Getting finance for residential HMO investment property for leverage

What is a HMO and are there Mortgages available for HMO Investment property

Real estate investors have invariably been keen to maximize the rental yield value of their portfolios. Classic Buy to let investment property would usually be a single house, a terraced, semi-detached, or detached family house. The individual would get the house using a mortgage and let the property out to a single tenant household. The rental income would be enough to cover the investors’ interest installment payments on the mortgage and certain additional on-going charges. The investor may take benefits from a leveraged financial position of his first deposit capital being used in the investment on the medium or long term investment of 5 to 10 years. His investment needs to keep pace with inflation and also offering him a yield on his leveraged investment.

There are actually limits to rental yields an investor can get on one dwelling BTL landlord rental property, whether it's a house or flat or penthouse apartment. Probably the most he may desire could be safeguard from inflation and some capital growth of the property value over time. However the rental income minus mortgage payments and various running costs really doesn't usually result in banking profits every month. This can be merely servicing the investment for the long term gain.

Greater rental yield would come from renting the identical property to more than one tenant for example with a student share house, the landlord can effectively charge you more per bedroom in the house than he could if he let to a single household family. This starts to move into the realms of what is called multi-let property - the home is let to two or more households. This affords the landlord greater rental yield income and minimising his exposure to rental voids, if one tenant defaults on rent then there are still rents from the remaining tenancies. This kind of letting arrangement is termed HMO.

The word HMO is short for for House in Multiple Occupation and does apply to properties with bedrooms which let to non-related tenants who then share kitchen and bathroom features, or properties arranged as bedsits. It may also apply to a property that the owner lives in and rents a a small number of rooms out. The normal rule which defines an HMO is usually a property with 3 or more storeys, which is let to 5 or more unrelated tenants. If you are unsure, then you should contact your local Council for advice, as there are regional differences.

The guidelines pertaining to HMOs were described in the Housing Act 2004 of which this Act also resulted the formal licensing of HMOs and provided an obvious meaning of what constitutes an HMO. Basically, there has to be a basal principle of ‘sharing’ facilities. Examples of this are as follows:

• A house that has been converted into bedsits where each tenant rents their own particular room (which may, or might not include a kitchen area) and shares bathroom/shower-room and WC and perhaps a kitchen.
• A college student share house, where each student rents just a room and shares all your other facilities - kitchen, communal lounge, bathroom/shower-room and WC.
• A flat or house where 3 or more unrelated tenants share the accommodation and facilities.
• An owner-occupier who may have 3 or more lodgers with a licence to occupy their lodging accommodation.

A brand-new class of planning use was unveiled in 2010 called C4 which covers all properties where 3 or more people share a dwelling. You will want an HMO licence if the property is:

• 3 or more storeys including a basement and above shops.
• Rented to 5 or more tenants
• Some or all of the occupants share bathroom, WC and/or kitchen facilities

Preparing finance to invest in a BTL investment property arranged as a HMO defined above, may be harder than arranging a mortgage on one dwelling BTL investment property. While there are a lot of banks and brokers who will offer the investor a mortgage for any property to be let as one house or one flat, rental properties that fall within the criteria of multiple letting , multiple occupation HMO investment property may be more difficult than at first may well seem. In the existing UK BTL mortgage market you'll probably find merely a maximum of 4 lenders who offer mortgage finance on HMO's.

From an investment decision perspective you are able to argue that a houses rented to multiple tenants would offer better rental security, on the grounds that the rental income is not really down to one household's income. The rent income for that property might be comprised of 4 to 5 rents from your individual tenants.


Should one tenant lose his employment, or suddenly move out or various other circumstances leading ultimately into a rental void, the property owner as only lost 1/4 or 1/5 with the rent towards the month or time it takes to re let that room / bedsit / flat. However the upside certainly is the investor should ultimately reap the benefits of greater rental yields as opposed to a singularly rented house or flat, plus greater return on a initial deposit employed in the investment, when compared to the same capital spent in regular BTL property.

Exploring the investment from the bankers perspective it can be seen as a riskier investment profile since the property owner may need greater hands on experience with dealing with rental property, dealing with tenants , and sustaining a larger property. There may also be additional costs involved towards landlords all through ownership for example local authority licencing fees, additional health and safety law requiring higher maintenance and capital costs of installing of fire doors, fire retardant furnishings, alarm systems, fire escapes and so on. This additional complexity would lower the resale value and amount of potential investors who could buy the property from your bank if the bank ever had to repossess the house from the existing owner and also have to sell on. these risk factors will have to be priced to the lending model.

Therefore in terms of cost and pricing of HMO mortgages in the lenders the perspective HMO investor should anticipate a payment slightly more on rates and fees. Although you can find only a handful of HMO mortgage lenders in the UK market the mortgage pricing still remains competitive in contrast to regular BTL mortgages. Potential borrowers for HMO mortgages ought to have existing BTL property within their portfolio and a few years of rental market working experience of owning and sustaining BTL property. For useful advice and to find out if you would qualify for a mortgage to acquire a HMO property you may make contact with a specialist mortgage broker who operates in this domain. We have included a link in the resources section of this article.