Looking for a guide to HMO mortgages? Then look no further, as we’ve distilled everything you need to know when it comes to applying for an HMO mortgage in less than 600 words.
If you’re at the stage whereby you’re looking to get an HMO mortgage, then you’re probably well-versed in this particular area. However, if you’re not, then let’s start with the basics.
What is an HMO mortgage?
First of all, let’s break the acronym down.
HMO stands for House in Multiple Occupation, which, simply put, means that there are at least 3 tenants living in the property.
Examples of an HMO include:
1. Student accommodation
2. A house share (but NOT with family members)
3. One house that’s been reconfigured to incorporate multiple bedsits
4. Hostels
What are the benefits of HMO mortgages?
The standard buy to let market has been squeezed over recent years, the result of which has impacted landlords’ profitability. HMOs, however, tend to be more profitable as landlords can generally ask for more overall than they would through letting a single property.
For example, a 3 bedroom house in Surrey may attract a rental income of £1,800 a month. Yet, if it’s converted into a 4 bedroom property with each room being let for £750 a month, then a landlord can now secure £3,000 a month.
Also, an HMO provides multiple, independent income streams, so if one person’s circumstances change and they leave, then you’re still receiving income from five other tenants.
What are the downsides to HMO mortgages?
Whilst HMO mortgage yields are higher, there are some cons, too.
For example, legislation is tighter (yes, even tighter) than standard buy-to-let mortgages. Perhaps the biggest example of this is the fact that HMO landlords require a licence – more on that below.
Room rental under HMO also tends to be a fully furnished affair, so there’s generally a degree of frontloading your investment to ensure that the rooms are ready to go.
When it comes to getting an HMO mortgage, it’s more common for HMO investors to purchase standard homes using a standard mortgage before converting them – you can’t get an HMO mortgage prior to conversion – so other interim finance measures, such as bridging finance, is generally required.
The three types of HMO licence
HMO investors will need a licence for every HMO property that they own. A licence isn’t given to the individual, nor does one licence cover multiple HMOs. Once given, licences tend to last 5 years.
They are as follows:
1. Mandatory HMO licence
This type of licence applies to larger properties (under Part II of the Housing Act 2004). HMO investors will need a mandatory HMO licence if the property meets a series of tests and is occupied by five or more people.
2. Selective HMO licence
This type of licence comes down to the local authority in which your HMO is located, and are generally designed to address housing issues specific to that area. Unfortunately, there is no central database advising what each local authority requires, so this type of licence requires a degree of legwork.
3. Additional HMO licence
This type of licence is given to properties that fall outside of the scope of the Mandatory HMO licence. It also tends to be issued in areas where HMOs are being ineffectively managed.
HMO mortgages explained
Still looking for more information? Ready to apply for an HMO mortgage? If so, contact our Guildford HMO mortgage broker team on 01483 238280 or by e-mailing info@complete-mortgages.co.uk.
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