With the rising cost of living, home rentals are becoming more popular among landlords and tenants. Landlords are now looking to buy more properties to lease out to generate income. On the other hand, tenants are searching for places to rent as it is more economical than buying a house.

With the increased demand, there are different rental options, like buy-to-let (BTL) properties or houses in multiple occupations (HMO). Mortgage lenders are offering loan products for these two types of properties. But what are they?

What Is The Difference Between BTL and HMO Properties?

BTL properties are leased to a single household, whether a family, married couple, or relatives, including stepparents and stepchildren. 

Conversely, HMOs are rented by multiple tenants (three or more) from different households and share communal facilities like kitchens and bathrooms. These properties may also be referred to as ‘house shares.’ 

Residential properties may be converted into HMOs, provided that they follow the set criteria and standards. You can avail of a mortgage for HMO if you plan on leasing your property to different occupants.

Advantages Of HMOs

To appreciate what HMOs offer, here are some of their advantages:

• Higher Income: Since HMOs are rented out to multiple tenants, the source of income also comes from different streams. With higher income, your profit margin also increases, which adds to the value you get from your investment.
• A Steadier Flow Of Income: Your flow of income is unlikely to be stopped since payments are given by different occupants. So, when one of your renters leaves, you can still earn from your other tenants.
• Greater Demand: Most occupants prefer renting HMOs since the cost is lower than renting the whole house.

Disadvantages of HMOs

Like other options, HMOs don't come without any disadvantages. Here are a few of them:

• More Expensive: HMO mortgages are often more costly than BTL mortgages because the process is more complex. There are more criteria to approve an application for HMOs than BTLs.
• Inconsistent Income: Although you can earn more with an HMO, your income may still be inconsistent when leasing to multiple tenants. An example is if your tenants are students. They are likely to rent the place for a year and leave.

What Is An HMO Mortgage?

An HMO mortgage is a specialized mortgage for HMOs. Note that you can’t use a regular BTL mortgage if you plan on running an HMO. Doing so may breach the contract between you and your lender and result in legal problems. 

HMO mortgages may be given at variable, fixed loan term rates, or interest-only rates. As discussed below, depending on your needs, you may avail of different HMO mortgages. 

• HMO Refurbishment Mortgages: Avail this mortgage if your property needs repairs and refurbishments. This product is also used if you plan on converting a property into an HMO. 
• HMO Development Mortgages: This product is more suitable if you require a large construction project and need funds to build your house share. 
• HMO Mortgages and Remortgages: This loan product is appropriate for existing HMOs. 

Requirements To Avail HMO Mortgages 

The requirements may differ from lender to lender. But here are some common requirements that need to be disclosed and prepared. 

1. 1. Landlord Experience 

Most HMO mortgage lenders would prefer applicants with at least a year of landlord experience, whether for BTLs or HMOs. Inexperienced borrowers may still apply for a loan, but the number of lenders accepting them is decreasing. 

Managing an HMO is complex since you’re managing multiple tenants. As such, lenders are likely to approve applications from experienced landlords. But some lenders accept unpracticed debtors if they have property agents manage their tenants. 

1. 2. Current Income And Loan To Value Ratio 

Some lenders have no income requirements. But others may require an income of at least USD$31,000. Some mortgagees may ask for your source of income to ensure you can secure regular payments. 

The loan-to-value (LTV) ratio is also a big consideration when approving a mortgage application. Your LTV is the ratio between how much you’re borrowing and your deposit. 

For example, a property costs USD$150,000, and your initial deposit is USD$40,000. That means you need to borrow USD$110,000 to cover the remaining amount. Your deposit is 27% of the total cost. So, your LTV is 73%. Most mortgagees decline borrowers with 80% or higher LTV ratios. 

1. 3. Credit Rating 

Your credit rating determines your ability to repay the amount you borrow. Lenders prefer borrowers with good grades. But you may still apply for a loan even with a poor rating. Ensure you can disclose your situation to a specialist broker to help you find the right products suited to you. 

1. 4. Property Value 

The property value is a key factor in determining whether or not an application should be approved. Property valuers conduct HMO valuation in two ways: bricks-and-mortar valuation or commercial valuation. 

The former assesses the property's value based on the building’s condition, size, location, number of bedrooms, and fair market value. The latter also looks at the same criteria and considers operating costs, rent, and generated income. 

1. 5. HMO License 

Landlords of large HMOs (seven or more tenants) must secure an HMO license before operating. However, this may also depend on the local authority where your property is located. Some places require all housemates to have their own licenses. 

In Summary 

The demand for affordable housing options continues to rise. This increase allows the HMO industry to grow and generate income from residential properties. 

With HMOs becoming a trend, HMO mortgages are becoming more available, and more brokers specialize in this product. If you plan on building your house share or converting your existing property into one, you can consult a specialist broker to guide you in finding the best lender to suit your needs.