HMO mortgages are generally seen as a good investment opportunity due to the higher than usual rental yield
A House of Multiple Occupancy (or HMO) is a residential property rented out to at least 3 unrelated occupants who share facilities, for example, a kitchen or bathroom. HMO rental payments often include all bills (utilities and council tax).
HMOs are generally seen as good investment opportunities due to their higher than usual rental yield – renting a property room by room generally gives investors a greater level of income.
For more information please contact our expert HMO mortgage brokers on 020 7220 5100 or click here for more contact options.
HMO mortgages tend to have slightly higher interest rates when compared to regular buy to let mortgages. This is because there are fewer lenders in the HMO mortgage market compared to lenders who offer regular buy to let mortgages.
At Coreco Commercial we can secure HMO finance at very similar rates to more traditional buy to let mortgages. We are Whole of Market and have established relationships with specialist HMO lenders who can assist both First Time HMO Landlords and Professional Landlords.
While on the face of it an HMO just seems like a buy to let mortgage with multiple people and individual rent contracts, there are lots of extra restrictions to consider. These restrictions come from both the government and local authorities as well as lenders themselves. Some examples that people often forget with HMOs are:
As with standard buy to let mortgages, when you apply for an HMO mortgage the lender will conduct a stress test. This is to make sure that you can afford to repay your mortgage with your rental income should interest rates rise.
Typically a stress test will look at the potential income from the property and whether that is enough to cover the mortgage should interest rates rise. Generally, lenders like to see the income generated from the rent cover between 125-145% of the mortgage interest cost.
Please ensure you have taken tax advice from a suitably qualified accountant/tax advisor to ascertain how best to structure the ownership of any HMO (Personal vs Ltd Co).
When approaching lenders for an HMO mortgage they typically like to see borrowers who are experienced landlords. However, there are a few lenders in the market that are willing to lend to first-time landlords.
Before you consider changing your property into an HMO, you must contact your local council to check whether a licence is required.
In 2010, the government introduced an alteration to planning regulations which meant that an owner of a residential property (Class C3) would only be able to convert the property into an HMO (Class C4) if planning permission had been granted.
The legal consideration given by local councils which can grant the application is called an Article 4 Direction. If it is not granted, it will remove the right to carry out certain types of ‘permitted development’.
In some instances, planning permission can be difficult to obtain. Be aware, local authorities in the UK have different views on granting HMO licences.
It’s important to research the views of your local council, or the area you are looking to purchase an HMO property in thoroughly before applying for the licence as you may not be able to obtain it.
More information can be found on your local council website.
If you are able to apply for an HMO licence, you need to do so through your local council. The application can be carried out by yourself, or you can ask a managing agent to do it on your behalf.
A licence is valid for no more than 5 years and must be reapplied for in advance of the existing one running out. What’s more, an existing licence cannot be carried over into a new property. For example, if you purchase an HMO that already has a licence through the current owner, you will be required to apply for a new licence yourself before purchasing the property.
Upon applying for your licence, important information surrounding the property will also need to be provided to the council. There include the details of;
The cost of an HMO licence will vary depending on the individual local authorities. There is usually a non-refundable admin fee for applying, regardless of whether or not the licence is granted.
To confirm the exact cost, it’s best to contact your local council for more information.
The penalties for not having an HMO licence can be severe. It is considered to be a criminal offence if you are the landlord of an HMO which should be licenced, but is not. As a result, the penalty fine could be up to £20,000 and you may be ordered to repay the equivalent of 12 months’ rent.
Alternatively, if the tenants are receiving housing benefit, you will be ordered to repay 12 months’ housing benefit to the council. Breaking the terms of your licence could also see you fined up to £5,000, and if you broke the licence terms by renting to more tenants than specified, you could be fined up to £20,000.
As a landlord, it’s also important to understand that if your HMO is not properly licenced, you may not be able to evict tenants in situations of difficulty. Ensure you carry out thorough research before applying for the HMO licence you think you need.
A Section 257 HMO refers to a specific type of HMO. It carries more regulations surrounding it so it’s important to ensure you have thoroughly reviewed the type of HMO licence you will need, and understand the difference.
A Section 257 HMO is a whole converted property rather than individual dwellings. Similar to a standard HMO, the property has been converted into self-contained flats however, less than two-thirds of the flats are owner-occupied. Most importantly, the conversion did not comply with the relevant Building Regulations in force at that time, and still doesn’t. For reference, you should access the appropriate building standards as listed by the Building Regulations 1991 or 2000 (whichever were in force at the time of the conversion) to confirm.
This type of property requires an additional licence and they can be difficult to navigate. It’s the responsibility of the property’s freeholder to ensure they have applied for it if required. Local authorities may operate their own scheme but its best to check with your local council.
Are you looking to maximise the profit from your HMO? Then a Multi-Unit Freehold Block (MUFB) could be a good solution.
A Multi-Unit Freehold Block is a property divided into self-contained flats, but instead of having individual leaseholds it’s all held under a single freehold title. Often, a Multi-Unit Freehold Block is converted from a single residence with each flat containing its own kitchen and bathroom facilities, but sharing the hallways and garden.
When looking for a lender to finance a Multi-Unit Freehold Block, it’s important to identify that a different type of mortgage will be required. When compared with an HMO, each unit is self-contained with its own private entrance and separate Assured Shorthold Tenancy (AST).
Although multi-tenancies may sound complicated, we’re on hand to help. Make sure to flag this to your specialist HMO mortgage adviser so we can explore what options are available to you.
Your home may be repossessed if you do not keep up repayments on a mortgage or any debt secured upon it.
There is no guarantee that it will be possible to arrange continuous letting of the property, nor that rental income will be sufficient to meet the cost of the mortgage.
A percentage of the mortgage amount may be charged depending on individual circumstances. A typical fee is 1%.
Coreco Commercial is a trading style of Coreco Specialist Finance. Coreco Specialist Finance. Registered Office: 117-119 Houndsditch, London EC3A 7BT. Registered in England Number: 06851546
Coreco Specialist Finance Limited is authorised and regulated by the Financial Conduct Authority.
Some types of finance offered by Coreco Commercial are not regulated. Please contact us for more details.
Coreco Commercial advisers are experienced mortgage advisers but we are not tax advisers. Please seek independent tax advice if required before you decide to proceed.
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