How does the type of HMO impact the mortgage process?

Navigating the mortgage landscape for Houses in Multiple Occupation (HMOs) requires understanding that not all HMOs are treated equally by UK lenders. The critical factors impacting your mortgage application are the size of the property (number of tenants), whether it requires mandatory licensing, and the property’s specific local planning status.

How Does the Type of HMO Impact the Mortgage Process?

The type of House in Multiple Occupation (HMO) you intend to purchase or refinance fundamentally shapes the entire mortgage process, from the choice of lender and the required deposit to the interest rate offered. Lenders assess HMOs based on perceived risk, administrative complexity, and regulatory requirements.

For UK mortgage purposes, HMOs are generally categorised by size, which usually determines whether they require mandatory licensing under the Housing Act 2004.

• Small HMOs: Typically houses 3 or 4 tenants forming two or more households. These often fall under standard C4 Use Class (for planning purposes) and may require fewer specialist requirements, although local council rules always apply.
• Large/Mandatory Licensed HMOs: Houses 5 or more tenants forming two or more households. These are subject to mandatory national licensing rules, usually fall under Sui Generis (unique) Use Class for planning, and face far greater lender scrutiny.

The Core Impact: Risk and Specialisation

Lenders view HMOs as more complex than standard single-family Buy-to-Let properties. The mortgage process is impacted primarily by the property’s complexity and the resultant risk profile.

1. Assessment of Risk

A larger HMO generally presents a higher administrative burden and a more concentrated regulatory risk (e.g., severe penalties for breaching licence conditions). Lenders factor this into their assessment:

• Voids: Smaller HMOs are typically seen as having more stable income streams, even if one room is empty. Large HMOs rely heavily on consistent occupancy across multiple units.
• Management: Larger HMOs require specialised, professional management, which is a requirement many mainstream lenders are uncomfortable underwriting.
• Safety & Compliance: Mandatory licensed HMOs must meet stringent fire safety and amenity standards, which impacts valuation and potential refurbishment costs.

Consequently, the pool of available lenders shrinks significantly as the HMO size increases, forcing applicants towards specialist lenders who understand the niche market and associated risks.

2. Deposit Requirements and Loan-to-Value (LTV)

The type of HMO directly dictates the required deposit (equity contribution) and the maximum LTV the lender will offer.

• Small HMOs (3-4 Tenants): Often qualify for standard specialist BTL products, sometimes allowing LTVs up to 75%. Deposits usually start at 25%.
• Large HMOs (5+ Tenants): Due to the higher risk, lenders demand greater borrower equity. LTVs are often capped lower, typically 65% or 70%, meaning deposits of 30% to 35% are common, sometimes reaching 40% depending on the lender and location.

Mortgaging Small HMOs (3-4 Tenants)

For properties accommodating fewer than five unrelated occupants, the mortgage process is generally simpler. Many lenders classify these as standard BTL with an HMO overlay, or may use a specific HMO BTL product.

Lenders will still require proof that the property complies with local council HMO standards, even if it does not require a mandatory licence. The application process will typically focus on:

1. The landlord’s experience (if any).
2. The property’s cash flow potential (rental income stress-testing).
3. The applicant’s credit history.

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Mortgaging Large HMOs (5+ Tenants and Licensed)

When an HMO requires a mandatory licence, the complexity increases significantly. These properties almost always require a dedicated, specialist HMO mortgage product.

Licensing and Compliance Requirements

The existence of a mandatory licence is both a compliance hurdle and a comfort to the lender. It proves the property has passed strict safety inspections regarding room sizes, fire safety measures (e.g., alarm systems, protected routes), and amenity provision (kitchens/bathrooms).

Lenders will typically require sight of the licence and will often require the valuation surveyor to verify that the property meets all licensing conditions. A property purchased without a mandatory licence in place—or one needing refurbishment to achieve compliance—may require a bridging loan initially before transitioning to an HMO mortgage.

It is crucial to understand the rules set by local authorities. You can find detailed guidance on mandatory licensing requirements across England and Wales by visiting the UK Government’s HMO information portal.

If bridging finance is used to facilitate the purchase or refurbishment of a property to bring it up to HMO standard, remember that this type of short-term finance carries specific risks. Your property may be at risk if repayments are not made. Consequences of default can include legal action, repossession, increased interest rates, and additional charges.

The Impact of Planning Use Classes

Beyond the number of tenants, planning permission is a critical factor impacting lender decisions. Planning laws define how a building can be used:

• C4 Use Class (Small HMO): Applies generally to properties shared by 3 to 6 unrelated individuals. Many local councils operate permitted development rights, meaning planning permission is not always required to move from a standard residential dwelling (C3) to a C4 HMO.
• Sui Generis (Large HMO): This designation means ‘of its own kind’ and typically applies to HMOs housing 7 or more unrelated individuals, or sometimes 5-6 tenants where the local council has imposed an Article 4 direction.

If your property falls into the Sui Generis category, it definitely requires specific planning permission. Lenders will insist on seeing proof of this permission. Lacking the correct Use Class status can make a property unmortgageable for most lenders until the situation is resolved.

Note on Article 4 Directions: Many local councils have implemented Article 4 directions, especially in areas with high student populations. This removes permitted development rights for C4 HMOs, meaning even a small HMO conversion may require full planning permission. Lenders are highly sensitive to Article 4 areas and will check the property’s compliance thoroughly.

Valuation and Underwriting Considerations

The way an HMO is valued also depends on its type. This distinction is vital because the valuation forms the basis of the maximum loan amount.

Small HMO Valuation: These are often valued using the ‘bricks and mortar’ approach, similar to a standard residential property, but factoring in a marginal premium due to the BTL demand.

Large/Licensed HMO Valuation: These are often valued using a commercial basis, sometimes called the ‘investment valuation’ or ‘income method’. The valuation heavily depends on the achievable rental income (yield), rather than just comparable sales of residential homes. The surveyor will assess the sustainability of the income based on room numbers, local demand, and compliance standards. This approach can be more volatile and depends heavily on the underwriter’s stress testing methods.

The type of HMO also influences the covenants (rules) placed on the loan agreement. Large HMOs often have strict rules requiring adherence to the licence conditions, professional management, and regular maintenance checks, monitored by the lender.

People also asked

What is the minimum deposit required for an HMO mortgage?

The minimum deposit generally starts at 25% of the property value for smaller, lower-risk HMOs. However, for larger, mandatory licensed properties (5+ tenants), lenders typically require a minimum deposit of 30% to 35%, reflecting the increased complexity and perceived risk associated with specialist properties.

Do I need a commercial mortgage for a large HMO?

While specialist Buy-to-Let (BTL) products exist for HMOs up to six or seven tenants, very large or complex HMOs (e.g., student blocks or converted guesthouses) housing eight or more tenants often require a commercial or semi-commercial mortgage. This depends on the specific lender’s product offering and how they classify the property use.

Does landlord experience matter when applying for an HMO mortgage?

Yes, landlord experience is highly influential, particularly for mandatory licensed HMOs. Specialist lenders prefer borrowers who can demonstrate a track record of successfully managing rental properties, as the administration and compliance burdens of HMOs are much higher than standard BTLs.

What happens if my HMO licence expires during the mortgage term?

An HMO licence must be maintained throughout the mortgage term if required by law. Most HMO mortgage agreements include covenants requiring valid licensing. If the licence expires or is revoked, the lender may deem the property non-compliant, potentially triggering a breach of contract that could lead to default, penalty fees, or the requirement to repay the loan.

Can I use a residential mortgage to buy an HMO?

No, a residential mortgage is specifically for owner-occupiers and strictly prohibits letting the property to multiple unconnected households as a business. You must secure a specialist Buy-to-Let HMO mortgage or a commercial mortgage, as using a standard residential product for an HMO is considered mortgage fraud.

Conclusion

The type of HMO fundamentally dictates the feasibility and structure of your mortgage. Smaller HMOs offer access to a wider range of lenders and more competitive rates. In contrast, larger, mandatory licensed HMOs demand specialist knowledge, significant compliance preparation, and higher equity contributions, focusing your application toward the niche HMO lending market. Careful planning, ensuring all licensing and planning permissions are in place, is crucial before engaging with any lender.