Thinking of investing in a House in Multiple Occupation? Here’s what you should know about lending criteria and how to maximise your rental yield.
Houses in Multiple Occupation (HMO) continue to attract landlords who want stronger rental income from a single property. With multiple tenants paying separate rents, the gross yield can look attractive on paper. The finance behind an HMO mortgage, however, is very different from a standard buy-to-let, and it needs careful planning from the outset.
We work with landlords who are moving into HMOs for the first time as well as experienced portfolio investors restructuring existing borrowing. In both cases, the key is understanding how lenders assess this type of property and how that impacts your borrowing power.
What counts as an HMO?
In simple terms, an HMO is a property rented to three or more tenants from more than one household who share facilities such as a kitchen or bathroom. Larger HMOs, typically five or more tenants, often require a mandatory licence from the local authority. Some councils also operate additional or selective licensing schemes, so it is important to check local rules before you purchase or refinance.
From a lender’s perspective, HMO mortgages are viewed as more complex. There are more tenants, more management responsibility and often more regulation. That complexity is reflected in underwriting and criteria.
How HMO mortgages differ from standard buy-to-let
Not every buy-to-let lender will consider HMOs. Those that do will usually have tighter criteria around property type and location. First time landlords may find options limited, while experienced investors with a track record of managing rental property will typically have access to a broader range of lenders.
Rental calculations can also differ. Some lenders assess the total rental income across all rooms, while others apply their own stress rates and interest cover ratios that may be higher than for single let properties. This directly affects how much you can borrow.
Hiten Ganatra, Director at Visionary Finance comments:
“HMOs sit in a more specialist part of the lending market. Lenders scrutinise experience, licensing, fire safety compliance and rental sustainability in much greater detail than they would for a standard buy-to-let. We understand how each lender approaches these cases because we place them regularly. That means we can position an application correctly from day one, rather than testing the market and risking unnecessary declines.”
Valuations can be handled in different ways too. Some lenders value on a bricks and mortar basis, similar to a standard property. Others may consider the investment value based on rental income. The approach taken can make a significant difference to your loan to value and future refinancing plans.
Experience matters
Many HMO lenders prefer borrowers who already own and manage rental property. This does not mean first time HMO investors cannot secure lending, but it may mean higher rates or more restrictive loan to value limits.
If you are planning to convert a single let into an HMO, lenders will want to understand the works involved, planning permission if required, and your experience managing multi tenant properties. Having a clear plan, costings and realistic rental projections will strengthen your application.
For portfolio landlords, the focus may be on overall exposure. Lenders often assess your entire portfolio performance, not just the individual HMO. This includes total borrowing, aggregate rental cover and background assets.
Hiten comments:
“With portfolio landlords, lenders look beyond the single property and assess overall leverage and how the entire portfolio performs under stress. Because we review clients’ portfolios holistically, we can identify pressure points early and structure borrowing in a way that supports future acquisitions rather than restricting them.”
Limited company HMOs
Many landlords now purchase HMOs through a limited company structure. Criteria for limited company borrowing can vary widely between lenders, particularly where directors have multiple properties or layered company structures.
Hiten adds:
“Limited company HMOs add another layer of complexity. The company structure, SIC codes, number of directors and existing exposure all influence lender appetite. We regularly advise on structuring before a purchase is agreed, ensuring the finance is viable in principle. That forward planning is often what separates a smooth completion from a delayed or declined case.”
Cost of HMO Mortgages: Fees, Interest and Management
HMO mortgages can involve higher arrangement fees and slightly higher interest rates compared with standard buy to let products. You may also face licensing fees, higher insurance premiums and increased management costs.
All of these need to be built into your projections. A strong gross yield does not automatically translate into strong net profit once finance and running costs are accounted for. Taking a realistic view at the outset helps avoid pressure on cash flow later.
HMO mortgage rates
Headline HMO mortgage rates can sit in a similar range to standard buy-to-let products, but the overall structure of the deal often carries more weight than the rate itself. Lenders tend to apply more cautious stress testing to HMOs, particularly where borrowers are higher rate taxpayers or operating at higher loan to value levels, which can affect borrowing capacity even where rental income appears strong.
Pricing is also influenced by leverage. While higher loan to value options are available, the most competitive terms are usually reserved for lower borrowing levels, and in some cases adjusting the loan amount slightly can improve both rate and lender choice in a meaningful way.
Reviewing and refinancing an existing HMO
If you already own an HMO, regular reviews remain essential. Rental income may have increased since you first purchased, or your loan to value may have improved. That can open up new options with mainstream lenders.
Equally, changes in regulation or local licensing rules may affect how lenders view the property. Staying ahead of your fixed rate expiry and reviewing options several months in advance gives you time to secure a suitable deal rather than defaulting onto a higher reversion rate.
If you are considering purchasing or refinancing an HMO, a detailed conversation before you submit an offer can save time and protect profitability.
Contact Visionary Finance today:
Email: [email protected]
Call: 01908 465 100
