HMO Mortgage lenders criteria and Loan to Value

More landlords are moving towards HMO mortgage (House in Multiple Occupation) products as well as MUFBs (multi-unit freehold blocks). HMO’s are often perceived as a recent and current model on the back of Buy-to-Let. However it’s worth noting that the first recorded HMO was established by William King in 1869, who converted an old house into five flats for rent. In 1953, Harold Macmillan introduced his “Housing of Working People” Act which gave councils powers to license HMOs and required them to be registered with local authorities if they had five or more storeys and were occupied by more than three families.

Is an HMO Mortgage More Expensive

The HMO mortgage is not an ideal option for everyone because there are certain criteria that need to be met before you can apply. For example and typically, you need to have a deposit of at least 25% of the purchase price and you need to have prior experience as a landlord before you can apply. However experience varies from lender to lender in that some may look to a minimum of 12 months prior experience as a landlord. While other HMO mortgage lenders criteria can vary from 6 months to 3 years. The HMO mortgage therefore can sometimes be a tough nut to crack without prior experience.

HMO Mortgage Typical Loan to Value

Typically the minimum HMO property value is £75,000 (qualifying areas) and for MUFBs minimum property value is £120,000 with £1 million available up to 70% and £1.5 million up to 65% LTV. A maximum loan to value (LTV) currently is around 75% and the maximum number of bedrooms (HMO) is 12, though some lenders will go to 20. This figure (12) also typically applies to MUFBs i.e. maximum 12 units. Special attention also needs to be considered when purchasing your HMO to ensure and qualify minimum HMO room dimension/s (statute & local authority requirements). While the majority of MUFB mortgage lenders will loan against a minimum of 25sqm per unit. If you are in the fortunate position of  having a larger deposit than 25% then this may well attract preferred rates.

The HMO and commercial property

An HMO mortgage an also be used for properties above or adjacent to commercial properties.The commercial activity of the business premises should be in line with the market locally. Furthermore that any commercial activity within the commercial premises does not affect long term rental opportunity. Maximum LTV for an HMO property above or adjacent to commercial premises is typically 75%. Other rule of thumb criteria can be as follows but not restricted to a Minimum age of 21. The maximum age at term end is usually 85 for individuals however this is more often than not extended for LTD companies to 95. Any applicant must have a UK credit footprint with no adverse credit history.

Do HMO lenders stipulate minimum income

A minimum income of £15,000 per annum is typical though some lenders criteria can stretch to £25,000. A minority of HMO lenders have the appetite to overlook minimum income requirements. Given the extra yield and cash flow an HMO offers some lenders are more flexible in their approach. It is notable that currently HMO property ownership is on the rise. A recent survey by SpareRoom identified that ‘Room wanted’ ads currently outnumber ads for ‘rooms available’. This is the 3rd time this has occurred in over 6 years. Prior to this was September 2019 and August 2015. These three dates correlate with a drop in supply compounded by an increase in demand.

HMO sees increased demand

The current demand is seen as the UK returning towards a semblance of normality post Covid. This is seen as a perfect storm in that not only are people returning to work but also out of friends and parents accommodation. While students (UK and overseas) are returning to universities. The home-ownership market is increasingly becoming HMO-oriented. An HMO property also offers a more affordable rental option than a one bed or 2 bed apartment and/or smaller terraced/semi 2 or 3 bed house. With an ever-growing demand for housing in the UK, there is no doubt that HMO will continue to enjoy wider support in the future.

HMO popularity fuelled by Government failure

The buy to let and HMO narrative is endorsed by the failure of government to meet it’s own targets (supply and demand). The target of 300,000 is set to be missed by almost a decade. Following the governments’ failure to invest in social housing. Assuming rates prior to lockdown targets may be reached by 2032. The effects of the pandemic are further likely to push numbers further off course. In the financial year 2019-2020 (prior to lockdown) the government oversaw the construction of 6,190 more homes than the year before. The Government’s commensurate mismanagement of the Covid crisis means house building will slow even further next year.