offer HMO mortgage products with no minimum income requirements. In short, HMO mortgages are now becoming increasingly accessible and we can generally arrange finance for most borrowers.

To find out more about qualifying for a HMO mortgage, you can call us on 01604 212879 or request a quote below.

 

What deposit do I need for an HMO mortgage?

As with any mortgage, the greater the deposit you can put down, the lower the interest rate will typically be.

For a HMO mortgage, the lowest deposit you’ll require is 15%, which would equate to an 85% LTV. However, in the current market, there is only one lender offering HMO mortgages up to 85% so options will be very limited, and due to the high LTV, rates will be at the top end also.

There are 4 or 5 other lenders who can offer HMO funding up to 80%, but most lenders will work to a maximum LTV of 75%, requiring a minimum 25% deposit.

Can I get a buy-to-let mortgage on a HMO property?

In the vast majority of cases, a HMO property will require a HMO mortgage, but there are certain instances where this is not the case, and a standard buy-to-let mortgage can be offered, often at lower rates, with lesser fees.

We have access to a couple of lenders who can offer a standard BTL product on a property that will be used for HMO purposes, under the following circumstances.

Lender 1 criteria:

  • All the tenants are named on the same AST (such as a student let)
  • Maximum of 5 tenants
  • The property must be owned personally, not in a limited company.
  • For the purposes of calculating the loan amount, the rental income will be based on what is achievable as a single standard let, not as a HMO, which could therefore restrict the borrowing amount. (although the lender will be aware it is to be used for HMO purposes)

Lender 2 criteria:

  • Maximum of 4 tenants
  • Available to individual and limited company borrowers
  • Individual or group AST
  • Affordability will also be calculated on the basis of a single standard let, not HMO.

What are current HMO mortgage rates?

HMO mortgage rates will vary dependent upon a number of factors, including but not limited to:

  • The loan-to-value required
  • The type of product selected
  • The size of the HMO (number of rooms)
  • Your credit profile
  • The tenant profile
  • Landlord experience

Lenders will offer a range of products, with the lowest rates having the highest arrangement fees.

As of the 01st May 2024, HMO rates are starting @ 3.14% with a 9.99% lender arrangement fee. More typically however, keeping lender fees reasonable, rates will range between 5% and 6%.

Do I need a minimum income to get a HMO mortgage?

No, there are a number of lenders that can offer HMO mortgages that have no minimum income requirement. You’ll still need to be able to evidence an income of some sort, which might be from employment, self-employment, or rental income from other properties.

For evidence of income, lenders will typically want to see the following:

 

  • If you are employed – last 3 months payslips.
  • If you are self-employed – last 2 years tax calculations, with the corresponding tax year overviews.

HMO Mortgage Affordability

Affordability for HMO properties is calculated using a stress test calculation similar to that of a standard buy-to-let property.

The stress test applied depends on a number of factors, and you can find out more about how this is calculated by reading our guide to buy-to-let stress testing.

Due to the nature of a HMO producing a higher level of income and higher yield, the stress tests for HMO’s will typically have a higher threshold to meet, as shown by the image opposite, from one of our lenders.

HMO Stress Test example

(The image above shows the Interest Coverage Ratio for an HMO as 175%, compared to a standard BTL of 130%. ICR rates will vary from lender to lender, as will the potential borrowing amount)

 

HMO Fees

What are the fees with a HMO Mortgage?

Fees for HMO Mortgages can be a little higher than those of standard buy-to-let properties, particularly for large HMO set ups.

Application Fee

Generally paid at the point of application, is a fee charged for reviewing the application and is usually non-refundable. This will typically be in the range of £100 to £200. (not all lenders will charge this)

Valuation Fee

Paid at the point of application and is the fee charged by the lender for a standard mortgage survey. The price payable depends upon the property’s value, and the fee payable will also depend upon the type of valuation being instructed. Most lenders will only do a valuation for mortgage purposes, which will be a standard brick-and-mortar valuation. The cost of an investment valuation will be higher.

Lender Arrangement Fee

The main fee the lender will charge and can be anything from a flat fee (typically £995) to a percentage of the loan amount (typically 1% to 2%). This fee can either be paid upfront or added to the loan.

Legal Fees

As well as your own, sometimes you’ll also have to cover the costs of the lender’s legal fees. Always check with your adviser for details of any lender legal fees payable.

HMO Mortgage Lenders

Which lenders offer HMO Mortgages?

We work with all the leading specialist and commercial finance lenders that offer HMO funding. A list of HMO mortgage lenders is shown below:

 

  • Aldermore Mortgages
  • Bath Building Society
  • CHL Mortgages
  • Fleet Mortgages
  • Foundation Home Loans
  • Hampshire Trust Bank
  • Kensington Mortgages
  • Kent Reliance
  • Keystone
  • Interbay Commercial
  • Landbay
  • LendCo
  • Lend Invest
  • Molo Finance
  • MT Finance
  • Paragon Bank
  • Precise Mortgages
  • Quantum Mortgages
  • Shawbrook Bank
  • The Mortgage Lender
  • The Mortgage Works
  • United Trust Bank
  • Vida Home Loans
  • West One Loans
  • Zephyr Homeloans

Call us on 01604 212879 to discuss your HMO requirements and get a no-obligation quote.

HMO criteria

What other criteria will HMO lenders have?

Along with landlord experience, HMO lenders will have a range of other criteria that both the applicant and the property will need to meet, as follows:

The number of rooms – lenders will have different products depending on the number of bedrooms the HMO will have. Small HMO’s tend to be HMO’s up to 6 bedrooms, with anything over 6 rooms generally being classed as a large HMO and therefore subject to different products.

It should be noted that if you are first-time landlord seeking a HMO mortgage, lenders will typically limit lending to properties with a maximum of 6 bedrooms.

Number of Kitchens—This is a factor that often comes up and can cause issues. Many lenders’ criteria state that the property can only have one kitchen, but we often see HMO properties with more than one kitchen. A room that might have a separate sink and some cupboard units could be classed as an additional Kitchen and fail a valuation. If you are unsure, it’s best to call us to discuss.

The tenant profile – All HMO lenders will want to understand the profile of the tenants that will occupy the property, as certain tenant types may be declined by some lenders, particularly if the tenants are deemed to be vulnerable. We cover this off further below.

HMO Mortgage Criteria

If you would like to find out more about HMO criteria and how they vary from lender to lender, you can visit our HMO criteria page.

HMO Tenant Types

HMO mortgage lenders will want to understand the type of tenant that will occupy the property. Tenant types could include the following:

  • Students
  • Working Professionals
  • Social Housing Tenants / DSS
  • Key Workers
  • Vulnerable Adults
  • Asylum Seekers
  • Vulnerable Young Adults (16 to 21)

Its important we understand the tenant type as not all lenders will allow all tenant types.

Where lenders can have an issue with tenants is when the tenant is classed as a vulnerable tenant.

HMOs For Vulnerable Tenants

Vulnerable tenants could fall into one of the following categories

  • Mental Health Issues
  • Learning Disabilities
  • Ex-offenders
  • Domestic abuse victims

Most standard HMO lenders will not be prepared to finance a HMO property that is let to vulnerable tenants. This is due to something lenders refer to as ‘reputational risk’. Reputational risk is essentially lenders’ concern about the negative publicity they might receive if they need to repossess the property.

HMOs with vulnerable tenants are typically sublet through a care provider. The landlord will have a contract with the care provider or local authority, typically for 3 to 5 years, and the care provider will sublet to the tenants.

Lenders will typically look to lend to regulated care providers but can consider unregulated care providers subject to how long they have been trading and the company’s strength.

This is a specialist area of HMO mortgage funding, and advice should be sought.

To explore HMO mortgage options for vulnerable tenants, we typically need to see a draft copy of any lease agreement and know the care provider and tenant profile. In some circumstances, there may be a full-time on-site carer, which will further limit options.

Call us for further information if you are considering letting to vulnerable tenants.

HMO valuations

How is a HMO property valued?

This will depend on the size and set-up of the HMO and also whether the property sits in an Article 4 area.

There are two types of valuations lenders will undertake, the most typical of which will be a standard bricks and mortar valuation, with the other being an investment valuation for more significant type HMO properties.

Bricks & Mortar Valuation

Bricks & Mortar Valuation

This is typically the most common valuation method for properties classed as a small HMO (6 rooms or under).

A bricks-and-mortar valuation is essentially the property’s current market value, considering local comparables. It does not factor in any investment valuation of the rent achieved.

Many potential HMO landlords often think that making a small change to a property to convert it to an HMO will warrant an investment valuation, such as putting a stud partition up in the lounge to convert a three-bedroom property to a four-bedroom property. Unfortunately, this is not the case.

This video from Shawbrook Bank talks about this in a little more detail.

Changing the usage from C3 to C4 will also offer little benefit as these two planning classes can be interchangeable. It is not the case that the property value will increase just because the rental value has increased. 

HMO Investment Valuation

Investment Valuation

HMO investment valuations consider the rental income and yield of the HMO property in question.

Location and whether the property sits within an article 4 area will also be considered.

To achieve an investment valuation, the property will typically need to meet the following:

  • Sit in an article 4 area
  • Minimum of 5 rooms
  • Property is clearly set up as an HMO with significant changes made and would not easily be converted back to regular residential occupation

We strongly recommend that if you are considering purchasing a property to convert it to a HMO to achieve an investment valuation once complete, you speak to us first to discuss how viable this may be and your options available.

HMO regulations

Will I need to get a license for my HMO property?

As a landlord, you must adhere to certain standards when running an HMO property. The local authority must be satisfied that you are a fit and proper person, and in most instances you’ll need to obtain a license confirming consent to operate the HMO.

There are different licenses depending upon the nature of the HMO.

  • Mandatory license – where the property has three or more stories with five or more tenants from more than two households.
  • Additional HMO license – for smaller HMO properties that don’t meet the mandatory threshold but still have three or more tenants from 2 or more households.
  • Selective license – required by some local authorities for all privately rented properties, including single occupancy properties.

You can find out more here about HMO Licensing in England & Wales, Scotland and Northern Ireland.

Article 4 Directive

This is a directive issued by the local authority limiting changes that can be made to a property without the need for planning permission from the local authority. The directive will apply to a defined area.

If the proposed property sits within an article 4 area, it will always need permission to change from C3 to C4 usage.

Find out more about bad credit buy to let mortgages

Work out how much you can borrow with our buy-to-let mortgage calculators

Learn more about purchasing a HMO in a limited company

Frequently Asked Questions

What is the maximum number of tenants a HMO can have?

This ultimately depends on the lender. Some lenders will only lend on HMO properties that house a maximum of 6 tenants, whereas other lenders can go up to 20.

We can also secure funding for larger HMO units, such as student halls, with some of our commercial lenders that could house 100 or more tenants.

Can I buy a property and use it as a HMO?

If the intention is to buy what is currently a standard residential property, which falls under C3 usage and use it as an HMO, then you’ll need to apply for a change of use to use the property as an HMO.

For HMOs up to 6 rooms, the planning class will need to be changed to C4 usage, and for seven rooms and over, the property will require ‘sui generis’ planning.

A mortgage lender will not lend against a property where the usage will be changed after completion, so the property will likely need to be purchased with a bridging loan initially, the change of use granted and then the property can be mortgaged.

Can I get a mortgage for a HMO in Northern Ireland

The vast majority of HMO lenders will not lend on HMOs in Northern Ireland, but there are 2 or 3 lenders that will. Call us today to see how we can help. 

Can I get a HMO mortgage for a Limited company?

Yes, practically all lenders will offer limited company products for HMO properties. It will depend on the type of limited company (SPV or trading business) so please call us to discuss. 

A small selection of some of our HMO lenders

We source our mortgages from the whole market, from the leading High St Banks & Building Societies to specialist HMO mortgage lenders. A selection of our HMO lenders is shown below.