In the UK property market, HMOs (houses in multiple occupation) are a popular choice for investment strategy. By renting out individual rooms to multiple tenants, instead of the traditional single let model, landlords make more money than regular buy-to-let properties. Also, HMO mortgage lenders have to be extra cautions when considering applications since there are a lot more factors that need to be considered over standard buy to let mortgages.
An HMO mortgage is more complicated because it has to follow certain rules, has to be managed in a certain way and has a lot of tenants. In this blog, we’ll talk about how lenders review HMO applications, focusing on the HMO lending eligibility threshold, the risk of multi-tenant properties, and the standards for valuing properties.
1. What is an HMO and Why does it Need A Special Lending Assessment
An HMO is a property rented to at least three or four people who don’t live together but share things common amenities such as kitchens and bathrooms. These rented homes can be anything from a small shared house to a large block of purpose-built apartments.
With a number of people live in the same house, this can lead to regulatory issues, complicated income structures and overall more work for the landlord. This is why HMO mortgage lenders complete a thorough risk assessment and detailed underwriting review before approving an HMO mortgage. They want to make sure that the business model, landlord and HMO property are all safe and compliant to all the latest standards and regulations.
2. Valuation Models: How Lenders Consider the HMO’s Worth
The process for valuing an HMO is different from that for a regular buy-to-let property with just one tenant. In these cases, lenders use either a commercial, or a bricks-and-mortar valuation.
- Commercial Valuation
Several commercial mortgage brokers in the UK use a commercial method to figure out how much a property is worth if it is a licensed house multiple occupation or bigger. This comprehensive method looks at the total operational costs and total rental yield to confirm that the property can make money.
B. Bricks-and-Mortar Valuation
Use the standard method of residential valuation if you have a standard property. This all-encompassing method is based on the prices of similar houses in the same area that have sold, as if they were sold as regular homes.
For both valuation models, the HMO Valuers will examine:
- Operating costs (management, maintenance, insurance, and utilities)
- Occupancy rates (projected and historical)
- Net operating income
- Gross rental income (total rent collected from rooms)
3. Examining Multi-Tenant Property Risk
Risk exposure is one of the most important things that lenders and commercial mortgage brokers will consider for a multiple occupancy mortgage. There are risks that come with multi-tenant properties that could affect the property’s condition and the income’s stability.
- Income Volatility and Tenant Turnover
Since the tenants in an HMO each have their own bedroom, this invariably means you will a much higher turnover of tenants – i.e. tenants will leave more frequently that they do with single-let properties.
HMO mortgage lenders will assess whether the landlord has a way to handle any voids quickly. They also look at the historical turnover of tenants to determine an average tenant occupancy duration and also the ongoing demand for HMO tenants in the area.
B. Property Management and Licensing
An HMO needs to be actively managed to handle legal issues, tenant issues, and repairs. HMO mortgage Lenders prefer borrowers who:
- Work with professional management companies.
- Have the right HMO certifications from the local council.
- Have worked in HMO management before.
- C. Safety and Regulatory Risks
A Buy-to-let mortgage calculator helps lenders figure out if the property meets local safety and building codes. Gas safety certifications are one of the most common checks.
- Electrical safety certification.
- Emergency exists.
- Emergency Lighting.
- Maximum number of people who can live in a property.
- Minimum sizes for rooms.
- Fire Alarms.
- Fire Doors.
4. Location Risk and Market Demand
HMO houses that are close to places where people work, go to school, or even transportation hubs are deemed more secure and less likely to experience any future drop in demand.
5. HMO Lending Criteria
Before approving any HMO finance in the UK, lenders will also assess the landlords financial history, level of experience as well as a number of other factors, including:
- A. Property Size and Type
Some HMO mortgage lenders may not be able to help with certain types of HMOs. For example, properties with more than one kitchen or have several floors.
- B. Costs and Credit History
Stability of income, debts, and personal credit history are all very important. Lenders also make sure to look at:
- Outstanding Mortgages.
- Unpaid loans.
- Payment history.
- Credit score.
- Proof of steady rental income.
Better money management and a clean credit history can help you get approved.
- C. Rental Income Stress Testing
HMO mortgage brokers also do rental stress tests to make sure that the property makes enough money to cover the mortgage payments, even in bad situations.
- D. Experience Level
HMO Lenders pick borrowers who already own and manage rental properties. Some lenders might even ask for proof of two to three years of experience of running HMOs. It can be hard for first-time HMO landlords to get approved, but some expert lenders will consider them if they put down higher deposits since this helps de-risk things for the lender.
Conclusion
As the UK’s leading Commercial finance broker, we work with clients from all angles, including the HMO Landlord’s ability to handle complicated tenancy arrangements and the property’s potential to generate income.
Property Investors can also get the most out of their HMO investments and successfully secure the best HMO mortgages by knowing how to qualify for loans, how to set value, and how to deal with risks when there are more than one tenant.
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