Is it worth refinancing an HMO mortgage for better rates?

As an HMO (House in Multiple Occupation) landlord in the UK, managing yield and maximising profit margins are paramount. Mortgage finance usually represents one of the most significant outgoing costs. Therefore, regularly assessing whether you can achieve a better interest rate or more favourable terms by refinancing is a critical aspect of portfolio management.

Is it worth refinancing an HMO mortgage for better rates in the current UK market?

The decision to refinance an HMO mortgage—that is, switching your current product or lender—is a strategic move that requires careful calculation. For most landlords, refinancing becomes highly worthwhile when the total cost of moving mortgages is outweighed by the anticipated savings over the new mortgage term.

HMO mortgages are complex buy-to-let (BTL) products, often carrying higher interest rates or fees than standard residential or single-unit BTL mortgages, reflecting the increased administrative complexity and risk profile. Securing a better rate can significantly boost your net rental income.

When Does Refinancing Make Financial Sense?

There are several specific scenarios where refinancing your HMO property is generally considered a sensible financial strategy:

• Ending a Fixed or Discounted Rate Period: This is the most common trigger. When your current fixed-rate term ends, you typically move onto your lender’s Standard Variable Rate (SVR), which is often significantly higher. Switching to a new competitive fixed or tracker rate before the SVR kicks in almost always results in substantial savings.
• Capital Raising: If your property has increased in value (equity growth) or you require capital to fund renovations or expand your portfolio, refinancing allows you to release this equity at a potentially lower overall borrowing rate than other forms of unsecured finance.
• Improved Credit Status: If your personal or business financial standing has significantly improved since you took out the original mortgage, you may now qualify for better products previously unavailable to you.
• Product Rationalisation: If you currently hold several HMO properties on different products, consolidating them with a single lender might simplify management and secure preferential portfolio rates.

Calculating the True Cost of Refinancing

Before proceeding, it is essential to calculate the precise break-even point—how long it will take for the interest savings to offset the refinancing costs. Failing to account for all fees can turn a seemingly advantageous rate reduction into a costly mistake.

Key Costs Associated with HMO Refinancing

• Early Repayment Charges (ERCs): If you switch lenders or products before your current introductory rate period has expired, you will likely incur an ERC. These charges are often substantial, typically ranging from 1% to 5% of the outstanding loan amount. If the ERC is high, refinancing might not be viable until the fixed term ends.
• Product Arrangement/Lender Fees: New HMO products carry arrangement fees, which can sometimes be added to the loan balance, though this means you pay interest on them. These fees can be high, often 1–3% of the loan amount, depending on the complexity and rate offered.
• Valuation Fees: A new lender will require an independent valuation of the property to confirm its market value and rental income potential.
• Legal and Conveyancing Fees: You will need a solicitor specialising in commercial buy-to-let transactions to handle the legal transfer and new security registration.
• Broker Fees: If using a specialist mortgage broker (highly recommended for complex HMO finance), their fee must also be factored into the total cost.

A simple formula involves calculating the total fees (ERCs + Lender Fees + Legal/Valuation) and dividing this by the estimated monthly saving achieved by the new, lower interest rate. This gives you the number of months required to break even.

Lender Criteria and Eligibility for Better HMO Rates

Lenders scrutinise HMO applications rigorously. Securing a better rate often depends on meeting stringent eligibility criteria:

1. Licensing and Compliance: The property must be fully compliant with local authority regulations regarding HMO licensing, fire safety, and standards of habitation. Non-compliance is a major barrier to competitive rates.

2. Loan-to-Value (LTV): Lower LTVs always attract the best rates. If your LTV has fallen since the original purchase (due to increased property value or capital repayments), you stand a much better chance of securing a prime rate.

3. Rental Coverage: Lenders assess the rental income based on a Rent Stress Test, ensuring the rental yield adequately covers the proposed mortgage payments (often calculated at a hypothetical higher interest rate, such as 5.5% or 6%), plus a necessary buffer.

4. Landlord Experience and Portfolio Size: Lenders typically offer better terms to experienced landlords with established, well-managed portfolios.

5. Credit History: Your personal and business credit history must be sound. Lenders perform checks to assess financial stability. Get your free credit search here. It’s free for 30 days and costs £14.99 per month thereafter if you don’t cancel it. You can cancel at anytime. (Ad)

Practical Steps to Secure a Better Rate

To successfully refinance and secure the most advantageous rates for your HMO portfolio, follow these steps:

1. Review Your Current Terms: Note the exact end date of your current product and the associated ERCs. Start the refinancing process 4–6 months before your fixed term expires.
2. Assess Your Equity: Obtain an up-to-date, professional market valuation of your property to understand your current LTV ratio.
3. Consult a Specialist Broker: HMO financing is highly specialised. A broker familiar with the HMO market will have access to the whole market, including niche lenders who offer the most competitive terms for complex properties.
4. Gather Documentation: Prepare your HMO licence, tenancy agreements, recent bank statements, and personal financial information promptly.
5. Compare Total Cost: Focus on the Total Cost of Credit—the total amount payable over the full term, including all fees—not just the headline interest rate.

For further impartial guidance on mortgages and managing property finance, you may find the resources provided by the government-backed MoneyHelper service valuable. Consult reliable financial guidance on mortgages here.

People also asked

How often should I review my HMO mortgage for refinancing opportunities?

You should review your mortgage terms at least six months before any existing fixed or discounted rate period is due to end. Reviewing every 2 to 3 years, even mid-term, is advisable to monitor current market rates and property equity growth for potential capital raising opportunities.

Can I refinance an HMO mortgage if I have bad credit?

While challenging, refinancing is still possible, but you will likely need to use specialist “adverse credit” lenders. These lenders typically charge higher rates and fees to offset the increased risk, making the savings benefit less pronounced, but it can still be better than moving onto an SVR.

Do HMO lenders value the property differently than standard BTL lenders?

Yes, HMO lenders often place greater emphasis on the property’s investment value, calculating its potential rental yield based on a per-room basis (rather than a single family rental basis). They also scrutinise the property’s standard of repair and compliance with complex HMO regulations.

Is it better to pay the arrangement fee upfront or add it to the loan?

Generally, paying the arrangement fee upfront is financially beneficial, as it reduces the amount of interest you pay over the term of the mortgage. Adding the fee to the loan balance means you pay interest on that fee for the life of the mortgage product.

What is the minimum deposit or equity required for an HMO refinance?

Lenders typically require a minimum Loan-to-Value (LTV) of 75% for competitive HMO products, meaning you need at least 25% equity or deposit. Lower LTVs, such as 60% or 65%, usually unlock the very best interest rates.

Ultimately, determining whether it is worth refinancing your HMO mortgage requires detailed financial modelling specific to your circumstances. Engaging a specialist broker ensures you access the most competitive rates available in the market and provides clarity on the true cost of switching.