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What is HMO Finance?
What is HMO Finance?
HMO Finance is a specialist funding solution for property investors who are buying and investing into HMO's, houses of multiple occupancy. These are a specialist type of property investment which can potentially generate higher returns than a standard buy to let investment, as you are effectively multi-letting the property.
HMO finance is perceived by most lenders are more complex than standard buy to let as there are more risk factors, and therefore HMO finance is typically available to experienced landlords.
HMO funding rates are generally considered to be commercial lending, so therefore rates are slightly higher than the standard rates for buy to let properties.
Types of HMO Finance Available
Types of HMO Finance Available
There are several different types of HMO finance available, here we have listed the most common types.
HMO Bridging Finance is a type of HMO funding which is used to acquire a property which may not yet be licensed as a HMO, or potentially needs some work doing to it in advance of letting it as a HMO. HMO bridging finance can be a helpful solution to enable you to acquire a property, carry out some work on it, then refinance on to a term loan/senior debt facility once the works have been carried out.
HMO Development Finance is a second type of HMO funding which is sometimes used to develop larger HMO's. A larger HMO will typically be classed as 5 rooms and above. Development finance can be used to fund the construction costs of redeveloping a property there are different types of HMO development finance, light refurb HMO finance, and heavy refurb development finance.
HMO Mortgages
HMO Mortgages
A HMO Mortgage as the name suggests is a type of mortgage which is specific to an HMO. Licensed HMO's are generally considered to be complex assets due to the number of tenants, and therefore lenders tend to prefer experienced landlords when funding HMOs. HMO mortgages are typically available up to 80% LTV with interest rates varying depending on the lender in question.
HMO Finance Frequently Asked Questions
HMO Finance Frequently Asked Questions
Q: If I’m buying a HMO Property under a limited company does my personal status on a mortgage matter?
A: Yes, you will be underwritten in the same way as applying in your personal name. Personal guarantees are also commonplace.
Q: Can HMO mortgage products be arranged in personal names rather than under a limited company?
A: Yes, absolutely. The product terms are likely to be driven by the HMO content so will be similarly priced.
Q: Can a HMO Mortgage on an flat?
A: Yes, some Mortgage Lenders only offer HMO mortgages on flats. Further considerations are the size of the bedrooms and communal area.
Q: I have a HMO leasehold flat and also own the freehold is this okay?
A: Generally Mortgage Lenders prefer the freeholder to be a different legal entity such as under a separate limited company. There are those who will take a view on identical names but may want a charge on the freehold too as result.
Q: I want to buy under a HMO Property under a limited company and have a separate property management set up can they provide the deposit?
A: Yes, there are a number of Mortgage Lenders that permit Inter-Company loans. As a minimum, one director/applicant must have a significant share in both Companies, and most Mortgage Lenders prefer ALL the directors to be in common. You should get professional advice on the tax position.
Q: How long does a limited company need to be set up to purchase a HMO property?
A: If this a “Special Purpose Vehicle (SPV)” then it can be established just ahead of a mortgage application. The business bank account will need to be up and running ahead of mortgage completion for the direct debit to function. If however, you are looking to purchase the property under a “trading” company (that has other operations than property purchase) then it is likely the business will need to have filed at least one year’s accounts.
Q: Can you buy a HMO Property as a first time buyer?
A: Yes, the rates are far higher though so you would need to work out whether the project will provide worthwhile returns. It is normally sensible to enter HMOs when you have at least one other property to your name.
Q: I own the property I live in can I purchase a HMO with a mortgage?
A: Yes, but you will be excluded from a large number of Mortgage Lenders who insist on a minimum 12 months of buy-to-let experience. Also how long you’ve been a homeowner may be a factor.
Q: I’m looking to buy a property and convert it to an HMO after it’s bought. Can I use a mortgage for this?
A: Expert advice from a Mortgage Broker such as Niche Advice is highly recommended if this is your plan. Most Mortgage Lenders do not allow change of purpose. Also, the Surveyor will value the property in its current state which would probably mean “a single family let” so the rental coverage may not work.
Q: I recently bought a HMO property how long is it before I can get a HMO Remortgage it?
A: The market typically sits at 6 months from the date it was registered at the Land Registry. Some Mortgage Lenders also ask for the property to have been let out for a period. If you are looking to remortgage sooner then you should seek professional mortgage help.
Q: I have carried out a significant amount of home improvements on a HMO property can I remortgage to get this money back?
A: Yes, if you paid for these home improvements from savings it is straightforward. If you have borrowed money for this purpose; say on loans on credit cards, this will be seen as “debt consolidation” which may limit Mortgage Lender choice, particularly if you are after an “interest only” mortgage as you would be pushing the debt repayment down the road. If the property was bought in the last six months the Mortgage Lender may use the purchase price as the benchmark for value rather than the current value.
Q: How many people can buy a HMO Property using a HMO Mortgage product?
A: HMO Mortgage Lenders shy away from “property clubs.” They want a clear understanding of who they are lending to so 2 to 4 main applicants depending on the Mortgage Lender. In the case of a Limited Company 4 main directors with a shareholding between then of 80% (to 100%). In the case of the remaining 20% shareholders, they would also need to be identifiable.
Q: What is the minimum deposit on a HMO mortgage or a HMO Remortgage?
A: 25%. Depending on the Mortgage Lender this could include gifts from relatives or money withdrawn from Companies you own.
Q: Why is my HMO Mortgage Lender only offering me a 5 year fix?
A: The simple answer could be this is the only product they offer, however it’s probably more likely to be the amount of money you are looking to borrow. The rental assessment is generally more favourable on 5 year fix products.
Q: Why can’t I get a “capital and interest repayment” mortgage from my HMO Lender?
A: The management of repayment mortgages is more labour and systems intensive, and as demand is relatively small a number of HMO Mortgage Lenders, particularly those launched in the last 2 years, have decided not to offer them. Overpayments may be allowed without penalty and this could be a way of managing your debt down. If you are not committed then shop around.
Q: Is it common to see high set up charges on a HMO mortgage products
A: Yes, although increased competition is driving these down they are still destined to be higher than standard mortgages as they present a greater risk to the Mortgage Lender.
Also, heavy fees can enable a lower interest rate which could lead to a more favourable rental assessment. Mortgage Lenders compete in this area to attract business.
HMO Mortgage Lenders often apply percentage product figures which hit large mortgages in particular. It’s therefore sensible to look out for special deals that appear from time to time with set flat fees. Your Mortgage Broker can help guide you on this.
The legal costs need to factor in extra checks such as HMO licensing and tenancies. Limited Company transactions also have specific Land Registry deadlines. All of which add to the cost.
Q: Can a foreign national buy a HMO Property and get a HMO Mortgage?
A: As a guide, if you are in the UK already you will typically need 2 to 3 years of address history here. If you are based abroad the country is a factor and you are likely to need a 35% and can expect high rates.
Q: I’m a British Ex-Pat can I buy a HMO Property using a mortgage?
A: You are likely to need the current UK letting experience and have 3 active lines of credit here including a mortgage.
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