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HMO Mortgage Broker Guide – For Buy-to-Let Landlords

By Kev TilleyCeMAP

Last Reviewed: 11th February 2021

HMO properties are more common than ever before, and a trend has been noted with landlords increasingly often choosing to apply for HMO mortgages. Rental properties are in high demand across the UK and whilst interest rates are low, landlords are keen to continue to reap the rewards of the current market conditions.

Houses in Multiple Occupation (HMO) can earn landlords increased rental income compared to traditional buy to let properties and therefore have become increasingly more common.

This guide will explore the purpose of HMO mortgages as well as the differences between traditional buy to let mortgages.

What is HMO?

As already mentioned, HMO stands for Houses in Multiple Occupation which means that a property is occupied by more than one tenant. Another common term to describe this time of property is ‘multi-let’.

Landlords can divide the property and charge rent per room or per flat or section of the property for example. The benefits to the landlord are increased rental income per property as well as reduced risk of unoccupancy.

Often HMO landlords pay the utility bills for the property and increase the individual rents accordingly to cover the utilities. However, if the property is converted into separate flats with individual title deeds the utility bills are the responsibility of the individual tenants.

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Is an HMO licence required?

Although HMO properties are very attractive to landlords due to the increased rental income possible, they can be complicated to set up and, in some circumstances, will require the landlord to seek an HMO licence.

Local councils manage the HMO licence process and therefore the relevant council will be the first port of call for any licencing queries. Some councils will only require HMO licences for larger setups if all three of the following conditions apply:

1) There are more than five tenants within an HMO property
2) The property has a minimum of three storeys
3) Tenants share facilities such as bathrooms or kitchens

However, the licencing rules do vary across the UK and therefore it is strongly advised that any landlord considering an HMO property contacts the relevant local authority directly.

If an HMO licence is required, an application will be required per property, rather than per landlord. The local authority will review an HMO licence application and will evaluate the proposed living conditions for tenants within the property as well as assessing the landlords themselves, checking they have not previously breached landlord laws.

If an HMO licence application is rejected, there may be a number of requirements that need adjusting before granting a licence, such as changes to the proposed property set up. However, if the landlord disagrees with the reasons why a licence application is rejected, they can appeal via an appeal process via the Residential Property Tribunal.

If an HMO application is approved, the licence is valid for five years.

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Differences between an HMO and a Traditional buy to let

With a traditional buy to let property, a landlord would purchase a property with the intent to let it to either an individual or a family. The tenant would pay rent either on a weekly or monthly basis and would usually pay the associated utility bills and council tax.

With an HMO property, each bedroom could be rented out separately, and any spare reception rooms could also be converted to additional bedrooms. Often this set up is best suited to single working professionals or students, depending on the location of the property. As previously, discussed the landlord often covers the utility bills and ensures that the rent per room is set at a rate to cover these costs.

In some occasions it is calculated that an HMO property can generate three times the rental value as a standard buy to let property, rented to a family, for example, however, this is not always the case! Read onto the next section to investigate the reasons why.

HMO income and expenses

There are several considerations in relation to income and expenses that should be reviewed when a landlord is debating which methods of renting out a property is most suitable.

The first matter is the utility bills associated with the property. With an HMO often the landlord is responsible for covering these bills and if the rate added to the rent is not correct and therefore does not cover the annual utility bills, the landlord could be left out of pocket.
Also, the landlord does not have control of the usage of utilities and therefore this is a risk area.

The next consideration is that the running costs of an HMO property can be higher, for example, there are increased health and safety guidelines to comply with for an HMO property as well as security matters to cover, such as locks on each room.

There will also be increased admin involved with HMO properties as there are more tenants to reference check and set up individual rental agreements with. If the landlord undertakes the legal checks themselves, it can be very time consuming however if this is outsourced, the charges are often per tenant and therefore will wrack up.

The risk of unlet periods between the two rental types is also to be considered. With a traditional buy to let, there is a higher risk to the landlord should a family move out, as the landlord would need to cover all costs during unlet or void periods.

However, these are often not as frequent as sometimes a content, the settled family could remain as tenants for many years. With an HMO property, often the risks of unlet periods are divided between tenants (depending on how the lease agreements are set up), which is favourable to the landlord.

In addition, the higher rental income from other individuals within the property is likely to be able to cover the property overheads such as a mortgage, should one tenant move out, however turnover of tenants are generally higher on shared properties due to the nature of them such students finishing their course or professionals moving jobs or location. Also, there can be more disputes between the tenants resulting in tenants wishing to leave.

Also, HMO properties may be rented on a fully furnished basis and therefore the set-up costs are higher.

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Location of the HMO property

As already briefly mentioned, the location of the HMO property is likely to have an important impact of the type of tenants required such as students and single professionals. City centres and university towns are often the location of choice for HMO properties. External factors are also highly important to the success of an HMO such as transport links.

HMO Mortgages

Often lenders will require several criteria to be met before accepting an HMO mortgage, including that the landlord is already experienced with letting property.

Although there has been a surge in the popularity of HMO properties recently, the HMO mortgage market remains fairly specialist. Access to HMO mortgages is usually via specialist mortgage brokers, seeking the most favourable terms and mortgage rates on the market.

Often HMO mortgage rates tend to be higher than standard buy to let mortgages due to the reduced availability of HMO lenders, however usually this is covered by the increased rental income.

HMO Mortgage Summary

An HMO is a method of renting out property maximising the rental returns. Although the higher rewards are often very tempting, there are other factors to consider, including additional compliance and maintenance costs.

Due to the specialist nature of HMO’s is vital that the advice of a specialist financial advisor is sought to ensure that as HMO is the most suitable approach to renting out a property.

Call us today on 01925 906 210 or contact us. One of our advisors can talk through all of your options with you.

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