Buy-to-Let Mortgages for HMO Properties: What You Should Know
Investing in Houses in Multiple Occupation (HMOs) can be an exciting opportunity for buy-to-let investors.
An HMO is, broadly, a building or self-contained flat occupied by at least three people who constitute more
than one household; the households share one or more basic amenity such as a toilet, bathroom or kitchen;
and each household pays rent under its own tenancy agreement. HMO properties often offer higher rental
yields than single tenancy properties, thus making them potentially more attractive investments. However, it
is also crucial to understand the regulations and significantly greater challenges surrounding the
management of HMOs.
HMO Regulatory Requirements
Before diving into HMO investing, it is important to be aware that this sector is subject to specific
regulatory requirements. For example, HMO properties have to adhere to certain minimum standards,
including from a health and safety perspective, and be licensed by local councils.
Standards
Whilst there are minimum national standards which must be met, local councils can set even higher
standards for their local areas. For example, the minimum national standards for sleeping room floor area
size are 6.51 m2 for one person over 10 years of age, 10.22 m2 for two persons over 10 years and 4.64 m2 for
one child under the age of 10 years. However, a local council may require a minimum sleeping room floor
area size of 8.5 m2 for one person and 11 m2 for two persons, regardless of age. It will also require that there
be a lounge of an adequate size for the occupiers of the property. In addition, there will be detailed
requirements with respect to food preparation, cooking and storage facilities; WC and bath/shower facilities;
laundry facilities and so on.
Other standards will pertain to matters such as security with respect to the communal front door, entrance
doors to individual dwelling areas and windows; fire safety and fire precautions, including means of escape
in case of a fire, fire resistant doors, fire alarms, emergency lighting, fire exit signs and firefighting
equipment; refuse storage; heating; electric safety; gas safety; energy performance certification; provision of
services; cleanliness and maintenance; and so on.
Licensing
HMOs with five or more occupiers are subject to mandatory licensing. Where exceptions to mandatory
licensing apply or HMOs have fewer than five occupiers, local councils will usually still require “additional”
licensing. The consequences of letting an unlicensed HMO or breaching HMO regulations or licence
conditions can be extremely severe. For example, the offending landlords may face unlimited fines, rent
repayment orders, banning orders and criminal convictions.
It is also important to note that compliance with HMO regulations can involve significant expenses,
including the costs of necessary property upgrades and licensing fees. Therefore, budgeting for such
expenses is crucial when assessing the financial feasibility of an HMO investment.
Financing HMO Properties
If you are considering obtaining a mortgage for a House in Multiple Occupation property, it is important to
be aware that the lender’s requirements can be somewhat different from those for a standard single tenancy
buy-to-let mortgage. Here are some key points to bear in mind:
First, it is worth noting that not all buy-to-let lenders offer mortgages for HMOs. Therefore, it is advisable to
research and identify lenders specializing in HMO mortgages and their terms and requirements fairly early
on in your financing journey. Furthermore, if your target HMO property has more than five bedrooms, it is
worth bearing in mind that you may not be able to get an HMO mortgage for this and might instead need to
look for a commercial property type of loan.
It is also important to note that HMO mortgages usually carry higher interest rates than standard single
tenancy buy-to-let mortgages. This is due to the complex nature of managing HMO properties and higher
perceived risks. Therefore, it is advisable to examine your financial situation carefully and consider whether
you can manage the higher costs associated with this type of mortgage before embarking on the HMO
journey.
HMO lenders are also likely to impose stricter requirements compared to standard single tenancy buy-to-let
lenders. For example, some HMO lenders might be particular about the location of the property. This could
be because there might be stronger local demand from students for a property situated close to a large
university. On the other hand, other lenders may prefer working professionals over students as your tenants.
Investing in HMOs demands thorough research, strong financial planning and selecting the right financing
partner. Ultimately, it is important to find a lender experienced in HMO financing who understands and is
aligned with the unique challenges and potential of your particular investment. The complexity of managing
these properties and the regulatory landscape also means that investors must approach HMOs with a clear
understanding of and plan for how they will manage the property, as well as an understanding of the
financial implications.
Key Financial Considerations for HMO Investments
There are several key factors to consider when evaluating the financial viability of investing in an HMO
property. These include the potential for higher rental yields, as HMOs can often generate higher rents due
to the ability to rent to multiple tenants. However, this potential needs to be balanced against higher costs
associated with HMOs.
One significant cost to account for is the interest rate on HMO mortgages. Investors should generate expect
higher interest rates than on standard single tenancy buy-to-let mortgages. This premium, ranging from 1-
2% or more, reflects the added risk and complexity of managing HMO properties.
Additionally, compliance costs can significantly impact on the investment required for an HMO property.
Meeting national regulatory standards and those required by local councils, together with licensing costs,
can require substantial upfront expenses and also higher ongoing expenses compared to a single-tenancy
buy-to-let property.
Nevertheless, HMOs represent an important segment in the private rental market and their ability to generate
potentially higher rental yields makes them an attractive investment proposition. However, investors need to
be confident about being able to deal successfully with the associated challenges and regulations. Success in
HMO investing hinges on successfully dealing with such complexities, as well as an appropriate financing
model. With the right approach, HMOs can be a rewarding addition to your investment portfolio. Consulting
with experienced professionals can provide invaluable guidance and ensure you make informed decisions
throughout your HMO investment journey.
FAQs
1. **What are the legal requirements for renting out an HMO property?**
Legal requirements include obtaining an HMO licence, and adhering to national and local regulatory
standards. These standards pertain to a wide variety of matters, including licensing; the sizes of bedrooms;
lounges; kitchens; toilets; bathrooms; refuse storage; heating; fire safety; routes to escape from fires; electric
safety; gas safety; energy performance certificates; provision of services; cleanliness and maintenance; and
so on. The consequences of letting an unlicensed HMO or breaching HMO regulations or licence conditions
can be extremely severe. For example, the offending landlords may face unlimited fines, rent repayment
orders, banning orders and criminal convictions.
2. **Are there any tax benefits associated with owning an HMO property?**
While the tax position of every HMO investor will invariably be unique, tax on rental income is usually
based on taxable profit after allowable deductions such as 20% of mortgage interest costs, letting agent
commissions, property management fees, service charges, insurance premia, repair and maintenance
expenses, and licence fees. Similarly, as well as stamp duty and selling costs, property improvement
expenses are usually deductible for capital gains tax purposes. However, it is best to consult your
professional tax advisor to determine your own unique tax position.
3. **What are the challenges of managing an HMO property compared to a single-tenancy buy-to-let
property?**
Stringent national and local authority standards for HMO properties pertain to a wide variety of matters,
including licensing; the sizes of bedrooms; lounges; kitchens; toilets; bathrooms; refuse storage; heating; fire
safety; routes to escape from fires; electric safety; gas safety; energy performance certificates; provision of
services; cleanliness and maintenance; and so on. Other challenges which make managing HMO properties
more demanding include potentially higher tenant turnover, multiple tenants and tenancy agreements, and
the complexity of managing shared living spaces.
