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Call free for a quote: 0808 132 0097 01603 896 867
Standard rate from a mobile: 01603 896 867
Houses in multiple occupation (HMOs) are extremely popular with buy-to-let investors, who are drawn to this area of the market by higher returns than those typically achieved by normal or ‘vanilla’ buy-to-lets. However, this type of property requires a special mortgage, which will often be subject to stricter criteria.
This article provides a breakdown of the criteria typically imposed by HMO lenders, and how they might differ from ordinary buy-to-let lending rules. As the number of lenders we can access is representative of the whole marketplace, the HMO criteria outlined below should give you a good idea of what you can expect when applying for an HMO mortgage.
At the time of writing, approximately a third of our panel will grant mortgages on HMO properties.
The average maximum loan-to-value ratio (LTV) imposed by HMO lenders is slightly lower; 72%, compared to 75% for ordinary buy-to-let mortgages. One lender will extend to 85%, the maximum permitted; this includes any fees that might be added to the loan.
HMO properties that are three or more storeys high, include shared amenities and are let to five or more people who form two or more households are subject to mandatory HMO licensing. Local authorities can also impose discretionary licensing on smaller properties, which they will usually consider if standards in a particular area are low or falling.
Almost all lenders will grant mortgages on licensed HMOs. The exceptions are those whose other criteria preclude licensable properties (for instance, the maximum number of rooms or units permitted).
The vast majority of lenders will also do unlicensed HMOs. Depending on the lender, though, there may be additional requirements: the property may need to be in licensable condition, it may need to be let on a single joint tenancy, and your lender may require confirmation that the council will not impose licensing in the future.
Units refer to self-contained flats that are on the same title. A flat is self-contained if it includes at least one cooking area, one bathroom and one lavatory that are for the exclusive use of the household occupying it 1.
A small minority of lenders do not impose restrictions on the number of units your property can include, but most do: the maximum ranges from none (meaning that your property can only comprise individual rooms, and not whole units) to 20.
Lenders are more lenient on the number of individual bedrooms they will permit, though some will still only allow a comparatively small number (between four and six). It is possible to find lenders who will allow six, eight, 10 or even 20 individual rooms, and a small minority have no maximum.
In HMOs where rooms are let individually, tenants have exclusive occupation of the room they rent and are entitled to lockable doors. Most lenders are happy with privacy locks of any kind, but some will not permit double locking night latches (often referred to as Yale locks, a generic trademark for locks of this type that are made by any manufacturer).
It is common for lenders to permit only one kitchen in an HMO (less common is the requirement that the property also has only one bathroom and one communal room). Some lenders who usually permit only one kitchen might consider a second if it is in keeping with the property, but if it is clear that the kitchen was hastily or shoddily installed, it will likely not be accepted.
Other lenders will consider properties with more than one kitchen, and as with units and bedrooms, some have no upward limit.
Many HMO purchases are below market value, as the property requires renovation or conversion in order to be habitable. Nevertheless, the average minimum property value imposed by HMO lenders is larger than that imposed by others. Fewer than half will grant loans on HMO properties worth less than £100,000; however, a small minority will stretch as low as £50,000. (Note that this figure may be higher in London.)
Rental cover for buy-to-let mortgages (also known as debt service coverage ratio) is usually set at 125%, with the interest rate used in the calculation being around 5% or higher. This is one area where HMO criteria are not too different to normal buy-to-let criteria; be aware, however, that a handful of lenders will calculate rental cover at 130% or even 150%.
Fewer lenders will consider second-charge lending on HMO properties than will not. For the most part, those who do will assess each case individually, so there are no definitive criteria regarding second charge HMO lending.
Most HMO lenders will permit capital raising—remortgaging to release equity from your buy-to-let property in the form of cash—for any legal purpose, with the following (almost universal) exclusions:
Others will only permit capital raising for property-related purposes, such as funding refurbishments or putting a deposit down on another property.
HMOs are either let on one single tenancy (known as a ‘joint and severally liable’ agreement), or on one tenancy for each individual room. Most HMO lenders will permit either arrangement; however, some will insist upon one over the other.
Some will exclude local authority tenants and tenants in receipt of benefits. None directly exclude student lets, though some are more receptive to lending on student properties than others.
For more information on letting out HMO properties, including the distinction between joint and single tenancies and whether or not an HMO requires a license, see our article Letting to Sharers.
References
All articles on our website are for information only and should not be interpreted as providing advice. Any rates mentioned may have become outdated since the time of writing. For current rates and an unbiased personal recommendation call and speak to an adviser on the numbers at the top of this page, or complete a quote form.
