“What typically tends to happen is that Ithe client phones you up and says, right, I wanna buy this property and I want it to be a HMO. You then look into it and go, “that’s not a HMO”. Am I as a broker gonna do this?” David Coleman
If you missed the previous episode with David Coleman on Bridging Loans, then we recommend you listen to that before listening to this episode or reading further. Bridging loans and bridging finance is really the basis of what you need to know before you learn more about HMO mortgages.
An introduction to our guest, David Coleman, Head of Sales at Positive Lending.
David is Head of Sales at Positive Lending, who specialise in bridging loans, second charge mortgages, commercial finance and specialist lending.
David brings a positive voice to the mortgage industry and to the specialist market. A father, partner, chef, Lego creator and part time DJ – he is a positive force of energy! Social media can be a powerful place as I met David on Linkedin and we have become friends through the platform. He feels that people get very conscious about what they should or shouldn’t post on social media. People can still underestimate the power of social media, but as David discusses, the people you connect with become a part of your everyday life.
HMO mortgages are becoming more and more popular and it is something you should be aware of. If you’re somebody that’s looking to potentially invest in property, or you’re thinking of perhaps investing in a holiday let or a buy-to-let you should also be considering a HMO mortgage.
Listen in above for the full episode or read below for a key summary of our conversation…
What is a HMO mortgage?
HMO stands for House in Multiple Occupation. A lot of landlords are investing or exploring these now because the security is a lot stronger. If you’ve got a property that’s got multiple bedrooms, you don’t need all of them to be occupied to still be earning from it…
Whereas if you’ve got a buy-to-let property, you are relying on that tenant or tenants to be in that property to achieve your rental off the back of it – and then obviously pay that mortgage.
So with a HMO, you could have four bedrooms and only have three of them occupied at the time, but still probably be able to cover your costs of the mortgage.
Student housing is a great example of a HMO
Yes and there are more. It could be sector specific / industry specific. University towns are popular for HMOs as students are going to need to rent a room and they can usually get the rooms filled easily. But there are different variants that a HMO mortgage can be used for.
Can anyone get one?
The answer is yes. There are restrictions surrounding criteria if you haven’t had a HMO before or had experience of being a landlord but it doesn’t mean they can’t achieve it. They might not get the full LTV they need or they may pay a higher rate.
Depending on the client’s experience and HMO experience, the deposit needed is similar to other BTL mortgages (i.e. 20-25%) but it really does vary from client to client depending on every circumstance.
Effectively it comes down to the local authority being the main difference – they have to sign off, they provide the licensing for that property. The HMO may need to have individual utilities for each room as another factor. All of that has to be considered.
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Are there any other differences criteria wise?
Roughly how much rent you receive will determine how much you can borrow, which is the norm for other mortgages. You have to consider what each room can achieve – you have to consider floor space per tenant, security available for each person in each room, which has a bath, shower, both or neither etc.
The risk factor is if any of the rooms were empty. You would want to be happy with your rental calculations. Investors want to invest in a university town because they know they have the clientele there, or nurses close to an NHS hospital. People look to rent in HMO properties as they are often more affordable than renting a whole property.
Are you noticing more HMO mortgages coming your way?
Yes. People are looking at properties, such as an old bed and breakfast property, and seeing the potential for a HMO – but that it needs the correct license etc. This is also why bridging finance can also come into it to convert the property, working with a broker on the exit strategy. So an understanding of bridging finance is important before considering a HMO as it is likely that a property will need to be updated or renovated.
It’s important to remember that the finance must be used in the right way. The HMO lender won’t lend on a property that isn’t a HMO. It needs to become a HMO before they are comfortable lending it.
It typically often starts with a bridging loan, to get the renovation work done and then the exit strategy is the HMO. We’re there to provide that solution for them and to create a plan for what it looks like and what they need to do.
Do landlords earn more from HMOs than normal buy-to-let?
It’s too difficult to say. Every client and circumstance is different.
If you’ve got a HMO you know the number of bedrooms and you’ve got a guarantee of tenants in there. Potentially yes, you can earn more if you have got a larger number of bedrooms you can rent out.
There are many opportunities and rules, which is why working with a specialist is a good option to consider. There’s usually a solution or a reason why specialist finance can help clients achieve their end goals.
I think people are trying to be more creative with their income to earn money.
Bricks and mortar has always been a security that if you are able to sit on, it will always come back around. So regardless of the the market dipping and peaking, if you are able to sit on your profit, it will always come around and security will always say strong.
It certainly opens up more conversations.
I think brokers will vouch that once you help a client with a specialist scenario, whether that’s a bridge or a HMO mortgage or a commercial mortgage or whatever it be, they’ll come back. Because you found a solution and they look at you as the solution finder.
Thank you to David Coleman of Positive Lending for joining Sarah Tucker on The Mortgage Mum Podcast. Listen to The Mortgage Mum Podcast on all major podcast directories including Apple and Spotify. You can also catch up on previous episodes on our website and on The Mortgage Mum YouTube channel.