House in Multiple occupations consists of a property rented out to more than three tenants. These people are not from the same family. They occupy the private bedroom but share communal areas like the bathroom, lounge and kitchen area.
When people say they share a flat or house, they are mentioning HMOs. One can make greater profits from an HMO than letting the flat be rented to a single-family. The rent can be charged individually per room. Thus, you’ll get more rent overall. Although, you need to hire a mortgage HMO specialist in London to carry out this process.
Difference between HMOs and other Rental Properties
Most students and young professionals who are unable to afford the rent of a whole property by themselves choose to live in HMOs. Maybe, they are not yet settled to move in with their partners. It is a cheaper option to rent one room than a whole property. It is obvious that the combined rent of all the rooms is more than the rent charged from a single-family. Thus, property management in London pays higher rent than other rental properties.
However, high potential rewards also have high risks. You will get a higher turnover of tenants than the buy-to-let. But every new tenant might be a problem. Those problematic factors are unknown. Those factors could be:
– Will they be able to pay the rent on time?
– What if they cause any damage?
– What if they trigger any dispute?
If you don’t want to deal with all this, you need a mortgage specialist for this.
A Mortgage Guide for HMO
HMO mortgage is a type of mortgage. It is specifically designed for landlords who rent their property to more than three tenants who are not from the same household. The key differences are:
– They are linked to the rates like London Interbank Offered Rate (LIBOR Rate).
– Maximum loan-to-value ratio (LTC ratio) occurs between 60% to 75%.
– Landlords have to show their years of experience before taking one out.
– HMO mortgages are more expensive both in terms of fees and interests.
The high cost of an HMO in London mortgage may result in less profit. Thus, it’s better to calculate these profit margins and the extra cost of an HMO mortgage. Having a mortgage broker helps in navigating various restrictions and conditions and helps you to get the right lender for your property.
How to get an HMO mortgage?
Most HMO mortgages are limited to experienced landlords. However, some lenders accept applications from landlords who have more than two years of experience in the HMO field.
Lenders also need some extra requirements to get you hired. Thus, if you are a first-time landlord you have to struggle to get your HMO mortgage approved and you have to start by letting your property to one family.
Once you get the experience of letting out the properties, you might gain experience in letting out HMOs. You can either convert the original property into one or buy a new property. No matter which option you choose, you need a specialist HMO mortgage. If you already possess a property, you need to approach your lender again and talk about remortgaging an HMO deal.
First, you need to get a sizable deposit for an HMO mortgage. Lenders also require an LTV ratio of 60 – 75%.
They also need some potential rental income while calculating their stress test calculations. Their amount is based on the rental income you get from letting the property rather than on individuals. That means mortgages are affordable with sizable profit margins. The mortgage broker also advises you on how high you can go to buy an HMO mortgage.
HMO mortgage stress test
It is the calculation that tells how much income you will require to cover the repayments of mortgages.
There are two stress tests:
- Annual interest
It tells how much interest you have to pay annually. It ranges from 3.5% to 5.5%, then multiply it by the loan amount to get the estimate.
- Rental income
It tells how much rental income is required for mortgage repayments. In this calculation, the lender multiplies its Rental Cover Rate by the annual interest rate.
What are the other factors involved in HMO mortgage affordability?
The lender calculates other factors and criteria to determine the affordability of HMO. These factors include:
– Sources of income
– Credit score
– Other rental properties
– Size of HMO
– The type of properties
All these factors are involved in HMO mortgage affordability.
It’s no hidden fact that HMO mortgages are more expensive than other To- let loans. Thus, it is important to get the best rates because the amount you pay in interest can affect your income.
Choosing an independent mortgage broker will open the door for various lenders. It could also be small lenders with customized products. In short, a mortgage broker will help you in finding and applying for the best HMO services in london.