HMO Mortgages: How to Fund Your HMO
What is an HMO mortgage? An HMO mortgage is a special type of buy-to-let mortgage designed specifically for properties classified as Houses in Multiple Occupation (HMO). An HMO refers to a property rented out to multiple tenants (a minimum of three) who do not belong to the same household. For instance, this could be a student accommodation where each student has a private bedroom but shares common areas like the kitchen, bathroom, and living room, or a house share where three or more professionals live together. You can take out an HMO mortgage either in your personal name or through a limited company, depending on your tax considerations or personal preference. How do HMO property mortgages work? HMO mortgages work similarly to buy to let mortgages, often being taken on an interest only basis on a fixed or variable interest rate, but they are designed specifically for Houses in Multiple Occupation (HMOs). These mortgages are secured against the property, and affordability is assessed based on the rental income it generates. HMO mortgages allow you to repay the loan through monthly payments. They are usually offered by specialist lenders and are typically interest-only and may come with specific conditions, such as a minimum property value, early repayment penalties, and additional arrangement fees. It’s important to fund HMOs with a dedicated HMO mortgage, as using a regular buy-to-let mortgage can violate your loan terms, potentially leading to the lender demanding full repayment. If you’re new to HMO financing, we recommend speaking to an HMO mortgage broker or expert for guidance. Buy-to-let mortgages vs HMO mortgages Regular buy-to-let mortgages are designed for single households renting out an entire property. This means you’d have one set of tenants on one tenancy agreement. HMO mortgages, on the other hand, are built for the higher potential income that comes with multiple tenants. One of the main differences between standard BTL mortgages vs HMO mortgages is the HMO mortgages tend to be more expensive, both in terms of the interest rates that are available on the market as well as set up fees. This is because HMO mortgages take into account factors such as number of tenants and potential income. What types of HMO property mortgages are available? In general, HMO mortgages don’t vary too much in type. The main types of HMO finance are either a standard HMO mortgage or bridging loan. However, some lenders offer varying types of HMO mortgage products that account for the different requirements of HMO properties and projects. For example, some HMO landlords are simply buying a ready to go small HMO property, whereas others may be converting a large house into a large HMO which requires heavy development work. Therefore, there can be some variations on the market on the types of funding available. We’ve broken down some of the most common types. HMO mortgage types for properties that require no additional work HMO mortgages / remortgages This is the standard HMO mortgage for acquiring HMO properties. It applies to both typical C3/C4 HMOs and sometimes Sui Generis (large HMO) properties for up to 6 tenants. Often an HMO licence is needed depending on the local council, but it is not always a requirement. Large HMO mortgages The main difference between a standard HMO mortgage and a large HMO (Sui Generis) mortgage is that a mandatory HMO licence is always required to obtain a large HMO mortgage. Large HMOs also tend to face stricter lending criteria due to their size and complexity. Student HMO mortgage Lenders who offer student HMO mortgages are generally tailored for landlords who own Houses in Multiple Occupation (HMOs) that are specifically let to student tenants. It considers factors such as the rental patterns and higher turnover that are common in student properties. Limited Company HMO mortgages A limited company HMO mortgage is as it sounds – an HMO mortgage specifically designed for investment through a limited company rather than an individual. This mortgage type treats the corporate entity as the borrower, with lending decisions based on the company’s financial stability and the income produced by the HMO property. HMO finance options for properties requiring additional works HMO mortgages are designed to finance a property which is either currently being let as an HMO or is ready to be let. This means that HMO lenders are usually unwilling to offer finance during the conversion phase. If you have an HMO that needs work doing, the below options are appropriate: Refurbishment HMO mortgages A refurbishment HMO mortgage is specifically created to finance the renovation of an HMO property that may need works doing before it can function as an HMO. This means that investors can borrow funds for both purchasing the property and covering essential repairs or renovations. Usually, it will revert back to a normal HMO mortgage when the works are complete, so works similarly to a bridging loan. HMO bridging loans An HMO bridging loan is a short-term loan that “bridges” the gap while your longer-term finance option is finalised. It’s a flexible HMO finance option that can be used either as an individual or a business and you can receive the funds as one lump sum at the start of the loan term. If you intend to buy a property that requires heavy work to make it a functional HMO, you might look to secure a bridging loan initially. This helps cover any necessary works needed to meet HMO building regulations. Once the renovations are complete and the property is compliant, you can transition from the bridging loan to a long-term mortgage product. HMO development loans Development loans are essentially another name for bridging loans that cover the specifics of the works needed for property. Development finance is appropriate for HMOs that require large-scale conversion or to construct a property from scratch such as purchasing land. They are generally larger projects. One of the main differences between development finance vs bridging loans is that bridging loans tend to release funds faster, making them