HMO (House in Multiple Occupation) Mortgage

When a property is occupied by three or more people that are not of the same household or family sharing facilities (kitchen, bathroom) it is known as a house share, or as an HMO (house in multiple occupation).

There is also a specific category known as Large a HMO. These are rental properties that accommodate five or more tenants, with shared toilet, bathroom, or kitchen facilities. A large HMO will require careful consideration and compliance with regulations due to the increased number of occupants and shared amenities.

As experts in property finance, UK Property Finance is well-versed in the intricacies of HMO properties. We provide personalised guidance and support to landlords and investors looking to navigate the HMO market. Our team can assist with understanding the regulatory requirements, financing options and the considerations involved in managing and maintaining a HMO property.

Is a licence needed to run Houses in Multiple Occupation?

If you want to set up and run your own HMO, you need to be aware of and consider potential licencing requirements.

Generally, a standard HMO with four or fewer occupants doesn’t require a licence.

If the property houses more than 5 occupants, it would require a licence to be obtained. This situation is known as a Large HMO or a Licenced HMO.

Although an HMO that occupy less than 5 people do not always need a licence, it varies with different councils, so it is important to check before letting the property out on a HMO basis.

It’s essential to understand the different terms and requirements associated with these types of properties.

Who to target for a HMO?

When targeting tenants for an HMO, there are several demographics to consider. Affordable housing tenants, such as those on housing benefits, offer a steady income stream. Students are another target group, as they often have rent guaranteed by their parents and have a limited study-course duration. Working professionals in their late 20s and 30s are also becoming more interested in a higher-spec HMO, typically seeking stability and a more professional lifestyle.

What kind of tenancy agreement is needed to run a HMO?

As for tenancy agreements, you have options as a landlord. You can opt for a joint and severally liable agreement, which covers all tenants under one contract, or individual contracts for each tenant. Joint contracts are suitable for groups of students or friends, while individual contracts are more common for a large, low-cost HMO or properties aimed at young professionals.

Can a HMO Provide you With Profit?

Profitability in the HMO market depends on various factors. While you may come across advertisements boasting “100%+ gross yields,“ it’s crucial to consider the costs involved. These include conversion expenses, finance costs, council tax, utility bills, insurance, repairs, maintenance, management fees, rent arrears and periods of vacancy. To optimize profits, some landlords choose to run their HMO through a limited company structure and seek guidance from professionals like accountants or financial advisers.

How do you finance a HMO?

When it comes to financing a HMO, there are numerous options available through the buy-to-let mortgage market. With approximately 40 lenders and around 1,500 different mortgage products, it’s essential to work with a broker, like UK Property Finance, who can provide expert guidance. Financing options include HMO mortgages for already converted properties, specialised bridging loans to cover purchasing and conversion costs and refinancing with an HMO mortgage or large HMO mortgage to settle a bridging loan.

Each lender may have specific criteria, such as the number of rooms considered for a HMO and how the property value is calculated. Lenders typically apply a slightly higher “interest coverage ratio“ to HMO mortgages compared to standard buy-to-let mortgages, reflecting the perceived higher risk of multi-tenanted properties. A skilled and knowledgeable broker can help recognise the most suitable and cost-effective financing options and package your application to meet the lender’s conditions.

How will my HMO be valued?

When it comes to valuing your HMO (house in multiple occupation), there are primarily two approaches that are commonly used:

Bricks and Mortar Valuation: This is the standard method of valuation for most HMO properties. It focuses solely on assessing the value of the building itself, assuming it is vacant. This type of valuation is typically used for residential properties that have been converted into an HMO.

Commercial or Investment Valuation: This approach takes into account the overall investment value of the property or the business potential it holds as an HMO. It considers factors beyond just the physical structure of the building.

While it’s often assumed that converting a property into a HMO automatically increases its value due to rental yields, this is not always the case. Specialist HMO mortgage lenders usually base the loan to value (LTV) ratio on the bricks and mortar value for standard residential houses converted into an HMO.

To explain an example: If a terrace house with 4 beds was located on a street where similar properties had a value estimation of £100,000; and one of the houses was converted to a 4-bed HMO, it is unlikely that the property mortgage valuation would increase as a result.

A smaller HMO is typically treated similarly to standard buy-to-let properties in terms of valuation.

In order to obtain an investment or yield-based valuation, typically a minimum of six letting rooms are required in the HMO property. This approach takes into account the income potential and investment value based on the rental yield.

Can I convert a property into a HMO?

Converting a property into an HMO is indeed a possibility. The popularity of these, particularly as a way of maximising income for landlords, has risen year-on-year.

You must however be sure that the property you have in mind fits the criteria and is fit for purpose.

Is there enough space to house all occupants comfortably, are their adequate facilities to serve the needs of the tenants, does the property need any structural or renovation work and how would it comply with any safety or licencing criteria.

Next, it’s crucial to familiarise yourself with the local planning regulations and licensing requirements specific to your area. Different regions may have varying rules and criteria for HMO conversions, including room sizes, amenities and fire safety measures. It’s advisable to consult with the local authorities or seek professional advice to ensure you meet all the necessary legal obligations.

Additionally, financing the conversion is an important consideration. You may need to explore options such as specialised HMO mortgages or bridging loans to cover the costs of the conversion and any associated expenses.

You can get the necessary guidance and valuable insight into the options available to you by first communicating with a broker that has specialist expertise of this particular topic.

Before taking the plunge, you also need to be aware of your responsibilities and regulatory commitments of owning and managing a property that will be used as an HMO.

This includes ensuring regular maintenance, managing tenant relationships and adhering to safety regulations. It can be helpful to engage the services of a property management company or seek advice from experienced landlords to streamline the process and ensure smooth operations.

At UK Property Finance, we have the expertise to assist you throughout the process of running and financing an HMO. Contact us to discuss your specific requirements and explore the possibilities in the HMO market.