HMO Mortgages

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Morgan Stewart joins the Mortgage and Protection Podcast once more, this time to share his expertise on HMO mortgages.

What is an HMO mortgage? 

HMO stands for house of multiple occupancy, for example, when a large house is let room by room, usually with all bills included. You can potentially have seven or more tenants in one property.

What are the different types of HMO mortgage?

The mortgage you need will depend on your tenant type, because a variety of people might stay in an HMO property. If you target blue collar workers and professionals, for example, you could have a house next door to a hospital. Student lets are slightly different, and you also have housing benefits or local housing authority lets.

So student accommodation is classed as an HMO?

Anywhere with three or more unrelated tenants,  is classed as a house of multiple occupation, which would include student housing.

Can anyone get an HMO mortgage? 

You need to be a homeowner to get an HMO Mortgage. The market has a lot more products available than there were a few years ago, because you get a higher rental yield from HMO, making it more attractive for the property investors. 

For the majority of HMO mortgage products, you will need to have one to two years landlord experience. There are lenders that will accept first time landlords if you own your own property, but most of them require some sort of leasing experience.

When would you use an HMO mortgage?

Anywhere that has multiple lettings in one property requires an HMO mortgage. For example, if you’re renting rooms out on an individual basis, or even if you have a group of students who want to live in a house together, that’s classed as an HMO, because you have three or more unrelated tenants. If they’re family, then it is not classed as a HMO.

How would you go about arranging an HMO mortgage? 

At GPS, we can take all the hassle and stress out of finding you the right product. There are certain things to be aware of with an HMO mortgage. Now, with an HMO, you need to decide immediately what the purpose of the property will be, as it can be quite complicated to change. With standard let properties, you can convert a house into a C4 HMO, which allows for up to six people to share a property without the need for planning. Once the property has seven beds or more, the class property becomes HMO, which requires a full application.

If work is required on the property to get it up to the required standards, you would have to start out with a Bridging loan. HMOs are expensive to adapt for multiple use and to furnish. It is a considerable investment and you need to make sure before you apply for any HMO mortgage, you have all your permissions and licences in place. 

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How are HMO mortgages different from Buy to Let mortgages?

The requirements for planning and licencing requirements are the biggest differences. There are minimum facility requirements for a certain number of people, for example, a five bedroom HMO needs to have a minimum of one toilet and a separate bathroom. For six people you need two full bathrooms as part of the Licencing requirements. 

Before you even start looking into licencing, you need to understand the planning laws in the area where you’re investing, for example, the whole of Wales is what we call Article 4 area, which means the government has removed our right to convert a house into a small HMO without planning permission. Local authorities will do this around the country, especially in areas where there’s a density of HMOs, like in student areas. In this case you’ll need to go through a full planning application.

Licensing is completely separate to planning. Planning gives permission to do something or not, licencing sets the rules for how you must comply with the planning regulations. For example, the number of bathrooms in a household, the number of kitchen units, the amount of worktop space and also the amount of cooking facilities available. These rules exist to prevent overcrowding. 

Fire regulations are also a significant consideration. Fire doors must be fitted properly and include smoke seals, smoke alarms are also needed in every property. With larger HMOs, you need emergency lighting and maybe fire escapes if the house is above a certain height. 

You’d need to get a fire risk assessment and work with environmental health officers within the local council. They manage the Licencing, so you’ll need to be engaging with them straight away. There is a cost to consider with licensing, and it can be quite complicated, but as long as you work within the guidelines and the framework, then it all works smoothly. Every Council has a different cost and they will come out to inspect the property. The main areas of concern are overcrowding communal areas and fire risk assessments. 

When you apply for your licence, they will also assess you personally and contact your mortgage lender to make sure you have the correct mortgage in place. Every lender has its own criteria, some will only accept student lets, for example. 

You also need to understand that setting up an HMO is quite expensive, so your rental yield should be ten times what it would be as a single let. Once you’ve got it all up and running, however, there is very good earning potential there. With certain lenders and valuers, we would have an investment valuation carried out on the HMO, so it would be valued like a business, on rental yield, rather than on the property value.

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If you’re thinking about investing in HMOs, make sure you do your research first, because there’s a lot of legislation to understand. As long as you work within the framework of the legislation and the property is nearby transport links or large employers, then HMO investing can be quite rewarding.

If anybody has any further questions on HMO mortgages, from the GPS website, navigate to the contact page and get in touch with Morgan or another member of the team who can help you.

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