HMO mortgage options – lenders criteria – and some of the challenges faced by landlords.
There are two main types of HMO mortgage applicants the ‘haves and the have-nots’.
In this article am going to talk about the ‘haves’ i.e. applicants who are established landlords who want to get into the House In Multiple Occupation (HMO) sector or are looking to refinance existing stock. Do not be put off if you are a first time landlord looking to get into HMO mortgages as I have got some fantastic solutions for that option too but it’s just not going to be covered in this article.
Experienced HMO mortgage applicants
What constitutes being an ‘experienced’ landlord is arbitrary, and to complicate matters each HMO mortgage lender has their own definition.
The upside of being categorised as ‘experienced’ is considerable as many more lending doors are open for you. Some lenders consider you ‘experienced’ if you have owned one buy-to-let for 6 months, for others multiple properties held for at least three years’ is the benchmark.
It is not of course as simple as owning properties. Experienced landlords will typically show good traits such as: at least 25% equity buffer across their portfolio; to demonstrate they have their own resources and not solely reliant on gearing to the maximum. The mortgages will also be impeccably maintained thus demonstrating good management and an ability to apply rental revenues laterally across properties to cover tenant void periods.
‘Experienced’, might by nature include: being street wise and hardened, but should not be confused with fraudulent. Some lenders will go beyond tenancy agreements and bank statements to prove your revenues and ask for SA302 self-assessment tax returns to show your rental incomes have been declared to HRMC. That latter also displays a full-time commitment to being a professional landlord rather than the buy-to-lets being an additional earner.
An additional step that some Professional Landlords take is to form a Special Purpose Vehicle Limited Company for this type of borrowing. Professional taxation advice is highly recommended for this method and is essential if the end game is to revert them to your individual name in the future. The other thing to be aware of is potential purchasers would be viewed as ‘buying from a company’ and therefore high street buy-to-let lenders would shy away from them as it would be considered a commercial transaction.
This is the ‘chicken and the egg’ finance question. Purchasing a property with an existing HMO Licence will provide the lender with some comfort at the initial application stage as it shows the property is of the required standard. However, for a new landlord / owner a new licence is required and the traditional mortgage lenders will not hold their Offers open indefinitely, and arranging a HMO licence can take time, so you will have to do your homework in advance or take interim short term finance.
If the intention is to convert the property into a HMO then the lenders will need to know how you plan to fund the project and cover the period when the property is not in a state to be let.
HMO mortgage options for experienced landlords
Acceptable Properties for HMO Mortgages
Firstly, can I start by stating lenders start from a nervous position when it comes to HMOs. Their general view is the more bedrooms there are the greater chance for the property to be undesirable and for rooms to be empty. Most HMO lenders will entertain 5 bedrooms and the number of lenders and your options reduce as you go beyond this level. It is also worth noting that whilst standard box-rooms are normally expected if the footage drops below 25sq foot then the room is normally discounted as a rental earner.
HMO Mortgage Rates
Example of current HMO mortgages
Based on a purchase price of £250,000 and a repayment mortgage of £175,000 over 25 years.
The products below are current as at 14 March 2014:
Product One: 2 Year Discount – Up to 5 Units within the HMO
Initial pay rate 3.29% (APR 5.7)
Valuation Fee £360 / Arrangement fee £999
Currently at £481.99 per month for 2 years. Followed by a 1% discount for a further 3 years, currently £731.04. After this period the mortgage will revert to the lender’s variable rate at the time. Based on today’s prices this would be £877.54 per month.
There is a telegraphic transfer fee of £35 and a mortgage discharge of £199 on full redemption. The main early repayment charges are 3/2% respectively of the amount repaid in the first 2 years
Product Two: Lifetime LIBOR Tracker – Up to 20 Units within the HMO
Initial pay rate 4.7% (APR 5.0)
Valuation Fee £545 / Arrangement fee £2,625
Currently at £695.70 per month for the mortgage term.
There is a telegraphic transfer fee of £50 and a mortgage discharge of £150 on full redemption. The main early repayment charges are 3% of the amount repaid in the first 3 years
To find out more on how we can help you with HMO mortgages please complete and submit our Contact Form on this website or call us on 020 7993 2044.
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Author: Payam Azadi
Payam Azadi is a partner at Niche Advice who are whole of the market Independent Mortgage Brokers. His role is very much focused on Property financing both on residential and commercial lines.