Complete guide to HMO finance including lending criteria, expected returns, and how to structure deals for houses in multiple occupation.
Houses in Multiple Occupation (HMOs) offer landlords the potential for significantly higher rental yields than traditional buy-to-let properties. However, securing finance for HMOs requires specialist knowledge and lenders, as standard buy-to-let mortgages often don't apply.
An HMO is a property rented to three or more tenants who form more than one household, sharing facilities like kitchens, bathrooms, or toilets. HMOs range from small shared houses to large buildings with many individual rooms.
In England and Wales, mandatory licensing is required if your property:
Many councils have additional licensing schemes covering smaller HMOs. Always check your local authority requirements.
HMOs typically generate higher returns than single-let properties:
Renting by the room rather than as a whole property generates more income from the same space.
High demand in most UK towns and cities means lower void periods.
If one room is vacant, you still receive rent from other tenants, reducing risk compared to single-let properties.
Specialist buy-to-let mortgages for HMOs:
If you own 4 or more mortgaged properties, you're classed as a portfolio landlord:
If converting a property to an HMO:
Refinance to an HMO mortgage once works are complete and rental income established.
HMO mortgages have stricter criteria than standard buy-to-let:
Room Sizes: Minimum room sizes vary by council but typically:
Facilities: Adequate kitchens, bathrooms, and fire safety measures as per local authority requirements.
Licensing: Many lenders require HMO licenses to be in place before completion.
Location: Lenders often have postcode restrictions and won't lend in areas with high HMO saturation.
First-time landlords: Most HMO lenders require previous landlord experience:
Some specialist lenders accept first-time HMO landlords with standard buy-to-let experience.
Minimum income: £25,000-£50,000 personal income (varies by lender)
Rental coverage: Rental income must be 125-145% of mortgage payment, calculated at:
Deposit: 25-30% minimum (70-75% LTV)
Lenders calculate rental coverage differently for HMOs:
Most common approach - each room's rental income is added together:
Example: 5-bed HMO
Lender calculation (assuming 145% ICR at 5.5% stress rate):
With 75% LTV, property purchase price could be up to £542,350.
Some lenders allow "top slicing" - using personal income to meet shortfalls in rental coverage. Useful for higher-priced properties or areas with relatively lower rents.
Shared houses: 3-6+ bedrooms with shared facilities
Targeting professionals: Higher specification, often ensuite rooms
Purpose-built student accommodation or student-targeted HMOs:
Larger multi-room properties:
Short-term lets (Airbnb-style):
Licensing fees: £500-£1,200 per property (varies by council)
Refurbishment to HMO standards:
Typical conversion costs: £10,000-£50,000 depending on property size and existing condition.
Furniture and equipment: £5,000-£15,000 for furnishing a 5-6 bed HMO.
Professional fees:
Higher maintenance: More tenants means more wear and tear - budget 15-20% of rent.
Management fees: 12-15% if using letting agents (vs 8-10% for single lets).
Utilities: Often included in rent - factor in £100-£200/month for 5-6 bed HMO.
Licensing renewal: Every 5 years typically.
Insurance: HMO insurance is more expensive than standard buy-to-let.
Council tax: If rooms are let separately, you may be liable for council tax (though tenants usually pay individually).
Purchase price: £300,000 Refurbishment costs: £30,000 Total investment: £330,000
Mortgage: £225,000 (75% of purchase price) Your equity: £105,000 (£75k deposit + £30k refurb)
Rental income: £2,500/month (5 rooms at £500 average) Annual income: £30,000
Annual costs:
Annual profit: £30,000 - £21,325 = £8,675 Net yield: £8,675 / £105,000 equity = 8.26% return on investment Gross yield: £30,000 / £300,000 = 10%
Not all lenders offer HMO mortgages. Specialist lenders include:
Some offer HMO products but with strict criteria.
Purpose-built products for HMO landlords with more flexibility.
Some have competitive HMO products, often regional focus.
Essential for HMOs - brokers know which lenders will accept your specific scenario, saving significant time.
Some areas have removed permitted development rights for HMO conversions - you'll need planning permission to create an HMO.
All rented properties must have minimum EPC rating of E. From 2025, this may increase to C for new tenancies.
Some councils require licensing for all rental properties in certain areas, in addition to HMO licensing.
Research your area: Check local demand, competition, rental rates, and licensing requirements.
Calculate realistically: Use conservative rent estimates and higher cost assumptions.
Build experience: Start with standard buy-to-let before moving to HMOs.
Use professionals: Solicitors, brokers, and letting agents experienced in HMOs save time and money.
Focus on compliance: Proper licensing and safety measures protect you and your tenants.
Plan for voids: Have reserves to cover 2-3 months of costs without full rental income.
HMO finance offers excellent opportunities for landlords seeking higher yields, but requires specialist knowledge, experience, and the right lender. The higher returns come with increased complexity, management requirements, and stricter financing criteria.
Success in HMO investing comes from thorough research, realistic financial planning, compliance with all regulations, and working with professionals who understand the HMO market.
Whether you're converting your first HMO or building a portfolio, securing the right finance structure is fundamental to maximizing returns while managing risk effectively.