Unsure if your property is an HMO? Check out our What is a HMO article.

What is an HMO Mortgage

HMO mortgages are specialised mortgage products that are specifically designed for individuals who plan to purchase and rent out a property to multiple tenants. HMO properties are different from traditional buy-to-let properties, and therefore, the financing requirements and criteria are also different.

Differences between HMOs and traditional BTLs

HMO properties usually require specific licences and approvals from local authorities, which most regular buy-to-let properties do not. Additionally, HMOs typically have higher insurance and maintenance costs, as well as different occupancy rates and need to follow specific HMO management regulations. HMO mortgages take these differences into account, providing financing options that are specifically tailored to the needs of HMO investors and landlords.

HMO Mortgage Rates

HMO mortgage rates start from around 3% and can range up to 8% or more, depending on the lender, property type, the borrower’s creditworthiness, the debt service coverage ratio, the current base rate amongst other things. The average HMO mortgage rate is around 5-6%, which is slightly higher than the average rate for traditional buy-to-let mortgages. Read more about HMO mortgage rates.

HMO Mortgage Criteria

Lenders who offer HMO mortgages take a close look at the specific property that you are interested in purchasing and the rental income it is likely to achieve. This helps to determine if the property is a viable investment and if you have the ability to repay the loan. In addition to a stable income and good credit history, there are several other criteria that you may need to meet to qualify for an HMO mortgage, here we have a look at some:

Income Requirements:
Lenders typically look at your current income and financial stability when determining if you are eligible for an HMO mortgage. You may need to demonstrate that you have a steady source of income, such as employment, self-employment, or investment income, and that you have enough income to make the mortgage payments, cover property maintenance and insurance, and meet any other expenses related to the HMO property.

Credit History:
Your credit history plays an important role in determining your eligibility for an HMO mortgage. Lenders will want to see that you have a good credit record, with a history of making payments on time, and that you have a low debt-to-income ratio.

Loan-to-Value (LTV) and Deposit Requirements:
The loan-to-value (LTV) ratio refers to the amount of the mortgage loan compared to the value of the property. For HMO mortgages, LTV ratios typically range from 60-75%, meaning that a deposit of 25-40% of the property value is required. A higher deposit may result in a lower interest rate, but it is also important to consider the cash flow and the cash on cash return implications of a larger upfront investment.

Loan Amounts:
HMO mortgages typically range from £50,000 to £1 million or more, depending on the lender and the individual’s financial circumstances. The minimum loan amount may be as low as £50,000, while the maximum loan amount may be much higher, depending on the lender and the property value.

Insurance:
Lenders will want to see proof of insurance for the HMO property, this can include public liability insurance and building insurance but could also include rent guarantee insurance or legal expenses insurance. Read more about HMO insurance. 

Licensing and Management Requirements:
To obtain an HMO mortgage, the bank will require you to provide evidence that you have the correct licence for the property before approving your mortgage. HMO licensing regulations differ from council to council, but generally, any HMO property must meet specific standards to ensure the safety and well-being of its occupants. The HMO licence ensures that the property has passed the necessary checks and complies with these standards. The bank will require you to provide evidence that you have obtained this licence or are in the process of doing so.

The reason for this rigorous process is to protect both you and the bank from any potential legal or financial issues that may arise from owning an unlicensed HMO property. If you fail to obtain the correct licence, you may be fined, and the bank may face legal repercussions. Furthermore, if you do not have an HMO licence, your tenants may be at risk, and you could face legal action if something goes wrong.

Getting a HMO Mortgage from Overseas

It is possible to get an HMO mortgage if you do not live in the UK, but this will typically require additional documentation and may result in higher interest rates and stricter lending criteria. Lenders may require additional proof of income, credit history, and the ability to manage the HMO property from a distance. Additionally, foreign nationals may need to provide proof of residency and citizenship in their home country.

Fees to Consider

When taking out an HMO mortgage, there are a number of fees to consider, including arrangement fees, valuation fees, and legal fees. Some lenders may also charge additional fees for mortgage broker services, early repayment penalties, and mortgage application fees. It is important to carefully review all fees and costs associated with an HMO mortgage, in order to determine the overall cost of the loan.

Lenders Offering HMO Mortgages

There are a number of lenders that offer HMO mortgages, including high street banks, specialist lenders, and online lenders. Some of the leading lenders in this market include Barclays, Santander, Nationwide, and BM Solutions, among others. It is important to compare multiple lenders and their rates, fees, and lending criteria, in order to find the best mortgage for your needs.

Using a Mortgage Broker

There are pros and cons to using a mortgage broker when searching for an HMO mortgage. On the one hand, a broker can help you compare multiple lenders and their rates, as well as provide advice and guidance on the mortgage application process. On the other hand, brokers may charge additional fees for their services, and they may not be able to find the best HMO mortgage for your specific circumstances. Ultimately, the decision to use a mortgage broker will depend on your individual needs and financial situation. If you do decide to use a broker, ensure you find a broker that specialises in HMOs.

Conclusion

HMO mortgages are mortgage products that are designed for individuals who plan to purchase and rent out a property to multiple tenants. These mortgages take into account the specific licensing, insurance, and management requirements of HMO properties, as well as the higher risk associated with this type of investment. When considering an HMO mortgage, it is important to carefully review the rates, fees, and lending criteria of multiple lenders, in order to find the best financing option for your needs.

Contact us today if you need a specialist HMO Letting Agent to manage or let your HMO property in South London, or if you require any HMO advice or consultation.