Financing a House in Multiple Occupation, or otherwise known as an HMO for short, is a more complex process than your standard buy-to-let investment opportunities.
HMOs require specialist mortgages, strict legal compliance, and higher operational costs, which can often put some people off from financing such an investment. However, there’s a primary benefit to HMOs in the way of higher rental yields.If you’ve been considering HMOs as a financial opportunity, then here are some finance basics for the curious homeowner to understand.
The definition of HMO and licensing
An HMO is a property that’s occupied by at least three tenants who are not from one household. They do share essential facilities, though, like a kitchen or bathroom.
Properties with five or more unrelated tenants will require a mandatory national license, and smaller HMOs may require an additional license depending on the local council’s rules.
It’s important to note that standard residential and standard buy-to-let mortgages aren’t suitable for most HMOs. You’ll need a specific HMO mortgage from a specialist lender.
Financing and costs to consider
With HMOs, you’ll typically need a larger deposit to invest in the property. Lenders will usually require between 25% to 40% of the property’s value.
As a result, there are often higher interest rates attached to these mortgages, too. Rates are generally 1-2% higher than standard buy-to-let mortgages due to the risk. Lenders will also assess affordability based on the property’s potential and room-by-room rental income, which must typically cover the mortgage payment by 125%-175%.
Many lenders will also require the borrowers to have previous buy-to-let landlord experience, though some options will exist for first-time landlords.
Upfront and ongoing costs
There are a number of upfront and ongoing costs to think about when it comes to HMO finance, and being prepared for these costs is important.
- Licensing fees – This varies by council, but you’re likely to pay between £500 and £1,000 for a license that will need to be renewed every five years.
- Renovation/setup – Budgeting for fire safety equipment, furnishing,s and potential renovations are all part of the financing required for HMOs.
- Utilities and council tax – Landlords will typically pay all utilities and council tax unless all tenants are on a single tenancy agreement or full-time students.
- Management – Management fees are often higher for HMOs, typically 12-15% of the rental income, compared to around 8-10% for single lets.
Legal and regulatory compliance
Non-compliance with HMO regulations can often result in significant fines, to the tune of £30,000 per offence in some cases, as well as criminal prosecution.
Ensuring the correct license is in place is important, too. Operating an unlicensed HMO is illegal. You should also adhere to all safety requirements from fire, gass and electrical safety rules. From annual gas safety checks to electrical inspections every five years.
Strict national and local rules apply when it comes to minimum room sizes, and planning permission will be required if you’re converting a property into an HMO.
Consulting with a specialist mortgage broker and doing the research will ensure you make the right decision when investing into a HMO.