Securing The Right HMO Finance

Securing HMO finance – what you need to know

As the popularity of houses in multiple occupation (HMO) properties has increased so too has the availability of specialist mortgages for this type of property. In the last 10 years, the market has grown from having just a few mortgages available to hundreds now. However, the pace of change and the complexity of securing the right HMO finance can be a daunting prospect for many landlords.

Here are some of the key things you need to know:

HMO mortgage criteria

HMOs are likely to experience a higher tenant turnover than single-household occupancy properties and, for this reason, the interest rates charged by lenders on these specialist mortgages tend to be higher. Although the principles remain fairly constant with that of a standard buy-to-let mortgage, typical areas of criteria that could differ for securing HMO finance include:

• Property value – the minimum HMO property value is usually £100,000, although this can vary, depending on location and lender
• Landlord experience – typically, lenders will not consider a first-time buyer or first-time landlord for an HMO mortgage. Applicants are expected to have a minimum 12-month track record of owning a buy-to-let property before applying for an HMO one
• Property height – some lenders specify a maximum number of storeys (up to four)
• Occupancy – the maximum number of bedrooms is usually eight
• Communal seating – some lenders require such a space to be available
• Kitchen facilities – only one kitchen is allowed in the property
• Client-type - loans are available to individuals and limited companies. They are also available to portfolio landlords

In addition to these HMO mortgage rules, you’ll have to meet the lender’s usual buy-to-let lending criteria on aspects such as age, income and credit history.

Getting the right advice before taking the plunge is vital. As a specialist independent broker, our friendly team at Vincent Burch will help you to navigate the HMO mortgage minefield. With access to the latest products and advice on regulatory guidelines and lender requirements, we’ll make sure you get the best deal for your business.

The amount you can borrow and impact of fees on the total cost

The maximum percentage of the property’s value you can borrow, known as the loan-to-value or LTV, is usually 75%, although it is possible to find HMO mortgages up to 85% LTV. This means you’ll need a sizeable deposit at the outset.

As with any mortgage, you should look at the set-up fees charged by lenders as well as the interest rates to compare the total costs over the initial period of the deal e.g. 2 2-year fixed rate. At Vincent Burch, we can provide a thorough mortgage product comparison to find the best value deal for you.

HMO mortgage affordability

Most lenders carry out a mortgage stress test – a calculation to decide how much income you’ll need to cover the mortgage repayments - and therefore how much you can borrow. Lenders need assurance that you can afford the repayments, particularly if interest rates go up. They use two main calculations:

1. Interest Cover Ratio – lenders use this to calculate how much interest you’ll be paying annually. They use an indicative intertest rate, typically 5.5%, and simply multiply it by the loan amount to produce their estimate. For example, if you’re taking out a loan of £200,000 and the Interest Cover Ratio is 5.5%, the annual interest you’ll be paying is £11,000.
2. Rental income – lenders use the Rental Cover Rate to work out how comfortably your rental income will cover your mortgage repayments. To factor in things like rental void periods, they’ll often use a figure of up to 145% of the annual interest rate. Using the previous example of £11,000 annual interest, this multiplied by 145% means you’d need to be achieving an annual rental income form the property of £15,950.

Other sources of income, your credit score and any additional rental properties you have and the rental income you earn from them will also be taken into account.

Finding the best HMO mortgage

With so many variables, it’s important to know that everything has been considered when looking for the right loan. Our experienced team of advisers can take the hassle out of the process by managing your application, ensuring it meets the necessary criteria and giving it the best chance of being accepted by a suitable lender first time.

Call today and let us help you take the next step as an HMO landlord.