Read this article for more information on HMO mortgages. If you are unsure if your property is a HMO, feel free to read our HMO Meaning article.
History of HMO Mortgage Rates
The HMO mortgage market has gone through significant changes in recent years, with new regulations and restrictions being introduced. Before the 2008 financial crisis, HMO mortgage rates were generally lower compared to traditional buy-to-let (BTL) mortgages. This was due to the higher yields generated by HMO properties, which were considered to be a low-risk investment.
However, the financial crisis led to stricter regulations on mortgage lending, and the HMO market was not exempt from these changes. As a result, HMO mortgage rates increased, making it more difficult for investors to secure financing for their investments. This led to a decrease in the number of HMO properties in the market and reduced the supply of affordable HMO properties for tenants.
HMO Mortgage Rates
Generally, the average rate for HMO mortgages is around 4% – 4.5%, with some lenders offering rates as low as 3.5% for certain types of HMO properties.
HMOs owned by an individual typically have lower mortgage rates compared to those owned by limited companies or special purpose vehicles (SPVs). This is because lenders consider individual ownership to be less complex and less risky compared to limited company ownership. The average rate for HMOs owned by individuals is typically around 3.75% – 4.25%.
On the other hand, HMOs owned by a limited company (SPV) tend to have higher mortgage rates, as lenders consider this type of ownership to be more complex and more risky. The average rate for HMOs owned by an SPV is typically around 4.25% – 4.75%.
HMOs owned by a limited company that is owned by a holding company (two-layered SPV) typically have the highest mortgage rates. This is because this type of ownership structure is considered to be the most complex and the most risky by lenders. The average rate for HMOs owned by a two-layered SPV is typically around 4.75% – 5.25%.
Buying a HMO via a Special Purpose Vehicle (SPV)
A special purpose vehicle (SPV) is a limited company set up specifically for the purpose of owning and managing a specific asset or group of assets. In the context of HMO investment, setting up an SPV can offer several benefits to the investor.
Separation of Assets:
By owning the HMO through an SPV, the investor can separate their personal assets from the assets of the HMO. This can provide protection against potential legal and financial risks associated with the HMO property.
Section 24 is a UK government policy that was introduced in April 2017. It limits the amount of mortgage interest relief that buy-to-let landlords can claim as a tax deduction. Previously, landlords could claim full relief on their mortgage interest payments, which reduced their taxable profits.
As a result of Section 24, many buy-to-let landlords have seen an increase in their tax liabilities, which has impacted their profits and made it more difficult for them to maintain their properties. For this reason, many landlords have been exploring alternative investment options, such as purchasing via a special purpose vehicle (SPV). This is because the SPV can claim tax allowances on mortgage interest, which will reduce the amount of tax they owe.
An SPV can offer other tax advantages to the investor too, such as the profits generated by the HMO property can be taxed at the lower corporation tax rate, rather than at the higher personal tax rate.
An SPV can offer greater flexibility when it comes to financing and ownership structures. For example, an investor can bring in additional partners or investors to share the ownership and financing of the HMO property, without having to transfer personal assets.
Simplified Estate Planning:
When it comes to estate planning, owning a property through a special purpose vehicle (SPV) can provide significant benefits compared to owning a property in your personal name. With an SPV, the transfer of ownership to beneficiaries or heirs is simplified, as the ownership of the property is held within the SPV, rather than being tied to the individual’s personal assets. This makes it easier to manage the transfer of ownership and can reduce the time and cost associated with the estate planning process.
In contrast, when a property is owned in an individual’s personal name, the transfer of ownership can be more complex, as it requires the transfer of the individual’s personal assets, including the property. This can result in a longer and more costly estate planning process, as well as potential legal and tax implications for the beneficiaries or heirs.
Having a Holding Company Structure
When it comes to purchasing investment properties, the structure of your companies can have a significant impact on your financial security and long-term success. If you are a business owner that owns a Limited company, there are additional steps you can take to maximise the protection of your investment properties. Below, we’ll explore the benefits of a holding company owning your LTD and special purpose vehicle (SPV) can be a game-changer.
First, let’s consider the typical approach to buying to let (BTL) properties. In this scenario, the LTD will loan money to an SPV to purchase the property. This may seem like a straightforward solution, but it presents several significant risks. For example:
- Risk of cross-contamination: By loaning money from the LTD to the SPV, you run the risk of cross-contamination of assets. If the SPV goes bankrupt or runs into financial trouble, the LTD’s assets may also be at risk.
- Limited liability protection: While an LTD provides limited liability protection, it may not be enough to protect your assets in the event of a legal dispute or bankruptcy. If you use the LTD to loan money to an SPV, you may be putting your personal assets at risk if the SPV or LTD run into problems.
- Tax implications: Depending on how the loan is structured, there may be tax implications for both the LTD and the SPV. This can be a complex issue to navigate and may result in additional expenses.
Now let’s consider an alternative approach – creating a holding company to own the LTD and owning a separate SPV to purchase investment properties. This approach offers numerous benefits, including:
- Enhanced asset protection: By creating a holding company to own the LTD, you create an additional layer of protection for your assets. If the SPV runs into financial trouble or faces a legal dispute, the holding company’s assets will remain separate and protected.
- Simplified tax structure: With a holding company structure, you can streamline your tax obligations by separating the tax liabilities of the LTD and SPV. This can simplify your accounting and reduce your tax burden.
- More flexible financing options: By using a holding company structure, you can explore a wider range of financing options. For example, you may be able to secure better loan terms or access additional capital for future investments.
Overall, the benefits of a holding company owning an LTD and a separate SPV for investment properties are clear. This approach provides enhanced protection for your assets, simplified tax obligations, and greater flexibility in financing options. If you’re considering investing in BTL properties and are already a business owner, take the time to explore this structure and ensure you’re setting yourself up for long-term success.
If you are thinking about investing in an HMO, it is crucial to understand HMO mortgage rates. The recent history of HMO mortgage rates has undergone major changes, making it important to stay aware of the timing and whether your rate is comparatively high or not. Also, although HMOs owned by a limited company (SPV) may have slightly higher mortgage rates compared to buying a HMO in your personal name, there are numerous benefits to owning investment property through an SPV owned by a holding company that are well worth considering.