HMO mortgages

HMO mortgage criteria: what lenders look for

HMO mortgage criteria vary more between lenders than almost any other buy to let product, which is where a broker earns their fee. Lenders look at the room count and whether the property is a standard HMO or a large HMO, the HMO licence and whether the local authority operates additional or selective licensing, the planning position and any Article 4 direction that removes permitted development rights, and the experience of the landlord. Some HMO lenders want a first time landlord to hold a standard buy to let first, while others will consider a first time HMO landlord with the right property and a clear business plan. The property itself has to meet the lender's asset criteria on room sizes, amenities and the EPC. We know which desks lend on large HMOs, which accept limited company and SPV borrowers, which want an assured shorthold tenancy per room and which prefer a single agreement, and we place the case with the lender whose criteria actually fit. All criteria are indicative, vary by lender, borrower and property, and are not an offer of finance.

How much deposit do you need for an HMO mortgage?

HMO mortgages are typically arranged up to around 75 percent loan to value, so the deposit is indicatively 25 percent of the property value, though the exact figure moves with the lender, the room count and the strength of the rental income. The loan is sized on the interest cover ratio the HMO rent gives against the lender's stress rate, and because a licensed HMO usually earns more per property than a comparable single let, a well tenanted HMO often supports the borrowing comfortably. Where the rent is tight relative to the loan, a lender may reduce the advance or look for top slicing from other income. On a large HMO or a case valued on a commercial basis, the leverage and the valuation approach can differ again. We model the interest cover and the achievable loan on our HMO mortgage calculator and the buy to let mortgage calculator before approaching lenders, so the HMO mortgage goes to market at a level that will fund. The figures are illustrative, vary by lender and property, and are not an offer of finance.

Are HMO mortgages more expensive?

HMO mortgages usually price a little above a standard buy to let mortgage, reflecting the specialist underwriting, the smaller pool of HMO lenders and the additional risk lenders attach to shared housing and licensing. The gap has narrowed as the HMO market has matured, and a strong case with good rental income and an experienced landlord can price competitively. Expect a lender arrangement fee, which on HMO and specialist products is often a percentage of the loan, a valuation fee that reflects the HMO inspection, and legal costs. Rates are commonly fixed over two or five years, and an early repayment charge applies inside the fixed period, so the term should match your plan for the property. We disclose our broker fee in writing and quote the HMO mortgage rates and the all in cost so cases can be compared properly. HMO mortgage rates move with the wider market, so we quote current indicative ranges rather than headline figures, and they are not an offer of finance.

Why use an HMO mortgage broker?

An HMO mortgage broker adds most where the product is least standardised, and HMO lending is exactly that. Few lenders publish HMO mortgage criteria in full, the definition of a large HMO and the treatment of licensing and Article 4 differ by lender, and the same property can be valued as a house or as an HMO investment depending on who underwrites it. We hold the relationships with the specialist HMO lenders, we know which will fund a large HMO, a limited company purchase or a conversion, and we structure the case, the rental income evidence and the business plan the way each desk wants to see it. That is the difference between an application and an approval. HMO lending arranged for landlords and companies is predominantly unregulated and falls outside the Financial Conduct Authority's regulated mortgage perimeter; where a case would be a regulated mortgage contract or a consumer buy to let, we refer it to an authorised firm. Alongside HMO mortgages we arrange multi unit freehold block mortgages, semi commercial mortgages, portfolio mortgages and bridge to let for landlords converting or refurbishing before the property is let.