HMO Mortgages for UK Expats, Landlords & Buy to Let Investors

What is a HMO ?

HMO stands for houses in multiple occupancy and are often favoured by BTL landlords due to their ability to obtain higher rental on the property which in turn, increasers the potential yield. Typical situations where they are used are:-

Types of HMO:

  • Student accommodation. In these cases, properties are sought in close proximity to universities and colleges where there is always a high demand for temporary accommodation.
  • House or flat share. These properties will generally be sought within UK Cities and will usually have three bedrooms. Tenants will often be young professional types starting out in their careers who need their independence but like having other similar type people around them.
  • A bed sit is usually defined as a one-roomed unit of accommodation typically consisting of combined bedroom and sitting room with cooking facilities. An HMO would incorporate several of these within the building. This arrangement allows the tenant full privacy, usually at a lower rental than would be the case in a small individual flat type property.
  • Mixed accommodation units. This can be where an HMO contains as well as the accommodation units, commercial property within it such as a shop or other business.

HMO licensing requirements

Where an HMO is being purchased in the UK, it will usually require a licence from the local authority if it has:

  • Three or more unrelated people occupying it
  • If three or more rooms within it are self-contained. For example, have a separate lock on the door and some form of washing facility.
  • If three or more separate tenancy agreements exist for the property.
  • If the building has three storeys or more it could be classed as an HMO but not in all cases.

However, regardless of the specific terms of licensing, many mainstream Buy-to-let lenders will view any property intended for multiple occupancy as an HMO even when it does not necessarily fall within HMO legislation under the local authority.

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Licensing mixed accommodation HMOs

Where the HMO is a mixed use building it will still be licensable by the local authority and subject to the licensing criteria stated above. However for the purposes of calculating the number of storeys any business/commercial floors are included (whether they are above or below the residential accommodation).  However, the business accommodation is not included in the part of the property which is licensed.

In some areas a local authority may impose additional HMO licensing which would mean that residential accommodation in a mixed use building may still be subject to additional HMO licensing.

HMO Mortgage Lending criteria

Lenders will all have differing criteria on which they will base any lending decision which means that any potential landlord would be wise to engage a specialist broker who has experience with this type of lending. Shown below is an indication of criteria that has been used in the past by one lender but this not only varies from lender to lender but each individual lender will regularly change their criteria and may also withdraw their product.

HMO typical lending criteria:

  • Maximum age 70 at application
  • Minimum property value is £100,000
  • Maximum 65% LTV
  • Maximum loan size £750,000 (unless otherwise stated)
  • Landlord experience: at least 2 years as a standard BTL landlord or 1 year as a HMO landlord
  • Let to Buy applications not accepted
  • Rental cover will be assessed on a multi-tenanted basis
  • All let properties will be subject to an Assured Shorthold Tenancy agreement of a minimum of 6 months, maximum of 36 months. Single and multiple tenancy agreements accepted
  • A property must have no more than four habitable storeys and no more than one kitchen
  • Properties consisting of more than one self-contained unit under a single title are not acceptable
  • A property containing no more than seven lettable rooms
  • The property must offer a communal seating area
  • A Specialist Security valuation will be required

There is no doubt that in the UK, HMO mortgages are in a niche of their own as the majority of the normal buy to let lenders do not lend on these. Where lenders are prepared to lend, interest rates tend to be a bit higher although not as high as would be expected on normal commercial finance although sometimes there is no option but to go down the commercial route.

An indicator of some of the Lenders that may lend on licensed HMO’s are Kent Reliance, Shawbrook, Paragon, Leeds, TMW, and BM Solutions plus some specialist commercial lenders but the number of bedrooms and your experience level as an investor will tend to limit your choice.

Advantages and disadvantages of purchasing HMOs

Investors considering purchasing an HMO should consider the advantages and disadvantages this may give, particularly if the landlords experience has been with BTL single let property.

Normal single let BTL property

Advantages

  • Less experience needed. If you’re just starting out then taking on a standard buy-to-let is a lot more straightforward than a HMO. There are fewer regulations you need to be aware of and unlike with some HMOs, you won’t need a special licence to operate as a landlord. Also, if you’ve no experience of tenancies, it’s easier to start off with letting one unit than several all at once
  • Less initial outlay. Usually but not in every case, a single let BTL property will be cheaper to purchase than an HMO.
  • Less void periods. A tenant will often stay for a year or longer in a decent single let property whereas with HMOs it’s often short term lets meaning more effort finding new tenants.
  • Higher capital appreciation. It is generally considered that single let properties increase more in value over time compared to HMOs.
  • Easier to sell. Single lets tend to have a wider market appeal than an HMO so when its time to sell you’ll likely have more people interested in buying

Disadvantages

  • More noticeable voids. If your tenant leaves and it takes a month or more to find a new tenant there could be a long void period without any income
  • Lower returns. Unless you bought cash, the income from a single let usually just covers the mortgage plus a small surplus which should be set aside for maintenance

In conclusion then a single let BTL property will generally provide: lower risk, less trouble with tenants but typically lower returns

Houses in multiple occupancy (HMOs)

HMO advantages

  • Less noticeable void periods. It is very unlikely all your tenants will leave at the same time, meaning you’ll always have at least some income every month even if you’re not at full capacity
  • Higher returns – Being able to let the HMO by the room rather than as a whole unit will normally generate a higher overall rent.

HMO disadvantages

  • More experience required. There are more regulations with HMOs, mainly in the area of health and safety and you may also need an HMO licence from your local authority before you can start letting to tenants. The number of tenants and the associated paperwork required will be much greater.
  • Higher initial cost. HMOs are usually larger than single lets and therefore likely to cost more. Also if you are converting a property into an HMO there are these costs to consider
  • More Effort – both in terms of having to find more tenants and handling the on-going maintenance. Tenants don’t tend to stay as long in HMOs and because there are more tenants in the first place, finding replacement tenants can be a constant worry. Because tenants know they probably won’t be staying very long they are generally not so careful about looking after the property.
  • Harder to sell. HMOs are most likely to appeal to other investors who will be very cost aware and the general public will have the cost of refitting the property to turn it back to a single unit.

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Procedure for obtaining an HMO mortgage for property purchase

1. First considerations for obtaining an expat HMO mortgage

HMO mortgages in the UK are currently unregulated which means that should things not turn out as you would expect, you may not be able to have your grievance considered by the ombudsman service in the same way as you would with a regulated mortgage. With this in mind, some mortgage advisers handle HMO mortgages in the same way they would when dealing with a regulated mortgage and although this does not change your risk, it does mean that your HMO mortgage should be properly handled.

In addition to the regulation situation, expat HMO mortgages can be very time consuming to organise and for these reasons it would be advisable to turn to an experienced expat HMO mortgage broker to handle things rather than attempt to deal directly with a specific lender. An expat HMO mortgage broker with proven experience will understand the market and will have contact with all lenders offering this type of service.

It should be noted that expat HMO mortgage brokers with the right experience to obtain expat HMO mortgages are thin on the ground and although there are many regulated mortgage brokers operating within the UK, you will find in practice that very few actually handle expat HMO mortgages on a regular basis.

The procedure steps shown assume that you will be using an experienced expat HMO mortgage broker to handle the process on your behalf.

2. First contact with your expat HMO mortgage broker

Whether you are communicating with your BTL mortgage broker by telephone or email or meeting face to face your expat mortgage broker should provide you with certain information about themselves and how they operate:

  • Identity – Who they are and how to contact them
  • Regulation – Explain how they are regulated to carry out mortgage business. All mortgage advisers in the UK are required to hold permissions to do so from the financial conduct authority (FCA) which they obtain through being either directly authorised by the FCA or by being an appointed representative of a network who is authorised by the FCA.
  • Terms of business – Provide you with their terms of business. This will include information on how they will charge you for their time and explain your rights in the event something goes wrong.

Having got that out of the way your HMO mortgage broker will gather comprehensive information on your circumstances. This process is called fact finding and it is absolutely essential that it is carried out thoroughly as the information gathered will form the basis for deciding on the mortgage product most suited to your needs.

3. Obtaining an agreement in principle for your expat HMO mortgage

With the fact find information to hand your HMO mortgage broker will research the market and identify a lender and product that he or she believes would best suit your needs. Many people think this is simply a question of finding an expat HMO mortgage provider offering the lowest rates of interest or low arrangement fees but in fact many other factors can come into play. Some such situations could be:

  • Time constraints – if a lender is known to be slow to consider a case or is known to complicate the process and you need a decision quickly then you may be prepared to accept a slightly higher interest rate if it lets you complete the mortgage within your fixed timeframe.
  • Lender criteria – lenders all have different criteria under which they will lend and it may be that the lender with the best rates may place you just outside their accepted criteria. You would then have to make the best deal possible with a lender who is prepared to accept you.
  • Credit rating – the best rates and terms are usually only available to those with a clean credit rating. Where this is not the case lenders will take account of this in the terms they offer and may even refuse to accept your application.

Having decided on one or two suitable products your HMO mortgage adviser will discuss them with you and when you agree on the most suitable one for your circumstances, your HMO mortgage broker will obtain a decision in principle from the lender. This is not a binding agreement but is only an indication that if the supporting mortgage information you provide with the formal application confirms what has been indicated for the decision in principle then there is a strong possibility that the lender will accept you.

Please note that the lender may carry out a credit check on you to assess your credit rating.

4. Submit the full expat HMO mortgage application

With a decision in principle acceptance you will be clear to make your formal application for your expat HMO mortgage. Your expat HMO mortgage broker will do this in conjunction with you as the application form needs to be accurate and will require a number of supporting documents, such as:

  • Proof of identity – documents such as passports and driving licences are normal.
  • Permanent address – Normally utility bills and bank statement type documents will be accepted.
  • Expat employment – Proof of income from employment or business will be required. Payslips and business accounts are usually used for this.
  • Affordability – Bank statements let the lender see your income going through but they also allow the lender to see how you spend that income. Today lenders look at a borrowers lifestyle to ensure that any expat HMO mortgage offer they make will be affordable to their client if the clients lifestyle is maintained.
  • Rental Value – The rental value of the property as confirmed on the HMO property survey report will be used by the lender to assess the amount of loan that will be made available.

5. Lender reviews your expat HMO mortgage application

On receipt of the formal expat BTL mortgage application the lender will review the information provided. In all likelihood the lender will ask for further information or documents to be provided and this process may be repeated several times until the lenders application processing team becomes satisfied that the case is sufficiently compliant to go to underwriting.

As part of this process the lender will instruct a valuation on the property. You will be expected to pay for this but will have no rights to see the valuation report. The lender will use that valuation report to decide how much they would be prepared to lend against that property.

At this point and if the valuation given in the report meets the lenders requirement the HMO mortgage application review team will take a final review of the case and decide whether to send the case for underwriting or reject the application.

6. Lender conducts final review of your expat HMO mortgage application

The underwriter is the lenders final decision maker and will review the whole case and check it carefully against the lenders lending criteria. If the underwriter is satisfied an offer for an HMO mortgage will be issued. Copies are usually sent to your solicitor and to your HMO mortgage adviser who will check the offer and alert you to anything that is not as agreed.

Note that by this time your expat HMO mortgage broker should have issued you with a letter outlining his or her reasons for advising you to accept that particular offer.

7. Lender issues your expat HMO mortgage offer

If the lender issues an HMO mortgage offer it will be sent to your solicitor with a copy to your HMO mortgage broker who will check the offer and alert you to anything that is not as agreed.  This is a formal document and it will show the amount of loan that is available and the monthly repayments. It will also provide the term of the mortgage and the terms and conditions under which the offer is made.

8. Solicitor receives your expat HMO mortgage offer

Once the solicitor has received the offer they should complete any checks and searches on the property, exchange contracts and move to finalise the purchase. Your solicitor will be the person that will draw down on the loan and arrange to pay the sellers solicitors for the property and pay any taxes such as stamp duty that may be required.

This whole process from first contact with your HMO mortgage broker to your solicitor concluding the purchase can take a long time and anything between 6 weeks to 6 months would be considered as fairly normal.

Scottish Law

If the property you intend to purchase is in Scotland then you will find the legal system to be slightly different. It is normal in Scotland for offers to purchase a property to be made through a solicitor which usually means engaging a solicitor right from the beginning.

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