HMO Licences and Mortgages Guide
HMOs are considered a lucrative form of income and stable investment for existing and aspiring landlords. A house in multiple occupation, also referred to as a HMO often consists of, buy to let properties rented to students wishing to share a home or young professionals who want to live closer to work.
To own and rent out a HMO, you may require a licence from your local council. However, it’s important to note that each local authorities interpretation and criteria for HMOs vary. Furthermore, mortgage lenders who offer HMO mortgages, have their own rules which must be met by prospective landlords.
Most of which will assess the property’s value, rental income and your credit history. Each section of the criteria will determine whether the bank is prepared to offer a mortgage agreement.
HMO Specialist Mortgage Brokers
With in-house HMO specialists, an email or phone call away, there is always someone happy to answer your queries and explain HMO mortgages in more detail. While also offering to take note of your circumstances, regardless of your credit history, to devise a selection of HMO mortgage solutions that suit your requirements.
In doing so, you can avoid spending time contacting individual lenders who may not apply to you. Instead, allow one of our HMO mortgage brokers to perform the hard work on your behalf and present the best lenders available, for you to apply for, that have a higher probability of approving a mortgage for you.
HMOs Legal Requirements
If you’re unsure about how to navigate the buy to let market, particularly that which concerns HMOs, the below explains HMO licenses in more detail.
The vast responsibilities of a landlord, whether new or experienced, is a lot to fathom. Some areas, such as laws and regulations that protect and safeguard tenants, no investor can afford to misinterpret. Landlords are accountable for seeking the relevant licences they need to ensure their property is safe to accommodate tenants, and there is a licence explicitly for HMOs.
The Housing Acts
Within the Housing act 2004, and for Scotland 2006, it defines HMOs status as a buy-to-let property. The Housing Acts promote and protect tenants who reside in shared and multi-unit housing. The importance of safeguarding tenants within HMO properties derived from tenants wit to more significant risks because;
- The actions of other tenants impairing the safety of the housings other occupants
- A landlord did not fulfil their responsibility to provide a safe environment for tenants to live
With the assistance of the housing act, local councils can identify the essential requirements, such as fire safety regulations, which need to be adhered to in the property, by the landlord, before a HMO licence is granted.
Houses of Multiple Occupants Defined
Properties are deemed HMO if the bathroom and kitchen facilities are shared. And at least three households reside in the shared home.
A household is described as a single person, or a family living together. Unrelated persons who live in shared accommodation are viewed as separate households and usually have a separate tenancy agreement. However, student house shares may hold a single tenancy agreement, although, by law, each student will be considered as an individual household.
Other examples of HMO accommodation are hostels, shared workers accommodation and shared housing.
HMO Mortgage Criteria
Lenders who supply HMO mortgages each have a set of rules to follow when considering lending money to an investor. Some of which can vary, here are six areas lenders frequently evaluate before choosing whether to lend and how much to give to a customer;
First-time buyers and new landlords can’t attain a HMO mortgage. Previous experience of owning a buy to let property for at least one year is a standard requirement.
Typically lenders will only consider HMO properties at a minimum value of £100,000. However, the minimum value is higher for properties in London. However, the property value is another section that changes per lender.
The number of rooms within the property could restrict your pool of prospective lenders. For most HMO mortgage lenders, eight-bedrooms is the maximum they’ll lend for. However, some banks might consider a larger property.
Some lenders will offer loans to limited companies, personal names and portfolio landlords.
Typically, the rental income for the property shall be surveyed in consideration of the bedrooms available. Undoubtedly, this will provide a more substantial loan in comparison to a property which is let to one household.
Loan To Value
Lenders often possess lending limits. The cap for lenders is usually 75%. However, some lenders may consider a higher LTV.
In consideration of the above factors, you may be wondering which points apply to you, and what lenders will consider HMO mortgage applications from you. Whether you have limited experience, or want to purchase a property value undercuts the usual £100,000 for HMOs, expert advice is available from CS mortgage solutions advisors.
Should You Apply For A HMO Licence?
To acquire a licence for a HMO, you will need to be a ‘fit and proper person’. In summary, this term refers to; having no unspent convictions, court hearings, tribunal meetings or civil proceedings that could impair your role as landlord. Additionally, you must not have been previously denied access to a licence, or own a property which is the subject of an interim or final management order.
As highlighted above, the housing act seeks to protect the health and wellbeing of tenants, by ensuring landlords are taking steps to make their accommodation a safe place for all occupants to live. Which is particularly true for more significant properties with multiple rooms and tenants, as they pose a much higher risk, safety-wise, in comparison to a dwelling let to a single household.
If you are buying a large property and want to rent the rooms out to multiple tenants, you should speak to your local authority about applying for a HMO licence. In doing so, the local council will take steps to assess your property, and if it meets their safety standards, you will be granted a licence that will last for five years. Before your licence expires, you must reapply for a new licence.
If the property you are contemplating purchasing is three stories or more, includes five or more tenants, who amount to at least two households, obtaining a licence by law is mandatory.
Furthermore, local councils may expand the criteria, if there are other HMOs that are not defined by the Housing Act, which they feel need to be licenced. An example being, if a specific multi-let property is in a location which is subject to a higher fire risk than other areas.
Fines and Penalties
It’s always wise to ask your local council whether or not your HMO requires a licence. In doing so, you can avoid the prospect of an expensive fine. The cost of which varies between England, up to £20,000 and Scotland, which is up to £50,000.
Suitable Tenants and HMO
The variation in criteria between local councils can leave many investors confused and curious about whether there are any requirements for what constitutes a suitable tenant in a HMO. In summary, HMO requirements are;
- Three or more occupants
- Unrelated tenants
- Share the home’s facilities
For instance, you’re probably familiar with the desire of students and professionals using house shares for commuting and social purposes.
Another common question people ask is whether landlords are legally allowed to live in a HMO. If you own a home, and rent out empty bedrooms to unrelated tenants, your home will adopt the status of a HMO, providing you house two or more lodgers or tenants. If this happens, you should, of course, meet the health and safety standards set by your local council.
Interest rates for residential properties are incredibly low. However, HMO properties, in particular, pose a higher risk to lenders. Thus the HMO mortgage rates tend to reflect this uncertainty, with higher rates. Rates of which are noticeably higher than standard buy to let mortgage arrangements.
As with mortgages for standard properties, the larger the deposit you have to put down on a property, your chance of securing a lower mortgage interest rate increases. However, ensure you scrutinise the one-off fees lenders advertise to prospective buyers, with the promise of securing a lower interest rate. Often, spreading the price of the fee across the mortgage product term can give you an indication of whether in comparison to a higher interest rate, whether it’s a cost-effective option long term. In summary, a low-interest rate does not always provide the best value, particularly when the impact of the initial fee is considered.
While scouting the market for mortgage products, it’s essential to take note of the types of mortgages available. Your options include fixed, tracker, and discounted variable mortgages.
The interest rate for this product will remain the same for the duration of the product. The product length varies from 2 to 10 years. Longer fixed mortgage terms equate to higher interest rates in comparison to products fixed for two years.
Fixed-rate mortgages are popular amongst lenders who prefer a set monthly fee for a set time, without the fluctuations that can arrive with purchasing a tracker mortgage.
If you apply for a tracker mortgage product, the interest rate is dependent on the mortgage lender’s standard variable interest rate, which fluctuates according to the bank of England’s base rates.
Tracker mortgages usually offer lower interest rates than fixed-rate mortgages; this is mainly due to the unpredictability of these products. The product term ranges from 2 to 10 years.
Discount variable mortgage
Mortgage products of this kind are set at a percentage that’s lower than the lenders’ standard variable rate. However, the monthly mortgage repayment could change if the lenders’ standard variable rate fluctuates. Terms for this product usually span from 2 to 5 years.
Can I Change Mortgage Products?
If during the agreed HMO mortgage product term, you source a better rate elsewhere, you can remortgage or change products. However, you will incur an early repayment charge, which can be costly and sometimes defeat the object of switching to a cheaper rate.
What Happens When The Mortgage Product Term Ends?
It’s important to note when the mortgage products term ends; it’s advised to remortgage to another mortgage product. Otherwise, you’ll be transferred to the lenders’ standard variable rate, which is usually higher than the product offers.
With an array of information to process along with requirements and criteria by lenders, the journey to attain a HMO mortgage is filled with obstacles. As a result, many investors decide to lean on our specialist mortgage brokers to help guide them through and devise a plan of options that appeal to the customer’s and fulfil the lenders’ criteria.
Are Limited Company HMO Mortgages Available?
A rise in HMOs and limited company buy to lets has increased demand for a combination of the two. The answer is yes, Ltd company HMO mortgages are available. However, the options are limited to a select number of lenders. You’ll often find mortgage providers who sell products for HMO mortgages, shall consider limited company HMO mortgages too.
For more details on attaining a Limited Company HMO mortgage, call one of our experienced mortgage advisors.
HMO Properties and Secured Loans
Secured loans are a popular way for landlords to lend more money than offered in standard mortgages. Whether to improve an existing multi-let property, acquire a new property or to manage and consolidate their current debt.
HMOs have proved to be a profitable investment for many, which is why more people are considering acquiring HMO mortgages. However, managing the process of obtaining a relevant mortgage alone can be daunting, which is why it’s essential to seek professional guidance from an experienced HMO mortgage broker from CS mortgage solutions.
In doing so, you will receive an array of mortgage options that apply, which will also give you the best chance of securing a mortgage deal.
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