HMO Mortgage – what is it and how do you get one?
A House of Multiple Occupancy (HMOs) is defined as a property rented out by three of more unrelated individuals. They are an attractive option for investors seeking higher yields than those offered by standard buy to let properties. An HMO mortgage is required when a property is let out on a room-by-room basis with separate Assured Short-hold Tenancy agreements in place.
Who can apply for an HMO mortgage?
HMO finance is widely considered a step up from BTL finance. This is reflected in the reduced number of lenders willing to fund first time HMO landlords. This doesn’t mean you need a vast BTL portfolio or years of landlord experience. The majority of HMO mortgage providers require a minimum of 12 months’ landlord experience. Funding options and experience requirements vary from lender to lender. Previous HMO experience does give you access to more options. An experienced HMO broker can advise you of your options in review of your particular circumstances.
What rates can I achieve with an HMO mortgage?
The rates on HMO mortgages are not too dissimilar from those you would expect on a BTL mortgage when looking at small HMOs (less than 6 beds). Rates for 75% LTV on a small HMO start from 2.89%, which is only 0.1% higher than their BTL mortgage counterpart.
When you begin to move to the larger HMOs (6+ beds), you will need to look to commercial lenders and should expect an increased interest rate to reflect this. You may be able to benefit from borrowing against the investment (yield-based) value of the property, as opposed to the bricks and mortar value.
Have your documentation prepared ahead of HMO application
Not all HMOs require a license. The general rule is that any property with five or more people, from two or more separate households, that share facilities require a licence. If you are looking to purchase an HMO, check what the policy is with the relevant local authority. If required, place your HMO license application ahead of your finance application to avoid delays. Many lenders will accept proof of license application to underwrite the mortgage.
Similarly, if you are looking to undertake any works to the property, ensure you have planning consent ahead of application. The same applies with building regulation sign-off. Where applicable, this is something you should be aware of when using a buy, refurbish, refinance strategy.
The most significant delays we have experienced during the application process for HMOs result from not having the required approvals in place. Having your documentation prepared from the outset enables the lender to get comfortable that there will be no issues relating to licensing or planning during the due diligence process.
How long does an HMO Mortgage application take?
HMO mortgages can complete in as little as 8 weeks. However, if you are slow in replying to enquiries and information requests, they can take as long as 5 months.
During periods of high volume, mortgage providers will implement set turnaround times (that is, the time in which they will review a response to their enquiry). We have seen these as high as 10 working days. In this instance you can help to speed up the application process by sending all of the required information over in one tranche at the start of the application.
Any other considerations?
As with all finance, a strong professional team can make or break the application process. A broker that understands the HMO mortgage process is imperative. Not only can they pre-empt the information a lender will require, but they can advise on the current turnaround times for each lender. This is particularly poignant if you want a faster application process. An experienced HMO broker will ensure you are placed on to a product fit for your requirements.
Solicitors are equally pivotal when applying for an HMO mortgage. It is key that you instruct a firm with at least 2 SRA appointed managers. Some lenders have an appointed panel list. If you are using a lender that has an approved panel, you will need to ensure that your solicitor is on this list.
Have more questions regarding an HMO mortgage? Contact our commercial team .