Everything you need to know about letting an HMO

Thinking about letting an HMO? Here’s a plain language guide to what you need to know, from what counts as an HMO, to how many rooms your property needs and what interest rates to expect.

What counts as an HMO?

HMO stands for “house in multiple occupancy”. It’s a property let to at least 5 people, where at least 3 of them aren’t in the same family unit.

For example, a property would be an HMO if it has a family of 3, plus two other unrelated tenants.

There are also a handful of rules around what landlords need to provide for a property to be accepted as an HMO, like a shared kitchen and living space.

What are the rules for HMOs?

Start off by checking with your local council to see if you need a licence for your HMO (you most likely will), and what the licence requirements are.

There are a few major rules that were introduced in 2018. Some of them are still being phased in, but lenders still look at if a landlord is following these rules when they evaluate HMO mortgage applications.

There are minimum room sizes single adults, couples, and children. You’ll need separate locks and doors for your tenants, and the property will need communal areas — and it can’t just be a kitchen. And there are more stringent fire safety regulations for HMO properties. You can read what all the rules are here.

HMOs are treated more like a business than a typical buy-to-let, so HMO landlords will have to do certain things a little differently, like set up a contract for waste pickup.

What are the differences in getting a mortgage for an HMO?

Mortgage interest rates for HMOs are almost always higher than for regular buy-to-lets, usually to the tune of 1 - 1.5%. That’s because there’s more work the lender needs to check and validate for an HMO mortgage application — the licence, the tenancy agreements, and special considerations like room size for valuation.

As an HMO landlord, your rental stress rate (how high rent has to be in order for you to repay the mortgage) is also higher. That’s because you’re supposed to be earning more in rent from an HMO than you would from a typical buy-to-let.

Am I eligible for a mortgage for an HMO?

Lenders want to see that you’re an experienced landlord, and they’re unlikely to approve you for an HMO if you’re not. That’s because there’s so much more work involved than with a typical buy-to-let: multiple tenancy agreements and admin, keeping on top of the extra upkeep and repairs that you get with more tenants, as well as making sure you’re following all the legislation.

In this case, experienced means you currently have at least one buy-to-let property, and you’ve had it for at least six months. If you’re a first time landlord, you’ll have a much harder time getting a mortgage for an HMO.

When is letting an HMO a good choice?

An HMO might be a good choice for you if you’re an experienced landlord, you know the costs and the risk involved, and you’re prepared for the extra time and admin (usually, that means hiring a management company).

If you’re prepared and you know what you’re signing up for, an HMO can be a great investment – but it’s important to be realistic about all the extra regulations, admin, and costs involved, and weighing those against the increased rent.

I’ve weighed the pros and cons – what’s next?

Setting up a limited company to buy your HMO is often a good choice, because you can file a lot of the extra costs that HMOs have as business expenses and get some tax back.

Another thing to conisder is taking on a property management company. They can take a lot of the stress and risk off your shoulders with things like tenancy agreements and admin.

And of course, using a broker (like Habito!) can put you in the best position for being approved for a buy-to-let mortgage for an HMO.