Why Houses in Multiple Occupation (HMO) are more profitable for landlords
Monday 5 September, 2022
Why are HMO type properties attractive to buy to let landlords?
Potential higher yielding HMO type properties remain attractive to portfolio landlords with the aggregated rental income vastly exceeding potential monthly mortgage interest payments maintaining a buoyant market. The same property let on a single AST (Assured Shorthold Tenancy) may struggle to achieve a 75% loan to value mortgage with the rental income and mortgage payments gap narrowing significantly with the recent interest rate hikes across lenders.
Katherine Mumford, Mortgage Broker in Tottenham, North London said:
‘Clients who purchased their property pre-2018 may be unaware of the regulations that have since been introduced and it is vital that brokers understand basic requirements themselves so that they can ensure the client is able meet the requirements to obtain the appropriate mortgage product going forward.
The type of HMO licence required varies between boroughs (mandatory, additional, selective) and I would advise anyone looking to purchase or convert to an HMO to familiarise themselves with their local council HMO requirements.
I would like to see more lenders coming into the market with Limited Company / HMO mortgage products to drive more competitive interest rates in a growing market brought about by the tax changes that have been phased in by the current government.’
What is an HMO?
The Government website states that an HMO is a house that is rented out to three or more unrelated tenants. The people living in the house may share bathroom and kitchen facilities. These rentals are often referred to as ‘house share’ or ‘multi-let’ as landlords charge for renting a room in a property, rather than charge to rent the whole house.
Buy to let v HMO buy to let
It is important to review the potential rental income from both types of property.
HMO Buy to let
If you rented out a 3-bedroom terrace house with 1 reception room to unrelated tenants, depending where you were based in the UK you could charge e.g a monthly rental income of £500 per calendar month for each room. This would generate £1,500 per month, or £18,000 per annum.
Buy to let
A traditional buy to let mortgage could see the same 3-bedroom property let to a family with two children. If the family was charged £800 per calendar month the rental would generate £9,600 per annum.
Katherine Mumford, Mortgage Broker & Protection Adviser in Tottenham, North London continued:
‘The example shows how much more rental income could be generated if you take out an HMO buy to let mortgage and rent to unrelated parties. However, it is worth remembering that with HMO mortgages the landlord will often have to pay the utility bills too and with electricity and gas prices increasing for everyone it is important to consider these potential costs in your calculation. There will also be other costs to consider with HMO buy to lets. Set up costs tend to be higher as each room needs to be secure and there are more health and safety issues that need addressing.’
Thomas Oliver mortgage brokers are used to offering HMO mortgage advice and our mortgage advisers work with lenders that specialise in these products. Our mortgage broking team can discuss the advantages and disadvantages of HMO mortgages with you and review the mortgage market for you which saves you time and enables you to take up the best HMO mortgage product for your circumstances.
If you are interested in learning more about HMO mortgages call our mortgage brokers now on 01707 872000 for an initial personalised consultation to discuss your HMO requirements.
