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House sharing has becoming increasingly popular as more (and older) people opt to live with housemates over ownership or renting alone. A survey published by Spareroom showed the number of housesharers aged 35-44 rose 186% from 2009 to 2014.
HMOs have become a buzzword among landlords, but what are the rules and costs, and is it the best route for everyone wanting to buy to let?
Ramneet Bains, a buy-to-let mortgage expert from Habito, breaks down the dos, don’ts & complexities of letting an HMO.
First off, what counts as an HMO?
An HMO, or “house in multiple occupancy,” is a property let to at least 5 people, where at least 3 of them aren’t in the same family unit. (So you could have, say, a family of 3 plus two other unrelated tenants).
There are quite a few rules around what landlords need to provide in an HMO, like a shared kitchen and living space, but that’s the starting definition.
So, what are the rules?
Start off by checking with your local council to see if you need a licence (you most likely will), and what the licence requirements are.
There are a few major things that are changing about HMO legislation that were passed in 2018 and are currently being phased in.
Room size, for instance – there are now new rules around what the minimum room size can be for a single adult, a couple, a child, etc. You’ll need separate locks and doors for your tenants, and the property will need communal areas — and it can’t just be a kitchen. And you’ll have more stringent fire safety regulations.
Typically, HMOs are treated like a business, so you’ll find yourself having to do things that a typical buy-to-let landlord wouldn’t have to, like set up a contract for waste pickup.
The main thing to keep in mind is that lenders are trying to be quicker than legislation. So even though all these things haven’t been completely phased in yet, you’ll need to treat them as if they are if you want to get approved for a mortgage or remortgage. For instance, only a few specialist lenders are still taking on unlicensed HMOs.
What are the differences when it comes to getting a mortgage for an HMO vs. a typical buy-to-let?
Mortgage interest rates for HMOs are almost always quite a bit higher (usually around 1 - 1.5% higher), simply because there’s more work the lender needs to check and validate for an HMO mortgage application — the licence, the tenancy agreements, special considerations like room size for valuation, etc.
The “rental stress rate” is also higher (how high rent has to be in order for the landlord to repay the mortgage). That’s because you’re supposed to be earning more in rent from an HMO than you would from a typical buy-to-let.
Lenders also want to see that you’re an experienced landlord, and they’re unlikely to approve you for an HMO if you’re not. That’s because there’s so much more work involved than with a typical buy-to-let: multiple tenancy agreements and admin, keeping on top of the extra upkeep and repairs that you get with more tenants, as well as making sure you’re following all the legislation.
In this case, experienced means you currently have at least one buy-to-let property, and you’ve had it for at least six months. If you’re a first time landlord, you’ll have an extremely hard time getting a mortgage for an HMO.
When is an HMO a good choice?
When you’re an experienced landlord, you know the costs and the risk involved, and you’re prepared for the extra time and admin (usually, that means hiring a management company).
In the last few years, younger and wealthier investors have started thinking more and more about HMOs – they’ve become a bit of a buzzword. Landlords want to maximise their deposit, and property prices haven’t risen as much lately, so they’re trying to extract value in other ways.
If you’re prepared and you know what you’re signing up for, an HMO can be a great investment – it’s just really being realistic about all the extra regulations, admin, and costs involved and weighing those against the increased rent.
So you’ve weighed the pros and cons and decided to make the jump – what’s next?
Setting up a limited company to buy your HMO is often a good choice, because you can file a lot of those extra costs as business expenses and get some tax back.
Definitely consider taking on a property management company if you haven’t already, they can take a lot of the stress and risk off your shoulders with things like tenancy agreements and admin.
And of course, using a broker (like Habito!) can put you in the best position for being approved for a buy-to-let mortgage for an HMO.