An introduction to HMO finance

If you’re thinking of buying a House in Multiple Occupation (HMO), then you need to understand that HMO finance does not work in the same way as a standard buy-to-let or residential mortgage.

Unless you are a cash-rich investor looking to buy an HMO outright, or an experienced HMO landlord looking to generate passive investment from peers to grow your portfolio (another subject entirely), then you’ll likely need some kind of finance.

The world of HMO finance is a complex but small one, with only a few lenders specialising in this type of mortgage product, although this number is slowly increasing. In the same way that HMO management is not for the faint hearted, nor is financing an HMO.

Generally speaking, mortgages for any type of buy-to-let property will be not only based on expected rental income, stress tested at 145%, but also your ability to pay should the property be empty or experience voids. Interest rates and fees are normally higher too, with a bigger deposit required due to smaller loan-to-value ratios.

These numbers and lending criteria only increase when looking at your HMO finance options.

When an HMO is not an HMO

Firstly, many HMOs are not bought already set up as house shares. You’ll probably be buying a single-occupancy dwelling or, if you’re more advanced and adventurous, maybe a small hotel, former doctors’ surgery or nursing home.

If you are buying a regular property that’s not already an HMO, you won’t be able to get an HMO mortgage because lenders will need proof of immediate rental income. This is where you need to speak to specialist mortgage brokers who can get a clear idea of your goals for the property, the capital you have and any other assets that may work in your favour until you convert the dwelling into an HMO and remortgage onto an exclusively HMO product.

A bridge over tricky waters

A bridging loan is a short-term loan with fairly expensive interest rates but these finance products can be beneficial to investors during the refurbishment and conversion of a property to an HMO.

Bridging loans can often be set up in a number of days and lenders will have low or no income requirements, won’t care that the property is uninhabitable, nor be concerned with rental income potential.

The amount available is often 60-75% of the value (either current market value or purchase price) and in some cases, one lender will be able to offer you a ‘bridge to let’ product followed by an HMO mortgage after refurbishment, meaning you don’t have to switch lenders. As with anything HMO related, it’s a complicated sector, so make sure you are armed with the right information and find a specialist broker or professional to help you.

HMO mortgages

As already mentioned, a lot of mainstream lenders don’t offer HMO mortgages because they are considered higher risk. This is due to the increased costs in preparing an HMO property for rental, management challenges with multiple occupancy and difficulties in HMO valuation. In the event of non-payment and repossession, there’s a chance the property will go down in value if it has been converted into an HMO.

The good news is that, compared to even a decade ago, the number of HMO finance products has significantly increased, simultaneously driving competition and interest rate wars in the market, giving investors more choice.

The lending criteria will take into account the rental income, licensing status, location and number of bedrooms. It’s also worth bearing in mind that most HMO lenders will only consider lending to experienced landlords too.

Anyone applying for a mortgage needs to prove where the funds are coming from, including HMO landlords, which is why using passive investment can cause issues.

What type of HMO finance product you are eligible for will also depend on how you own the property. Since the new rules surrounding mortgage interest tax relief came fully into force, many landlords have moved the ownership of their buy-to-let and HMO properties into limited companies. Initially, products to cater for this arrangement were thin on the ground and expensive but it seems the market has evened out.

Whatever you do, don’t go it alone. Go through a mortgage broker to help you find the best deal for you and your circumstances.