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A Comprehensive Guide to HMO Mortgages

Property investment is a dynamic and diverse field, offering numerous opportunities for investors to grow their wealth. At Mortgage Scout, we are increasingly finding that investors are looking at the option to invest in Houses in Multiple Occupation (HMOs). With the changes from Section 24 taxation having been in place for some time, now could be the right time to review your investment strategy and consider HMOs as a new area. 

Embarking on this journey requires a comprehensive understanding of how HMO mortgages work, the prerequisites for potential purchasers, and the nuances of property valuation within this sector. In this article, we'll draw on Mortgage Scout and Leaders' extensive experience to explain the intricate workings of HMO mortgages, what potential buyers need to have in place before applying, and the key differences between commercial and bricks-and-mortar valuations for HMOs of varying sizes.

Understanding HMO Mortgages


HMO mortgages, also known as House in Multiple Occupation mortgages, are specialized lending products designed to facilitate the purchase or refinance of properties that are to be used as HMOs. An HMO is a residential property where three or more unrelated individuals share common facilities, typically the kitchen and bathroom. 

To grasp how HMO mortgages function in the UK property investment sector, let's break down the key components.

Property Eligibility:

- To be eligible for HMO mortgage financing, the property must meet the legal requirements for an HMO, including specific safety standards and the necessary licenses.

- The size of the HMO property, often measured by the number of bedrooms and occupants, plays a crucial role in determining the mortgage terms and rates.


Licensing Requirements:

- HMO properties require mandatory licensing in many UK regions. It's imperative for potential buyers to ensure that the property meets all local licensing regulations.


Tenant Management:

- Managing tenants in an HMO can be more complex than for traditional buy-to-let properties. Lenders will typically assess the landlord's experience and management capability. Working with a local agent who understands the nature of HMO management such as Leaders, is imperative to how successful the home will be for its tenants.

Allison Thompson, National Lettings Managing Director at Leaders said “Houses of multiple occupation are a different niche of the Private Rented Sector (PRS) to the more common single let. They require specialist knowledge and understanding to ensure your investment and the mortgage companies lending is protected, working with a letting agent who have experience of managing them and letting your lender know this is your proposed route can help combat any concerns they might raise.”

Every local authority has different regulations when it comes to safety in an HMO, so it’s also important to contact the HMO officer at your local council to understand exactly what is required in your chosen area. 

Prerequisites for Potential Purchasers

Before applying for an HMO mortgage, potential purchasers need to have certain elements in place to improve their chances of approval and secure favourable terms.

- Strong Credit Score: A good credit score is crucial to secure competitive mortgage rates. Lenders assess credit history to gauge the borrower's reliability.

- Deposit: Buyers need to have a substantial deposit, typically 25-30% of the property's value, to secure an HMO mortgage.

- Experience: Lenders prefer borrowers with prior experience in property management, as HMOs require a higher level of landlord involvement. However, in some cases this can be a single BTL property owned and operated for at least a year. 

- Legal Compliance: Ensure the property is legally compliant with HMO regulations and has the required licenses.

- Rental Income Projections: Present a well-researched business plan demonstrating the property's rental income potential, including tenant demand and local rental rates.

Commercial Valuation vs. Bricks-and-Mortar Valuation

Valuation is a crucial step in the HMO mortgage application process. It determines the property's worth and influences the mortgage terms. The type of valuation required can vary depending on the property's size and intended use.

- Bricks-and-Mortar Valuation: For smaller HMOs, typically those with up to six bedrooms, a bricks-and-mortar valuation is commonly used. This valuation assesses the property's structural integrity, condition, and market value as a standard dwelling.

- Commercial Valuation: For larger HMOs, typically those with seven or more bedrooms, where the property cannot be easily converted back into a family home may require a commercial valuation. A commercial valuation takes into account factors including rental income, yield, and the property's suitability for HMO purposes.

- Rental Yield: Commercial valuations often consider the rental yield the property can generate, which is a key metric for investors. A higher yield can positively impact the mortgage terms.

-Rental Income Potential: A commercial valuation takes into account the property's income-generating potential, which is a critical factor for lenders in larger HMO cases.

Investing in HMO properties can be a lucrative venture, but it comes with unique challenges and requirements, especially when seeking HMO mortgages. Potential purchasers must ensure their eligibility by complying with HMO regulations and having the necessary financial prerequisites in place. Understanding the nuances of property valuation, including the difference between bricks-and-mortar and commercial valuations, is also essential to secure favourable mortgage terms. Mortgage companies are often looking for clarification that the borrower will be able to manage the HMO in an appropriate way to reduce any perceived risk from their side. 

Sarah Thompson, Managing Director of Mortgage Scout, says: “As the property investment sector continues to evolve, HMO mortgages remain a popular choice for investors. By staying informed, following best practice and working closely with experienced professionals, investors can successfully navigate the HMO market and leverage the opportunities it offers for wealth growth in the property sector.”

* This article has been written by Mortgage Scout, part of the Leaders Romans Group *

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