A House in Multiple Occupation (HMO) is a form of letting where different tenants (usually 3 more) occupy private bedrooms but share such as the bathroom or kitchen. An HMO benefits both parties, the landlord and the tenant. Tenants pay way less to rent a single room than they would for an entire property. On the other hand, landlords receive a greater profit from the combined rent of all the rooms.
Whether you are a first-time landlord or seasoned investor, you need to know where you can get the resources to fund an HMO development or refurbishment. In this article, you will learn why HMO mortgage is at the top of the pack among other financial sources for this profitable project.
What is an HMO mortgage?
An HMO mortgage is a loan specifically designed for a property that is occupied by multiple tenants. The HMO property is used as the security for the loan. Most HMO mortgage products are available on both purchase or remortgage basis and to both individual and group borrowers.
With the popularity that HMO mortgages are gaining each day, standard lenders have now included this as one of their products. A good number of lenders have also specialized in HMO lending, meaning that investors and landlords are taking HMO letting seriously now more than ever.
Other than the development mortgage loan used to build an HMO property from scratch, HMO refurbishment mortgages are specifically important. This mortgage is designed for refurbishment projects to convert a property to HMO if it is not, or increase the value of an existing HMO property. The funds can be used for complete renovations, including loft conversions and extensions.
The eligibility criteria
To know if you qualify for an HMO mortgage, you need to directly reach out to either a qualified mortgage broker or a mortgage lender. The most basic information needed by these parties include:
- Your experience as a landlord
- The location of the HMO property
- The type of tenants, whether housing association, students or professionals
- The number of lettable rate
- The rental income
- The property management used whether letting agency or landlord
- The need for an HMO license
These details, plus the report of several visits to your HMO property, will form the basis of your mortgage approval.
If you have managed a few HMO units in the past, the mortgage application and approval process may be easier for you. This does not mean that first-time landlords are locked out. If you are a beginner investor in this industry, a letting agent will help ease the mortgage application process.
What is the difference between an HMO mortgage and a buy-to-let mortgage?
Unlike HMO mortgage, a buy-to-let mortgage does not allow for multi-letting. This means that you can only borrow this loan to develop or renovate single let units. If a buyer-to let finds out that you have multiple tenants in your property, they may recall the mortgage immediately. Also, a buy-to-let mortgage can damage your credit score, making subsequent loan applications challenging. In this regard, HMO mortgages have earned the hype considering that they allow for the development of multi-tenant property per the terms that you will agree with your lender.
HMO mortgage rates
The HMO mortgage rates vary from one lender to the other. The loan to value and the use of the loan (development of refurbishment) also determine the rate for these loans. The rates are available on a fixed or variable basis. Although HMO mortgage rates are relatively higher than those charged for buy-to-let, they make financial sense in the long run. This is obviously due to the high returns that come with HMO properties.
To make the most out of this type of mortgage, you should compare the rates of different lenders online and choose the one that is friendly to you. Even better, there are tons of HMO mortgage calculators to help you determine the loan’s affordability. Luckily, if you get an HMO mortgage with a good rate and then take the full initiative of managing your property properly, your chances of making decent returns are very high. This is the other reason why investors are going for HMO mortgages.
The property and real estate industry has, for a long time, been a good source of income for many investors. The HMO letting strategy has so far proved to be very viable in regard to the returns it brings. If you want to develop such a property, you need a reliable, affordable, and efficient financing source. Currently, there is no form of financing that can equal what HMO mortgages offer to landlords and investors. From the points above, it is clear that HMO mortgages have genuinely earned the hype surrounding them.