HMO Mortgages Explained

What counts as an HMO

A house in multiple occupation is a property let to three or more tenants who are not one household and who share facilities such as a kitchen or bathroom. Five or more occupants across two or more households makes it a large HMO, which requires mandatory licensing everywhere in England and Wales.

Many councils also operate additional or selective licensing schemes covering smaller HMOs, so the local scheme matters as much as the national rule. Lenders will normally want to see that the property is licensed or that a licence application is in progress.

How lenders value an HMO

This is the detail that catches new HMO investors out. There are two valuation bases and they can produce very different numbers.

A bricks and mortar valuation treats the property as an ordinary house and is the more common approach for smaller HMOs. A commercial or investment valuation capitalises the rental income, which can value a well-configured HMO well above its residential worth and is usually applied to larger properties, typically six or more lettable rooms.

Where a lender uses bricks and mortar, the extra rent improves your coverage but does not increase the valuation, so refinancing to release the value you created needs a lender that will value on an investment basis.

Typical criteria

Expect most HMO lenders to want:

• A deposit of 25 per cent, and sometimes 30 to 35 per cent for larger or unlicensed properties
• Rental coverage that clears their interest coverage ratio, commonly 125 to 145 per cent of the stressed monthly interest
• Landlord experience, often 12 to 24 months of owning a standard buy-to-let, although some lenders accept first-time HMO landlords with experience as a single-let landlord
• A maximum number of lettable rooms, frequently 6, 8 or 10 depending on the lender
• A licence in place or applied for, plus compliance with room size and amenity standards
• Purchase through a personal name or a limited company or SPV, depending on the lender

Article 4 and planning

In areas covered by an Article 4 direction, converting a family home into a small HMO needs planning permission rather than falling under permitted development. Buying in an Article 4 area without existing HMO use or consent is a common reason a case collapses at underwriting.

Check the local position before you offer. Existing lawful HMO use is a genuine asset and is worth documenting for the lender and the valuer.

Personal name or limited company

Most new HMO purchases are now made through a limited company or SPV, because finance costs remain fully deductible against company profit while personal ownership only attracts a basic rate tax credit. That said, the right structure depends on your other income, your plans for the profit and your exit, and it is a question for your accountant alongside your broker.