Are multi-unit freehold blocks considered HMOs for mortgage purposes?

Understanding the distinction between a Multi-Unit Freehold Block (MUFB) and a House in Multiple Occupation (HMO) is crucial for property investors in the UK. Although both types of properties involve multiple dwellings or occupants, they are defined differently under planning, regulatory, and mortgage rules. This difference dictates which specialist mortgage products you will need, how the property is valued, and the level of regulatory compliance required.

For mortgage purposes, the answer is generally no, MUFBs are not automatically considered HMOs, but the lines can blur depending on tenancy arrangements.

Defining the Structures: MUFB vs. HMO

Lenders, regulators, and insurers rely on clear definitions to assess risk. While they both deal with properties housing multiple units or people, their primary definitions are based on different criteria:

Multi-Unit Freehold Block (MUFB) Definition

An MUFB is a single freehold title that contains two or more self-contained residential units (flats or apartments). Crucially, the units must be contained within the same structure or block, and the freeholder retains ownership of the entire building structure and common areas. Examples include a block of four flats held under one freehold title.

• Focus: Legal structure and title ownership.
• Units: Typically self-contained flats (each with its own kitchen and bathroom).
• Mortgage requirement: Specialist MUFB mortgage or commercial finance.

House in Multiple Occupation (HMO) Definition

An HMO is defined by how the property is occupied, regardless of the physical structure. A property is usually considered an HMO if:

• It is occupied by three or more tenants, forming more than one household.
• Those tenants share amenities such as a kitchen, bathroom, or toilet facilities.

This definition encompasses standard student lets, shared professional houses, and hostels. The key defining characteristic is the sharing of non-self-contained facilities by multiple unrelated households.

• Focus: Occupancy and tenancy arrangements.
• Units: Often shared rooms or bedrooms within a single dwelling.
• Mortgage requirement: Specialist HMO mortgage products.

The Overlap: When an MUFB Requires HMO Licensing

The primary concern for lenders arises when an MUFB operates in a manner that falls under HMO regulations. This usually happens if the units within the MUFB are not truly self-contained, or if the freeholder rents out individual rooms within a flat to multiple, unrelated tenants.

If you own an MUFB containing three separate, self-contained flats (Flat A, Flat B, Flat C), and you rent each flat to a single household, the block itself remains an MUFB and does not require HMO licensing. However, consider the following scenario:

• You rent Flat A (a three-bedroom apartment) to three individual, unrelated students who share the flat’s kitchen and living room.

In this instance, Flat A is now operating as an HMO, even though it resides within an MUFB structure. This means Flat A may require HMO licensing from the local authority, and the lender will assess the property based on the increased regulatory risk associated with HMOs, even if the other flats remain standard tenancies.

Mandatory Licensing Considerations

Mandatory HMO licensing applies nationally if the property is occupied by five or more people forming two or more separate households, regardless of the number of storeys. Local authorities also have powers to introduce additional and selective licensing schemes, which can catch smaller properties, including units within an MUFB.

Failure to comply with HMO licensing rules, where applicable, is a serious matter. It can lead to severe fines, banning orders, and difficulty securing specialist finance. Investors must ensure they check their local council’s requirements thoroughly. You can find detailed regulations on the Government’s official guidance page regarding HMO licensing on GOV.UK.

Mortgage Implications for MUFBs and HMOs

Because the risk profile and exit strategies differ significantly between a standard Buy-to-Let (BTL), an MUFB, and an HMO, lenders have specialised product sets for each:

Valuation Methods

Mortgage providers rely heavily on how a property is valued. This is where the distinction is most pronounced:

• MUFB Valuation (Self-Contained): Lenders typically value an MUFB using the Investment or Commercial valuation method. They assess the rental income generated by all units and apply a yield. However, in some cases, they may also consider the potential break-up value (the total value if each flat were sold separately on a long leasehold basis).
• HMO Valuation (Shared Facilities): HMOs are almost always valued purely on the commercial investment method, focusing on the higher income potential derived from room-by-room letting. This tends to yield a higher valuation than a standard BTL, but the number of lenders willing to finance them is smaller.

If an MUFB unit is found to be operating as an unlicensed HMO, the lender may reject the application entirely or require immediate rectification before drawing down funds.

Lender Criteria and Risk

Both MUFBs and HMOs are considered higher risk and require specialist lending because they generate complex income streams and involve intensive management. Standard BTL mortgages are almost never suitable.

Lenders who specialise in this sector consider factors like:

1. Experience: Does the borrower have prior experience managing complex properties?
2. Stress Testing: Higher stress rates are often applied due to potential void periods or licensing costs.
3. Maximum Units: Lenders often cap the number of units allowed in a single MUFB (e.g., maximum of 6 or 8 self-contained units under one freehold).
4. Occupancy Status: The lender will demand confirmation of tenancy agreements to confirm whether the individual units meet HMO criteria.

People also asked

What happens if I try to finance an HMO with a standard BTL mortgage?

Lenders will almost certainly decline the application once their valuation survey reveals that the property is operating as an HMO, or if the tenancy agreements indicate shared occupancy. Standard BTL products are priced for lower risk and do not account for the complexities of HMO management or the potential need for mandatory licensing, requiring specialist products instead.

Can I convert an MUFB into an HMO without planning permission?

It depends on the size and scope. Converting a standard dwelling (C3) to a small HMO (C4, 3–6 tenants) generally falls under permitted development, although local authorities often use Article 4 directions to remove this right, making planning permission mandatory. Converting to a large HMO (Sui Generis, 7+ tenants) almost always requires full planning consent.

Do I need separate title deeds for each unit in an MUFB?

No, the core definition of an MUFB is that all units are contained within a single freehold title. If the units had separate title deeds, they would be considered individual leasehold properties, fundamentally changing the legal structure and finance requirements. MUFB finance is specifically designed for the complexities of a single freehold containing multiple generating units.

Are MUFBs considered commercial property for lending purposes?

While MUFBs are residential in nature, due to their multiple income streams and complex management, many lenders treat them within the scope of commercial or semi-commercial property lending. This means they are assessed based on the projected income yield rather than purely on the open market value for standard residential use.

What is the minimum number of units for a property to be classed as an MUFB?

The generally accepted standard in the UK lending market is two or more self-contained residential units held under a single freehold title. If there is only one unit, it is simply a standard residential freehold property.

Summary of Key Differences for Finance

When seeking finance, be prepared to clearly articulate the nature of the property and its occupation. Whether your property is classed as an MUFB or an HMO will dictate which specific lenders and products are suitable.

MUFB finance tends to be more straightforward when all units are self-contained, focusing on the block’s income potential and structure. HMO finance requires deep scrutiny of compliance, licensing, and management expertise due to the high regulatory requirements associated with shared living.

Working with an experienced finance broker who understands the nuances of specialist property structures is highly recommended to ensure you secure the correct product compliant with both lender criteria and local authority housing regulations.