“There are two things that you can’t be TOO cautious about, i.e., Property and Mortgage.”
HMO, also known as House in Multiple Occupation, is a great option for landlords in the UK. The rate of investment that you can get from this option is much higher than renting property to a family. However, “house in multiple occupations” can be a confusing concept. That’s why this article will help you understand this concept properly.
What is HMO?
A house in multiple occupations refers to residential property which is rented out to three or more tenants. Every tenant has a private room. However, they need to share some areas, such as the kitchen, bathroom and lounge area.
You must be wondering – How is it different from regular let out property? Well, the only difference is that the tenants are NOT from one household or family. That’s why the landlords need to get an HMO license and a special mortgage.
Note: Other terms used for this type of property are “Flatshare” or “House share.”
Different Categories of HMO
It is generally divided into two categories, i.e., Large and small.
Large HMOs are rental properties where 5 or more tenants share the common areas. These require a licence from local councils, which is provided after proper inspection of the property. Furthermore, landlords need to renew the licence every 5 years.
On the other hand, rental properties where four or fewer tenants reside is categorised as smaller HMOs. Depending upon the area you live in, you may or may not need a license. So, you need to check that with your councils.
Note: In Scotland, the licence is reviewed every three years.
A landlord can not rent a “flatshare” without a licence. Moreover, the license is not issued to the landlord but is given for the property. That means, if you have more than one “flatshare” property, you need a separate licence for each property.
Along with this, the council might also apply other conditions before issuing the licence. For instance, they may ask you to provide additional facilities. The fees for the licence will also vary from council to council.
Types of HMO mortgages
HMO mortgage is designed explicitly for multi-let property investors. It is because HMO investments are generally heavily regulated and include the cost of licences, certificates and safety checks. Yet, you can easily get HMO mortgages in the UK with some research and help from specialists. Nonetheless, here are the three types of loans that you can avail of.
- HMO mortgages and remortgages: for existing multi-let properties.
- HMO refurbishment mortgages: for renovation projects.
- HMO development loans: for major build projects
It is noteworthy that not every lender offers HMO mortgages. Therefore, you need to find professionals who have expertise in the market. Also, look for the best opportunity to get better funding terms.
Besides, the lender might also have its own conditions before lending. For instance, they may want a special communal area for all the tenants or only one kitchen for all the tenants. Therefore, it would be better if you learn about such terms and conditions beforehand. It will help you make well-informed decisions.
Difference between HMO and BTL mortgage
Many people get confused between BTL (Buy to let) loan and HMO (House in Multiple Occupation) loans, as both are associated with renting properties. However, the income yield of BTL is less as compared to HMO.
Besides that, there is one major difference between both- BTL loans DO NOT allow property renting under multiple tenancies. It will be written very clearly in the agreement. On breaching the contract, the lender can recall the mortgage immediately. Needless to say, it will affect the credit score of the landlord to a great extent. And there could be penalties as well.
Eligibility for HMO
Generally, an HMO loan is given to landlords having experience of two or more years. Newbie landlords can also avail of this loan, however, the application process might be more challenging for them. So, if you are a newbie landlord, you must seek help from financial specialists.
In any case, for availing of the loan you need to make a significant deposit. Usually, the lenders require an LTV (Loan-to-value) ratio of 65 to 80% or less. Along with this, the lender will also take into consideration the potential rental income. The income is calculated with the help of a mortgage stress test.
Besides that, the lender might also ask you about your income sources, credit score or any other rental property. All these factors will help determine your repayment ability. In addition to this, every lender can have their specific requirements, which they will specify in the contract.
The rate of interest for HMOs is generally higher than the BTL. You may also need to pay any specific fees for a detailed valuation process.
The valuation is usually yield-based, which is an estimate based on multiple of the rent. Or, valuation could be determined by assessing the property’s market price. The method selected is generally subjective in nature and might be based on the lender’s criteria.
Also, the final interest rate varies from lender to lender. Lenders usually make their decision depending upon the LTV (loan to value) ratio. What type of loan you have borrowed also plays a vital role. Nonetheless, the borrower has the option to select the fixed or variable rates.
That’s the reason why it is essential that you learn about several lenders and select the final lender accordingly.
Tenant safety is a crucial aspect of the HMO mortgage. Therefore, according to the law, every landlord needs to fulfil the following responsibilities:
- Install and maintain smoke alarms.
- Provide safety certificates for electrical appliances.
- Send the council an updated gas safety certificate. (every year)
- Availability of fire doors.
It ensures that the tenants are living in a safe environment. Moreover, it also helps the council to keep a check on the landlord’s activities.
If your aim is to earn rental income, you must take “House in Multiple Occupation” into consideration. Once you have successfully attained the loan and fulfilled all the requirements, you can sit back and enjoy a good income.