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Benefits of HMO Mortgages for New Landlords

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HMO mortgages on more considerable buy to let properties have conventionally been the remit of experienced landlords – and rental knowledge is sometimes a requirement for HMO licensing purposes.

However, a relaxation of HMO mortgage criteria has meant that HMOs are a more accessible investment opportunity, with many benefits to consider.

Here the Revolution Brokers team explains some of the key advantages to considering an HMO in your rental portfolio – even if you aren’t a seasoned landlord.

Properties Considered an HMO

A residence with multiple tenants sharing bathrooms and kitchens is defined as a house of multiple occupancies (HMO).

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Previously known as house shares, these properties are commonly used for student accommodation and shared housing in busy cities and commuter belt regions.

The Benefits of Buying an HMO

There are some downsides to investing in an HMO, as they usually require more hands-on management and can be a higher financial risk.

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Still, several advantages make it worth considering.

Rental Yields on HMOs

The most significant advantage of owning an HMO is that your rental yield will be much higher than for another buy to let property.

Average yields are around 9.13%, making the returns considerably higher than a traditional residential investment home (yields of about 3.5%) and semi-commercial properties (6.69%).

While you’ll usually need to cover higher maintenance costs, the additional returns typically cover this expense with ease.

Reducing Tenancy Vacancies

A big challenge for landlords is coping with mortgage payments during vacancies and the uncertainty associated with high tenant turnovers.

HMOs are primarily rented to students, so turnover is anticipated, seasonal, and something you can prepare for.

The other benefit is that with multiple tenants, you’ll usually spread tenant vacancies over two or more individuals, making any vacancy less financially impactful.

HMO Locations

Successful HMO investments rely on the property being in a suitable location. Demand for rented rooms is very high in city centres and large towns.

Many professionals choose to rent a partial property as a weekday stop-gap and a more affordable alternative to renting or buying a whole property close to their place of work.

With high property market demand and little affordable housing, HMOs become more appealing for prospective tenants looking to live close to metropolitan areas and university campuses.

Some of the best locations are those close to transport links, in city centres, near local amenities, or within walking distance of a university.

Understanding HMO Licensing

Licensing rules for HMO landlords vary between local authorities. While there are baseline requirements, each council has its own regulations, so it’s wise to inquire before applying for an HMO mortgage.

For example, some authorities won’t require a license for an HMO with four tenants or less, but others will.

An upside of licensing is that you might find less competition for HMO properties in regions with stricter rules.

Licenses can take a while to arrive, but you can go ahead and apply for a mortgage in the meantime, provided you have evidence that you’ve made your application.

Accessibility for HMO Mortgages

The buy to let market is growing, and more lenders are beginning to offer specific mortgages for HMOs.

Rates are higher than for a standalone buy to let investment, but as competition increases between providers, the rates are correspondingly dropping.

If you’re looking for an HMO mortgage, please get in touch as many specialist mortgage broker are offering incentives, such as:

  • Cashback
  • Free valuations
  • No product fees

Some of the best deals are for two year fixed products, with a deposit of at least 25%, with rates around 1.73%. You can secure an HMO mortgage on a five year fixed deal for a little more.

Commercial HMO rates for incorporated landlord businesses are higher, but if you have a more substantial deposit to put down, we can negotiate those on your behalf!

Assessment Criteria for HMO Mortgages

As we’ve mentioned – in the past, HMO mortgages were limited to experienced landlords.

Many lenders do still prefer applicants to have from one to three years of experience, but other HMO mortgage providers are comfortable with six months experience, or even none at all.

Another change in the market is that some of the biggest HMO lenders extended their criteria a couple of years ago, accepting applications against properties in Scotland.

This adaptation means that there are more potential HMO mortgages out there and better rates available.

Lenders primarily look at security when assessing an application and ensuring that the rental income will be more than enough to cover the mortgage payments, plus any vacant periods and maintenance costs.

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