What’s the minimum deposit required for an HMO mortgage?

Navigating the mortgage market for Houses in Multiple Occupation (HMOs) requires specialist knowledge, particularly regarding the initial capital outlay. While standard buy-to-let (BTL) deposits typically start at 20% or 25%, the unique risks associated with HMOs often lead lenders to mandate a higher minimum deposit contribution from the borrower.

Understanding What’s the Minimum Deposit Required for an HMO Mortgage?

The minimum deposit required for any mortgage product is intrinsically linked to the maximum Loan-to-Value (LTV) ratio a lender is prepared to offer. The LTV represents the percentage of the property’s value that you are borrowing. Since HMOs are considered specialist investment properties—often carrying a higher perceived risk than single-tenancy buy-to-lets—lenders typically cap the LTV lower, thereby increasing the mandatory minimum deposit.

For UK HMO mortgages, the common starting point for a deposit is 25% LTV, meaning you borrow 75% of the property’s value. However, it is essential to understand that this is often the minimum available under the most favourable circumstances. Many lenders, particularly for larger or more complex HMO conversions, may insist on higher deposits.

Typical Deposit Requirements for Specialist BTL vs. HMO

While the terms “buy-to-let” (BTL) and “HMO” often overlap, mortgage products are distinctly categorised based on the occupancy model:

• Standard BTL (Single Family Occupancy): Deposits typically range from 20% to 25%. This offers the highest LTV ratios (up to 80%) because the risk profile is lower.
• HMO (Multi-Tenancy Occupancy): Deposits usually start at 25%, but often increase to 30% or 35%. Lenders are less likely to offer LTVs above 75%, and many competitive products may cap borrowing at 70% or even 65% LTV.

If you are looking for the absolute minimum deposit, you will likely need to demonstrate a very strong financial position, significant landlord experience, and excellent credit history. Conversely, if you are a first-time landlord investing in an HMO, expect to be asked for a larger deposit.

Why Do HMO Mortgages Require a Higher Deposit?

Lenders perceive HMOs as higher-risk investments for several core reasons:

Increased Operational and Legislative Complexity

HMOs are subject to stringent licensing and management regulations enforced by local authorities in the UK. For example, if the property is a ‘Large HMO’ (five or more tenants forming two or more households), mandatory licensing applies. Non-compliance with these rules can lead to severe penalties or even the revocation of the licence, significantly impacting the property’s rental viability and value. The greater regulatory burden increases the risk of management failure, which the lender accounts for by requiring a larger capital buffer (i.e., a higher deposit).

You can find detailed information regarding HMO licensing requirements and compliance on the official GOV.UK website.

Liquidity and Valuation Risks

Should the lender need to repossess and sell the property due to payment default, HMOs can be more difficult to sell quickly than standard residential properties. The potential buyer pool for an existing HMO is smaller, often limited to professional landlords or specialist investors. This reduced liquidity means the property may fetch a lower price or take longer to sell, increasing the lender’s potential loss. A higher deposit mitigates this risk.

Rental Volatility and Void Periods

While HMOs often generate higher gross rental yields than standard BTLs, they can also experience higher tenant turnover and more frequent void periods across individual rooms. Lenders model for the risk that the income may drop if several rooms become vacant simultaneously. By demanding a larger deposit, they ensure the borrower has more equity built into the property from the outset.

Factors That Influence Your Specific Deposit Requirement

The exact deposit percentage you will be required to put down is rarely a fixed number. It will depend heavily on the convergence of several key variables:

• Your Experience: Established landlords with a portfolio of successful properties often qualify for lower deposit requirements (higher LTV) than new landlords.
• Property Size and Type: A smaller HMO (e.g., four beds, no mandatory license) may attract better LTVs than a larger, purpose-built HMO of six or more units that falls under mandatory licensing rules.
• Location: Properties in established rental hotspots with strong tenant demand and stable house prices typically carry lower risk for lenders, which may translate into higher LTV offers.
• Rental Coverage Ratio (ICR): Lenders must be satisfied that the rental income generated by the HMO comfortably covers the mortgage payments, plus a buffer. If the projected rental yield is exceptionally strong, it may allow the lender to be more flexible on the LTV.
• The Lender and Product: Specialist bridging finance companies and niche building societies may offer products with slightly different LTV caps than major high-street banks. Using a specialist broker who understands the HMO market is vital to access the best deals.

The Impact of Using Bridging Finance

Often, investors use bridging loans to purchase a property quickly—especially if it requires significant conversion or refurbishment to meet HMO standards—before refinancing onto a long-term HMO mortgage. While bridging finance is short-term, the underlying equity you inject (your deposit) remains crucial.

Bridging lenders typically assess risk similarly to long-term mortgage providers. While bridging finance focuses on the property’s potential end value (Gross Development Value or GDV), they still require a minimum contribution, often starting at 25% to 30% of the initial purchase price.

If you use bridging finance, be aware that most bridging loans roll up interest, meaning you typically do not make monthly payments. Instead, the interest is paid off when the loan is redeemed (usually through the refinance onto an HMO mortgage). This structure increases the total debt owed over the term. It is crucial to have a clear exit strategy in place.

Compliance Note: Whether securing an HMO mortgage or specialist bridging finance, it is essential to remember that your property may be at risk if repayments are not made. Defaulting on loan payments can lead to severe consequences, including legal action, repossession of the property, increased interest rates, and additional charges and fees.

People also asked

Can I get an HMO mortgage with a 15% deposit?

It is exceptionally rare, if not impossible, to secure an HMO mortgage with only a 15% deposit (85% LTV). Due to the specialist nature and heightened risk profile of HMOs, lenders typically mandate a minimum deposit of 25% LTV. If you only have a 15% deposit, you may need to consider raising additional capital or looking at standard BTL properties first.

Does my required deposit change if the HMO is unlicensed?

The required deposit is usually determined by the number of tenants, not the immediate licensing status. If the property requires a mandatory licence (typically five or more occupants) but does not yet possess one, some lenders may refuse to lend altogether until the application is submitted, or they might impose stricter LTV caps (requiring a larger deposit) until the licence is formally approved.

Are there higher fees associated with HMO mortgages?

Yes, specialist HMO mortgages often carry higher arrangement fees compared to standard residential or BTL products. These fees can range from 1.5% to 3% of the loan amount. While these fees don’t directly impact the minimum deposit calculation, they significantly increase the total cash required at the point of application.

Can I use a deposit from a gifted source?

Generally, yes, gifted deposits are acceptable for HMO mortgages, provided the gift is clearly documented, non-repayable, and comes from an approved source (usually a family member). However, the lender will still require the minimum LTV requirement to be met by the combined cash sources (your own funds plus the gifted amount).

Preparing for Your HMO Mortgage Application

If you aim to secure the lowest possible deposit requirement (e.g., 25% LTV), preparation is key. You must demonstrate to the lender that the investment is low-risk and highly professional. This includes having a detailed business plan, projections for costs and yields, and proof of sufficient reserves to cover unexpected maintenance or void periods.

Lenders will rigorously assess your personal financial history as part of the underwriting process. They will check your credit file to ensure you have a clean history of managing debt, which includes reviewing any existing mortgage or loan obligations. Understanding your credit position before application is crucial to avoid delays or unexpected refusals.

A strong credit score can improve your chances of accessing higher LTV products, thus lowering your cash deposit requirement.

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Working with a financial advisor or specialist HMO mortgage broker can provide a significant advantage. They have direct access to specialist lenders and products that may not be available on the open market and can advise you on the specific deposit thresholds required by different providers based on your circumstances and the nature of the HMO investment.

While 25% is often cited as the minimum deposit, successful HMO investors typically budget for 30% to 35% of the property purchase price to ensure they have the best range of competitive products available to them.