Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
A property you can let to a group of tenants rather than a single person or household can be a more lucrative buy-to-let investment as you can charge a higher combined rent. However, there can be extra risks involved so if you need a mortgage to buy one, lenders will require you to take out a special type of buy-to-let mortgage.
This type of shared property is known as a ‘house in multiple occupation’ (HMO), which will often be a house shared by students or working people who can’t afford to rent a whole property on their own, so what you’ll need is an HMO mortgage. They may be advertised specifically as HMO mortgages or regular buy-to-let mortgages that allow you to borrow on HMOs.
Although mortgages for HMOs work in a similar way to conventional buy-to-let loans there are some key differences to be aware of.
The official definition of an HMO is a property let to 3 or more people from more than one household. A household can be a single person, couple or family. Each one rents a single unit in the property but shares cooking and/or bathroom facilities and usually has their own tenancy agreement, although in the case of students there may be one between them.
Lenders may have their own definitions of what they consider to be an HMO, however, so working out whether you need an HMO mortgage is not always straightforward. For example, the Mortgage Works defines one as being a property occupied by 5 or more people with more than one tenancy agreement.
In Scotland and Northern Ireland you need a licence to rent out an HMO, while in England and Wales you need one in certain circumstances, such as if it’s a ‘large’ HMO defined as one being let to 5 or more people. To get a licence, you must make sure the property meets certain standards and be a ‘fit and proper’ person to hold one.
If you have a smaller HMO that doesn’t need a licence you may be able to take out a standard buy-to-let mortgage.
With an HMO it’s likely that you’ll have a higher turnover of tenants than with a single-household property and every additional tenant comes with the risk that they might not be able to pay their rent or cause other problems.
For these reasons HMO mortgages tend to be more expensive than buy-to-let ones and impose additional criteria to minimise the risk to the lender, such as requiring you to be an experienced landlord. There are also fewer lenders offering them.
Other downsides are that properties with multiple tenants may need more repairs and maintenance, it might take more work to fill all the rooms and, as you usually need to draw up a separate contract for each tenant and vet each one separately, it can be more time-consuming than a regular buy-to-let investment. Plus there is the extra admin involved if you need to get an HMO licence.
You should work out whether the extra costs involved make it worth investing in an HMO before you do it.
As with buy-to-let mortgages, loans for HMOs are usually taken out on an interest-only basis and the rent you expect to get must be more than the interest payments. It must usually be at least 125% of the interest. They also often use a higher interest rate than you would actually be paying to calculate this, which could be 5.5% for example, to make sure you would still be able to afford the repayments if rates went up.
These calculations are known as ‘stress tests’ and will determine how much you can borrow. The lender will also look at your income and outgoings to make sure you can afford to pay back the mortgage.
The additional criteria you or the property might have to meet to be granted an HMO mortgage include:
A minimum property value, which could be £75,000 or £100,000
A minimum level of experience as a standard or HMO landlord, usually 1-2 years
A maximum number of storeys in the property – you may not be able to get a mortgage on one with more than 4 storeys
A maximum number of bedrooms in the property, which could be 6 or 8
No more than one kitchen in the property
A communal seating area in the property
You will also have to meet the lender’s usual buy-to-let lending criteria on aspects such as your age, income and credit history.
The maximum percentage of the property’s value you can borrow (known as the loan-to-value or LTV) is usually 75%, although it is possible to find HMO mortgages up to 80% LTV.
To find out how much you could borrow, how much repayments would be and what deals you might be able to get you can use an HMO mortgage calculator. These are often found on brokers’ websites and will ask you to enter details such as the property price, how much you want to borrow and the term you want to take the mortgage out over.
It’s a good idea to use a few as they may give you different results. Some will show you specific deals available for your needs while others will just show you monthly repayment amounts.
While regular 5-year fixed rate buy-to-let mortgages start at around 2% for borrowing up to 75% LTV, you would pay at least around 3.5% for an equivalent HMO mortgage. Most deals are 2 or 5 year fixes, although there are some variable and tracker rates available.
As when taking out any mortgage you should look at the set-up fees as well as the interest rate to compare the total cost of deals over the initial period, after which you would be able to remortgage without paying early repayment charges. The ones with the lowest interest rates won’t necessarily be the cheapest overall. A mortgage broker can help you do this.
The total mortgage fees could range from zero to as much as £4,000 or more as product fees may be charged as a percentage of the loan amount. If you had to pay a 2% fee on a £150,000 loan for example you would pay £3,000.
As with regular buy-to-let mortgages, you can also take out HMO mortgages as a limited company. Owning rental property within a limited company can give you tax benefits as the income tax relief available to private landlords on finance costs, such as interest payments and mortgage fees, has become less generous in recent years. Since the 2020/21 tax year you have only been able to claim tax relief at the basic rate.
There is a relatively small number of lenders offering HMO mortgages and they are mostly niche lenders rather than mainstream ones. Many only offer their deals through brokers. You may currently be able to find HMO mortgages through the following lenders:
Foundation Home Loans
The Mortgage Lender
As HMO mortgages are complex and mostly offered through brokers, you should speak to a specialist HMO mortgage broker to find the best deal for you. They will be able to look at all the products available to find the ones most suitable for your needs as well as identify which are the best-value options. Another benefit of getting mortgage advice is that you’ll be able to claim compensation if you’ve been given bad advice.
If you're a first time buyer or looking to move house or remortgage, we can help you find the best mortgage deal to suit your needs.