Landlords: Do you need an HMO mortgage?

By Helen Jackson 8th July 2022

With the cost of living continuing to rise in the UK, almost as fast as its population, so too does the need for cheaper housing alternatives for tenants. HMO, or House of Multiple Occupancy, provides an answer for many.

Are you a landlord thinking of maximising your profits by letting out individual rooms in your property?

Well, in this guide, we’re going to be looking at what an HMO actually is, what you’ll need and the pros and cons before you take your next steps.

What is a House of Multiple Occupancy (HMO)?

More commonly referred to as a ‘house share’, an HMO or House of Multiple Occupancy is a term that refers to a residential property rented by at least three individuals who are not originally from one household or family. The tenants will share the property, occupying individual bedrooms, while sharing communal facilities, such as the bathroom, kitchen, garden and lounge, etc.

Popular with students and young professionals, HMOs provide a more affordable housing alternative for young people who generally aren’t yet financially stable enough to live alone, nor are they settled enough to live with a partner.

The tenant not only gets to spend less on rent by spreading the cost amongst their housemates but also makes savings on bills, from gas, electricity and water, through to internet and TV subscriptions.

With demand for cheaper accommodation continuing to grow across the UK, many landlords are opting to rent out their properties as HMO lets. This type of rental can be much more lucrative than a single-occupancy rental, but this will require you to look into certain things, such as the type of mortgage you’ll need before you start renting your property out as an HMO.

What type of mortgage will I need for an HMO?

When deciding to purchase a property with the intention of renting it out as an HMO, you’ll require a different kind of mortgage than a standard buy-to-let. If renting out a property to three or more individuals from separate households that aren’t related, married or in a civil partnership, you’ll require an HMO mortgage.

In this situation, you won’t qualify for a typical buy-to-let mortgage, as they are designed for single-household tenants only. If you have bought a property with a buy-to-let mortgage, you will be restricted to renting out to a single-occupancy household.

Using this property to rent out to HMO will almost certainly leave you in breach of the terms and conditions of your buy-to-let mortgage, which could cause your lenders to take legal action against you.

What is the difference between an HMO mortgage and a typical Buy-to-Let mortgage?

HMO mortgages are generally harder to obtain than a typical buy-to-let mortgage, with many lenders requiring a track record of being a successful single occupancy landlord or having relevant experience of letting an HMO previously.

You may find obtaining an HMO mortgage challenging if you don’t have anywhere from six months to three years of ‘landlord experience’.

With fewer lenders providing HMO mortgages, this type of loan market is much less competitive. Lenders can raise their interest rates significantly because they are necessary when renting out to an HMO. So, if this is a route you choose to go down, you will need to be prepared to pay higher rates than you would with a standard buy-to-let mortgage.

Loan-to-value (LTV) on an HMO mortgage is usually capped by lenders at 80%, meaning that a minimum deposit needed will be 20%. But most HMO lenders will require closer to 60-75%.

For example, the average LTV for a typical buy-to-let is 73.3%, with the limit being capped at 85%, requiring only a 15% deposit. So when taking out an HMO mortgage, depending on your personal and unique circumstances, be aware that the lender will require you to part with a larger deposit.

Advantages of an HMO

It may prove to be a bit extra work, but there are plenty of advantages to renting out an HMO property; here a just a few:

Potential for substantially higher rental yields – if done correctly, landlords of HMO rentals can expect to make about 20% more than with typical rented accommodation.
Less chance of gaps in income – having multiple paying tenants in a single property means if one tenant moves out or falls behind on their rent, money is still coming in while a replacement is found.
More favourable tax position – claiming them as expenses of the “rental business”, you can make tax deductions on qualifying items within communal areas of your HMO.
Growing demand for flexible and affordable living – the ever-increasing number of young single students/professionals looking for shared accommodation means plenty of potential tenants.

Disadvantages of an HMO

But there are still several things to be wary of when choosing to rent out your property as an HMO; we’ve listed a few below:

Higher turnover of tenants – your renters are more likely to be short-lived, meaning less predictable monthly income, with more frequent time-consuming advertising for new tenants.
Potentially higher maintenance costs – with the inevitably higher churn of tenants, you will likely see less care for your property. Also, clashes of personalities are more likely with strangers living together, leading to potential antisocial behaviour, and potentially causing significant damage to the property.
Complications over utility bills – some landlords of large HMOs choose to pay the bills and include these fees in the rent ease complications. While this is a popular approach, with multiple people living separate lives in one property, it’s likely to have larger utility bills to pay.
More expensive – obtaining an HMO mortgage might mean you’ll have to part with a larger deposit and higher interest rates, meaning more significant monthly repayments. You’ll also need a £500 HMO licence, which you may or may not be approved for, based on experience.
Resale value will be affected – if modifications are made to accommodate an HMO, the property’s appeal at resale will be significantly smaller, as it will only appeal to the small yet growing HMO landlord market.

Hopefully, this guide has given you a better understanding of what an HMO is and what you can expect as a landlord should you start renting your property out this way.

As a landlord, you’re probably always on the lookout for ways to increase your income — check out our guide for 7 ways to increase your income as a UK landlord.