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What are the advantages of HMO buy to let mortgages?

Thursday 26 August, 2021

In this article Thomas Oliver mortgage broker Vishal Gulrajani in Hertfordshire, London and Cheshunt reviews HMO (house in multiple occupation) mortgages. If you want more information on the various buy to let and HMO mortgages available in the mortgage market, please contact your Thomas Oliver mortgage broker on 01707 872000. Our qualified mortgage broking team offer personalised buy to let mortgage advice.

What is an HMO mortgage? 

Since the tax changes were introduced over five years ago, we have seen investors try and combat the reduction in profits by changing their approach when buying properties. One of the most popular methods is using an HMO mortgage. This is a particular type of buy to let mortgage where the property is let out to at least three different individuals who are not from one household, but live together and share facilities like a kitchen and bathroom. 

Student lets or worker accommodation are examples of HMO mortgages

Gaining rent from individual room lets is a lot more profitable then renting to a family, but like anything that is more profitable it comes with its drawbacks.

How many HMO properties are there in London

The number of HMOs in London has been increasing year on year. Although there isn’t an up-to-date figure of the number of HMO properties in London, in 2013-14 there were an estimate 195,230 in London. In the rest of England there were and estimated 288,138 HMOs. Of the HMOs in London, by far the most populous  borough was Southwark with over 20,000. This was followed by Hackney, Brent and Wandsworth with around 15,000 HMOs.

Disadvantages of HMO mortgages

Firstly, normal buy to let investments are still profitable but HMO mortgages can achieve returns that are sometimes three times greater than traditional buy to let mortgages, so you can see the attraction. For this reason, the HMO mortgage never struggles on the rental calculation, and you can normally buy one with the minimum 25% deposit. The drawback is that an HMO license is required or will be required on completion, and sometimes depending on the council it can be difficult to obtain this license and you can also incur costs which you should include in your calculations when deciding which investment to make.

What is expected of you as a landlord with an HMO mortgage

If you are experienced in the HMO market, you will already know what is expected of you as a landlord regarding tenant safety. Whether oversight is carried out by a property agent you have appointed or directly by you as the landlord, it is essential under law to:  

  • Send the council an updated gas safety certificate every year
  • Install and maintain smoke alarms
  • Provide safety certificates for all electrical appliances whenever requested

If you have applied and been approved for a refurbishment HMO, typically the refurbishments will need to be completed within a six-month timeframe of obtaining the loan.

How to get your property up to licensable HMO standards

To ensure a property is up to licensable HMO standards, the basics include 

  • Fire Doors
  • HMO compliant fire alarm
  • Approved door locks

So already you can see there is lot more work involved in buying and maintain an HMO, but there is also a lot more profit to be made. 

HMO mortgages are typically 1% more expensive than normal buy to let mortgage rates

Another very important factor that needs to be noted is that HMO rates are approximately 1% more expensive than normal buy to let rates although this has never hampered an investor’s decision due to the massive increase in rental income available. Remember on a normal buy to let mortgage you cannot have individual tenancy agreements and the lenders will send out a valuation to make sure the appropriate mortgage is being applied for on the designated property. 

Vishal Gulrajani, mortgage broker in Hertfordshire, Cheshunt and London said: ‘Overall HMO mortgages are more popular than ever, and the profit yields are exceptional. However, this mortgage product isn’t for the faint hearted nor is it something I would recommend to a first-time landlord. Remember there is a higher potential for conflicts in the household as five strangers could be living together, so an experienced landlord can draw on his experience to deal with this situation. Consequently, I would strongly suggest you seek mortgage advice and research HMO’s thoroughly before investing in one. At Thomas Oliver we have liaised with our HMO mortgage partners to make sure we can accommodate all your needs. We can explain how the products work and recommend the best HMO mortgage for your personal circumstances. If you are looking for HMO mortgage advice, call our mortgage broking team now on 01707 872000. We offer all property buyers a free initial mortgage consultation.’

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