HMOs: Maximising Your Property's Potential
HMOs: Maximising Your Property's Potential
Your home may be repossessed if you do not keep up repayments on your mortgage.
Most Buy to Let Mortgages are not regulated by the Financial Conduct Authority.
All information was accurate at the time of publication.
8th October 2024
What Is A House of Multiple Occupancy (HMO)?
A House of Multiple Occupancy (HMO) is a rental property where multiple tenants share individual rooms within a shared property. This arrangement offers several advantages for tenants, including:
Lower rental costs: Tenants can enjoy more affordable rent compared to renting an entire property. This allows them to live in more desirable areas, such as those closer to their workplaces or with better amenities.
Shared utility expenses: Tenants can divide utility costs among themselves, reducing individual financial burdens.
Greater flexibility: If one tenant decides to move out, it doesn't affect the tenancy of the remaining occupants. This is unlike traditional tenancies where all tenants are on a single agreement, requiring a new contract or potential eviction for everyone.
For landlords, HMOs can provide:
Higher rental income: By renting out individual rooms, landlords can potentially earn more than with a traditional single-family tenancy.
Increased property value: The higher rental income generated by an HMO can contribute to increased property value, making it more attractive to future buyers.
Easier resale: HMOs often appeal to other landlords, potentially simplifying the selling process and reducing the need for estate agent services, saving on fees.
What Risks Come With A House of Multiple Occupancy (HMO)?
One potential drawback of HMOs is the risk of disruptive or problematic tenants. If one tenant's behaviour negatively impacts the living environment, such as destroying shared spaces or making life difficult for other occupants, it could lead to tenant turnover.
Additionally, landlords should be aware of the evolving property market and regulatory landscape. Obtaining an HMO licence is often a legal requirement, and associated costs can vary depending on property size and location. It's essential to research current licensing fees and potential future increases.
For example, in Bristol, the New HMO licence fee for a 5-bed property increased from £1,420 to £1,886 on April 6, 2024.
Landlords may need to make specific property modifications to comply with HMO regulations, such as providing adequate fire safety measures or ensuring sufficient communal space.
Can I Buy A House of Multiple Occupancy (HMO) As A First Time Landlord?
While not all lenders offer HMO mortgages, there are options available for both experienced and first-time landlords. Some lenders may require at least one year of letting experience before approving an HMO mortgage application. However, certain lenders allow first-time landlords to purchase HMOs with up to six lettable rooms. Experienced landlords may be eligible for HMOs with up to ten lettable rooms.
What Requirements Are There For A House of Multiple Occupancy (HMO) Property?
When applying for an HMO mortgage, landlords must meet specific requirements and ensure their property adheres to certain criteria. The number of lettable rooms can vary between lenders, with some setting maximums from four to 20 rooms, while others have no restrictions. Additionally, the number of kitchens may be limited to one or two, or there might be no maximum.
Some require the bedrooms to be of a certain size:
- 6.51 m2 for one person over 10 years of age,
- 10.22 m2 for two persons over 10 years or
- 4.64 m2 for one child under the age of 10 years
Do I Need A Licence For My House of Multiple Occupancy (HMO)?
The availability of HMO mortgages can depend on the specific property's licensing status. Some lenders may be willing to finance properties that don't require a licence, while others may refuse to lend on properties where a mandatory licence is needed. There are also lenders that accept applications for unlicenced HMOs if the property is expected to obtain a licence within six months of completion. In such cases, the conveyancer typically verifies that the licence is in place.
What Deposit Do I Need For My House of Multiple Occupancy (HMO)?
Similar to traditional buy-to-let mortgages, a 25% deposit is generally recommended for HMO mortgages. While some lenders may offer higher loan-to-value ratios (LTVs) of up to 80%, it's prudent to aim for a 25% deposit to secure better interest rates and terms.
How Do They Calculate The Rental Coverage For House of Multiple Occupancy (HMO) Mortgages?
Lenders calculate affordability for HMO mortgages based on the combined rental income from all Assured Shorthold Tenancies (ASTs). The specific calculations vary depending on your tax bracket (basic, higher, or combined) and whether you're buying individually or jointly. If you're purchasing through a limited company, different calculations apply.
Additionally, lenders may offer higher loan amounts for longer fixed-rate mortgages, such as 5-year terms or more, compared to shorter 2-year terms.
Should I Purchase My House of Multiple Occupancy (HMO) In My Personal Name Or In A Limited Company?
While it's essential to consult with a tax adviser for personalised advice, many landlords are choosing to purchase HMOs through limited companies. One advantage of this structure is the potential to borrow larger amounts compared to individual ownership, especially for those in higher income tax brackets.
I’ve written a blog about buying in your personal name or through a limited company called Which is Best for Your Buy to Let: Personal Name or Limited Company?
Can I Buy A Property With A Bridging Loan And Then Remortgage To A House of Multiple Occupancy (HMO) Mortgage When I’ve Completed The Work?
Many clients discover suitable properties in desirable HMO locations and utilise bridging loans to finance the purchase and necessary renovations. These renovations often include installing fire doors and converting existing rooms into additional bedrooms. Once the work is completed, landlords can remortgage onto a traditional HMO mortgage. Some lenders may have ownership requirements of one, three, or six months before allowing this.
When valuing the property for the remortgage, lenders may consider the original purchase price plus the costs of renovations.
How Do I Manage My House of Multiple Occupancy (HMO)?
Managing an HMO property can be demanding, especially when juggling a full-time job. Landlords may choose to engage a reputable letting agency to handle tasks such as tenant sourcing, managing property maintenance issues, and coordinating cleaning services. This can free up valuable time and ensure the HMO runs smoothly.
It's important to conduct thorough research when selecting a letting agency. Consider factors like experience with HMOs, fees, and the level of service provided.
For Bristol-based landlords, I like to recommend Front Door Lettingswho also have a great Instagram account.
Whether you're an experienced HMO landlord or considering your first purchase, I'm available to discuss your options and provide personalised guidance. While I can offer comprehensive advice on property and mortgage matters, it's essential to consult with a qualified tax professional for accurate and tailored tax advice. If needed, I can recommend a suitable tax adviser.