What’s the typical arrangement fee for an HMO mortgage?

Arrangement fees for HMO (House in Multiple Occupation) mortgages are crucial factors in determining the total cost of a borrowing package. Due to the specialist nature and increased risk profile of HMO properties compared to standard buy-to-let (BTL) investments, these fees are typically higher and more variable. While standard fees generally fall within the range of 1.5% to 3.0% of the total loan amount, complex cases, high Loan-to-Value (LTV) applications, or specific specialist lenders may charge fees up to 5% or sometimes more, depending on the complexity of the deal.

What’s the Typical Arrangement Fee for an HMO Mortgage?

When investing in Houses in Multiple Occupation (HMOs), understanding the associated costs is essential for calculating expected returns. The arrangement fee, also known as the product fee or completion fee, is a primary cost imposed by the lender for setting up the mortgage. As HMO lending is a specialist area, these fees reflect the extra due diligence, risk assessment, and administrative complexity involved.

The fee structure for HMO mortgages is highly dependent on the individual lender, the specific product chosen, and the perceived risk profile of the property and borrower. However, the market generally operates within the following parameters:

• Standard Range: For straightforward HMOs (typically 3-6 bedrooms, low LTV), fees often sit between 1.5% and 3.0% of the total borrowed amount.
• Specialist Range: For properties requiring mandatory licensing, large HMOs (LHMOS, often 7+ bedrooms), or applications involving adverse credit history or complex corporate structures (SPVs), fees might range from 3.0% to 5.0%.
• Fixed Fees: Less commonly, some lenders offer flat fees, though these tend to be reserved for smaller loan sizes or specific niche products.

It is important to remember that these fees are paid in addition to the interest charged on the principal loan amount, and they represent a significant upfront investment.

Why HMO Mortgage Fees Differ from Standard BTL Fees

HMOs present a different risk profile to lenders than traditional single-tenancy buy-to-let properties, justifying the generally higher arrangement fees. Lenders must account for several factors:

• Increased Complexity: Assessing an HMO requires deeper analysis of tenant demand, rental income stability (multiple leases), and wear and tear.
• Higher Regulatory Burden: HMOs require specific mandatory or additional licensing from local authorities, ensuring compliance with strict fire safety, space, and facility standards. This adds administrative weight to the lending process. You can check the mandatory HMO licensing requirements on the official UK government website for further details regarding compliance.
• Greater Management Overhead: Lenders acknowledge that managing an HMO typically involves more work, potentially increasing the risk of voids or management failures if the landlord is inexperienced.
• Valuation Challenges: Valuing an HMO can be more complicated than a standard residential property, often requiring specialist surveyors and factoring in potential commercial valuation methods, which increases lender costs.

Key Factors Influencing the HMO Arrangement Fee

Lenders do not apply a single blanket fee. Instead, the final arrangement fee you are quoted is determined by a combination of factors related to the property, the deal, and your own financial standing.

Loan-to-Value (LTV) Ratio

The LTV ratio is perhaps the most significant determinant of the fee. LTV represents the size of the loan compared to the property’s valuation (e.g., a £150,000 loan on a £200,000 property is 75% LTV). Generally, the lower the LTV, the lower the risk to the lender, and therefore, the lower the arrangement fee. Products requiring higher LTVs (e.g., 80% LTV) will almost always attract higher fees and interest rates.

Property Size and Licensing Status

A larger HMO, particularly one classified as a Large HMO (usually housing five or more people forming two or more households and requiring mandatory licensing), is viewed as a more complex asset. Properties with higher numbers of bedrooms or multi-unit conversions will often incur fees at the upper end of the scale.

Lender Type and Product Structure

High-street banks, which offer simpler HMO products, might maintain lower, fixed fee structures but often have stricter eligibility criteria. Specialist lenders, on the other hand, are willing to take on more complex or unusual properties, development finance, or borrowers with less perfect profiles. While their flexibility is an advantage, this typically comes at the cost of higher arrangement fees (the 3.0% to 5.0% range).

Borrower Experience and Financial Profile

An experienced portfolio landlord with a clean track record and strong credit score may be offered more preferential rates and lower fees than a novice investor. Lenders assess risk based on your financial history. A clean credit record typically leads to better deals and potentially lower fees. Before applying, understanding your credit status is essential. 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)

Paying the Arrangement Fee: Upfront vs. Roll Up

Once the arrangement fee is calculated, usually as a percentage of the loan amount, you must decide how to pay it. The payment method has significant implications for your immediate cash flow and the long-term cost of borrowing.

1. Paying Upfront (or Deducting from Loan Drawdown)

If you pay the fee upfront, usually at the point of completion, you keep the total loan amount lower, thereby avoiding paying interest on the fee itself. This is generally the most cost-effective option over the life of the mortgage, provided you have the necessary capital available.

2. Rolling the Fee into the Loan

Many landlords choose to “roll up” the arrangement fee, adding it to the principal loan amount. This reduces the immediate cash outlay required for the purchase. However, it is crucial to understand the compliance implications:

• Increased Debt: Your overall debt instantly increases by the fee amount.
• Interest on Interest: You will be charged interest on the rolled-up fee for the entire term of the mortgage, making the effective cost of the arrangement fee significantly higher.
• LTV Impact: Rolling up the fee slightly increases your LTV ratio, which must remain within the lender’s maximum limit.

When comparing products, always ask for the total repayable amount calculation, including rolled-up fees and interest, to get an accurate picture of the most economical option.

Other Associated Costs in an HMO Mortgage

The arrangement fee is only one component of the total cost of securing an HMO mortgage. Investors must also budget for:

• Valuation Fee: Because HMOs are specialist properties, valuation fees are generally higher than for standard BTLs, reflecting the specialist surveying required.
• Legal Fees: You will need a solicitor experienced in commercial property and HMO legislation.
• Broker Fees: If you use a specialist broker (highly recommended for complex HMO deals), they will charge a fee for their services, typically a fixed amount or a percentage of the loan size.
• Application Fees: Some lenders charge a small, non-refundable application fee to cover initial administrative costs, regardless of whether the application proceeds.
• HMO Licensing Fees: These are paid to the local authority and are necessary for legal operation. They vary widely based on the council and the size of the HMO.
• Exit/Early Repayment Charges (ERCs): If you plan to refinance or sell the property early, you may incur significant ERCs, particularly during the initial fixed-rate period.

When taking on any substantial borrowing, it is important to remember that financial commitments carry risk. Your property may be at risk if repayments are not made, potentially leading to repossession, legal action, and increased interest rates or additional charges.

Minimising Your HMO Mortgage Costs

While specialist HMO fees are unavoidable, there are strategies to ensure you secure the most competitive deal and minimise your total expenditure:

1. Use a Specialist Broker: An independent broker specialising in HMO finance will have access to the whole market, including niche products not available directly to the public. They can quickly identify the best balance between a low interest rate and a manageable arrangement fee.
2. Compare the APRC (Annual Percentage Rate of Charge): Do not compare deals solely on the interest rate or the fee alone. The APRC provides a single figure that incorporates interest, compulsory charges, and fees, giving you the best metric for comparing overall borrowing costs.
3. Increase Your Deposit: By increasing your deposit, you reduce your LTV, which directly opens up access to products with lower arrangement fees and reduced interest rates.
4. Prepare Documentation Thoroughly: Ensure all necessary documentation (licensing proofs, income statements, business plans) is ready before application. This speeds up the process and reduces the risk of rejection or lengthy delays, which can sometimes lead to increased costs.

People also asked

Can I negotiate the arrangement fee on an HMO mortgage?

Arrangement fees are generally fixed for a specific product and advertised to the market, meaning direct negotiation is rare. However, a specialist mortgage broker may be able to advise on alternative products from the same lender that offer a trade-off—for example, a slightly higher interest rate in exchange for a lower (or zero) arrangement fee, allowing you to choose the structure that best suits your cash flow.

Are high fees worth paying for a better HMO interest rate?

The decision depends entirely on your investment horizon and loan size. If you plan to hold the property for a long time (e.g., five years or more) and the loan amount is large, paying a higher arrangement fee upfront for a significantly lower interest rate often results in lower total payments over the term. For short-term investments or smaller loans, a lower fee product may be more cost-effective.

What happens if the arrangement fee is paid but the deal falls through?

If the fee was added to the loan and only payable upon completion, you typically owe nothing. However, if the fee was paid upfront (often known as a reservation or application fee), it may be non-refundable, especially if the fault for the failure lies with the borrower or if significant administrative work has already been undertaken by the lender or surveyor.

Is a fee-free HMO mortgage product ever available?

Yes, some lenders offer “fee-free” HMO mortgage products. However, these are almost always compensated for by a significantly higher interest rate than comparable deals with arrangement fees. While they save on upfront capital, they substantially increase the long-term interest paid, so careful calculations are required to determine if they offer genuine savings.

How long do I typically have to pay the arrangement fee?

Most arrangement fees are due upon completion of the mortgage process, though they may be payable earlier if you choose to secure the product rate upfront, or if the fee is deducted directly from the mortgage funds released at drawdown.

In summary, while the typical arrangement fee for an HMO mortgage hovers between 1.5% and 3.0%, the dynamic nature of HMO investment means that costs are always tailored to the individual risk. Prudent investors must look beyond the initial fee and assess the overall APRC and long-term implications of adding fees to the loan amount to ensure the investment remains profitable.