What fees are typically associated with HMO mortgages?

HMO (House in Multiple Occupation) mortgages are specialised financial products designed for landlords letting properties to multiple unrelated tenants. Due to the inherent complexity and perceived higher risk associated with HMOs compared to standard Buy-to-Let (BTL) properties, the associated fees are often higher and more intricate. Understanding these costs upfront is crucial for calculating the true profitability of your investment.

What Fees Are Typically Associated with HMO Mortgages?

Navigating the mortgage market for HMO properties requires a detailed understanding of the costs involved, which extend far beyond the standard interest rate. These fees can substantially impact your overall investment returns. We break down the primary categories of expenses you can typically expect when applying for and managing an HMO mortgage in the UK.

1. Lender and Arrangement Fees

Lender fees are charges levied directly by the financial institution providing the mortgage. These are often the largest upfront costs and must be factored into your financial planning.

Product and Arrangement Fees

The arrangement fee, sometimes called a product fee, is the cost charged by the lender for reserving and setting up the specific mortgage product. For specialist products like HMO mortgages, these fees are generally high.

• Typical Charge: While standard BTL mortgages might charge 1% or 2% of the loan amount, HMO arrangement fees typically range between 2% and 5% of the total loan amount.
• Payment Options: You will typically have the choice to pay the fee upfront or roll it into the mortgage balance. While rolling it in avoids an immediate cash outlay, remember that you will be paying interest on the fee amount for the entire duration of the mortgage term, increasing the total cost significantly.

Booking and Application Fees

Some lenders charge a non-refundable booking or application fee simply to process the application. Although usually much smaller than the arrangement fee, this cost is payable immediately and covers the administrative burden of initial assessment.

Telegraphic Transfer Fee (or Funds Transfer Fee)

This small charge covers the administrative cost of electronically transferring the mortgage funds to your solicitor upon completion. This fee is standard across most types of mortgages.

2. Valuation and Survey Costs

Valuation fees are mandatory, as the lender requires confirmation of the property’s market value and its suitability for lending. For HMOs, this process is notably more complex than for a standard single-family home.

Specialist HMO Valuation Fee

HMO properties are typically valued using a commercial basis, assessing their rental income potential rather than just comparable sales data. This requires a specialist chartered surveyor with experience in HMO licensing and rental calculations.

• Higher Cost: Due to the specialised nature and complexity of commercial valuations, HMO valuation fees are generally higher than standard residential or BTL valuations. The cost is often determined by the property’s size, location, and complexity.

Independent Surveys (Optional but Recommended)

While the lender’s valuation protects their interest, it does not detail the property’s structural condition. Given that HMO properties typically experience high wear and tear, arranging an independent survey (such as a Level 2 Homebuyer Report or a Level 3 Building Survey) is highly recommended. These costs are paid directly to the surveyor.

3. Legal and Administrative Expenses

Legal fees are non-negotiable costs associated with the conveyancing process—the legal transfer of property ownership and the establishment of the mortgage agreement.

Conveyancing Solicitor Fees

You will pay your solicitor for the legal work involved in purchasing the property and registering the mortgage deed. Because HMO mortgages involve verifying specific licensing and planning requirements (e.g., compliance with Article 4 directions or existing planning use classifications), the legal work is more extensive than a typical residential purchase, leading to higher fees.

Disbursements

These are costs paid by the solicitor on your behalf to third parties, including Stamp Duty Land Tax (SDLT), Land Registry fees, and necessary local authority searches. For HMOs, searches must often specifically verify planning permissions and check for outstanding enforcement notices relating to safety standards.

Broker or Intermediary Fees

Given the complexity of the HMO market—where products are often niche and rates vary significantly—most investors use a specialist mortgage broker. The broker fee covers the advice and administration of sourcing and securing the correct product.

• Fee Structure: Broker fees can be structured as a flat fee, an hourly rate, or a percentage of the loan amount (typically 0.5% to 1.5%), or sometimes a combination of commission paid by the lender and a fee paid by you.

Credit Search and Due Diligence Fees

Lenders perform credit checks on all applicants as part of their due diligence process to assess risk. While the initial check may be absorbed by the lender, it is wise for applicants to check their own credit reports before application to resolve any issues:

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4. HMO-Specific Regulatory and Running Costs

These expenses are unique to properties operating as Houses in Multiple Occupation and are essential for compliance and operation.

HMO Licensing Fees

If your property meets the criteria for mandatory licensing (typically 5 or more unrelated tenants forming 2 or more separate households, and usually over 3 storeys), you must obtain an HMO licence from your local authority. Even smaller HMOs may require a licence under selective or additional licensing schemes.

• Cost Variability: Licensing fees vary widely across different councils in the UK, sometimes running into thousands of pounds, and must be renewed regularly (typically every five years). Non-compliance with licensing requirements can lead to severe fines and mortgage default. You can check the official UK Government guidance on HMO requirements to understand the specific rules applicable in your area.

Safety and Compliance Certification Costs

Maintaining an HMO requires stringent compliance checks, which incur regular costs:

• Fire Safety: Costs related to installing and maintaining fire alarm systems, emergency lighting, and fire doors.
• Gas and Electrical Safety: Annual Gas Safety Certificates and Electrical Installation Condition Reports (EICRs), required at specified intervals.
• EPC (Energy Performance Certificate): Must meet minimum energy efficiency standards.

Insurance Premiums

HMO insurance is significantly different and more expensive than standard residential or BTL insurance. The policies must cover the increased risk associated with multiple tenancies and mandatory property standards.

5. Ongoing Management and Potential Exit Fees

Beyond the immediate setup costs, landlords must budget for ongoing management fees and potential future costs.

Property Management Fees

If you use a management company, their fees (typically 10% to 15% of gross rental income) must be factored in, especially as HMO management is labour-intensive.

Early Repayment Charges (ERCs)

If you decide to pay off the mortgage early or switch to a new product outside the fixed term, the lender may impose ERCs. These fees are usually detailed in your initial mortgage offer and can be substantial, often calculated as a percentage of the outstanding loan balance (e.g., 3% or 4%).

People also asked

What is the typical deposit required for an HMO mortgage?

Lenders generally require larger deposits for HMO properties due to the increased risk profile. While some standard BTL mortgages might accept 20% down, HMO mortgages typically require a minimum deposit of 25%, and often 30% or more, depending on the property size and number of tenants.

Are HMO mortgage interest rates higher than standard Buy-to-Let rates?

Yes, HMO mortgages typically carry slightly higher interest rates than standard Buy-to-Let products. This is because they are considered specialist or semi-commercial products, reflecting the increased administrative complexity and the potential risk associated with managing multiple tenancies and licensing requirements.

Do I have to pay Stamp Duty Land Tax (SDLT) on an HMO property?

Yes, Stamp Duty Land Tax is payable on the purchase of an HMO property. Furthermore, most HMO purchases are subject to the 3% SDLT surcharge applied to purchases of additional residential properties in England and Northern Ireland, regardless of whether the property is classed as residential or commercial for lending purposes.

How can I reduce the overall cost of my HMO mortgage fees?

You may be able to reduce upfront costs by opting for a higher interest rate product that charges a lower arrangement fee. Additionally, carefully comparing broker fees and shopping around for specialist legal services can help. Crucially, ensuring the property meets all licensing standards from the outset avoids costly remedial work and potential fines.

Securing an HMO mortgage involves a wide array of fees that demand careful planning and budgeting. While the initial costs may seem high, especially concerning arrangement fees and specialist valuations, these costs reflect the commercial nature and regulatory complexity of HMO investments. Working with a specialist broker who understands the nuances of what fees are typically associated with HMO mortgages can help you navigate this complex landscape and secure the most cost-effective solution for your investment strategy.

Remember that while professional advice helps identify necessary products, your property may be at risk if repayments are not made. Potential consequences of default can include legal action, repossession, increased interest rates, and additional charges, highlighting the importance of thorough financial forecasting.