HMO Finance: What Landlords Need to Know

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.

What is an HMO?

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.

Mandatory HMO Licensing

In England and Wales, mandatory licensing is required if your property:

• Is rented to 5 or more people
• Forms 2 or more separate households
• Shares toilet, bathroom, or kitchen facilities

Many councils have additional licensing schemes covering smaller HMOs. Always check your local authority requirements.

Why HMOs?

HMOs typically generate higher returns than single-let properties:

Higher Rental Yields

• Standard buy-to-let: 4-6% gross yield typical
• HMO: 8-12%+ gross yield achievable

Renting by the room rather than as a whole property generates more income from the same space.

Strong Tenant Demand

• Students
• Young professionals
• Key workers
• Contract workers

High demand in most UK towns and cities means lower void periods.

Multiple Income Streams

If one room is vacant, you still receive rent from other tenants, reducing risk compared to single-let properties.

HMO Finance Options

Standard HMO Mortgages

Specialist buy-to-let mortgages for HMOs:

• LTV: Typically 70-75% (lower than standard buy-to-let)
• Interest rates: Usually 0.5-1% higher than standard buy-to-let
• Minimum rental coverage: 125-145% of mortgage payment
• Products: 2, 3, or 5-year fixes, or tracker rates

Portfolio Landlord Considerations

If you own 4 or more mortgaged properties, you're classed as a portfolio landlord:

• More stringent underwriting
• Full portfolio review required
• May need to demonstrate overall portfolio profitability
• Some lenders won't accept large portfolios

Refurbishment Finance

If converting a property to an HMO:

• Bridging loan: For purchase and heavy refurbishment
• Refurbishment mortgages: Some lenders offer products for light works
• Development finance: For major conversions

Refinance to an HMO mortgage once works are complete and rental income established.

Lender Criteria

HMO mortgages have stricter criteria than standard buy-to-let:

Property Requirements

**Room Sizes**: Minimum room sizes vary by council but typically:

• Single occupancy: 6.51 sqm (70 sq ft)
• Double occupancy: 10.22 sqm (110 sq ft)

**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.

Landlord Experience

**First-time landlords**: Most HMO lenders require previous landlord experience:

• Minimum 1-2 years as a landlord
• Existing buy-to-let property ownership

Some specialist lenders accept first-time HMO landlords with standard buy-to-let experience.

Financial Requirements

**Minimum income**: £25,000-£50,000 personal income (varies by lender)

**Rental coverage**: Rental income must be 125-145% of mortgage payment, calculated at:

• The lender's stress test rate (typically 5.5-6%)
• On an interest-only basis

**Deposit**: 25-30% minimum (70-75% LTV)

Rental Income Assessment

Lenders calculate rental coverage differently for HMOs:

Room-by-Room Method

Most common approach - each room's rental income is added together:

Example: 5-bed HMO

• Room 1: £550/month
• Room 2: £550/month
• Room 3: £500/month
• Room 4: £500/month
• Room 5: £600/month
• Total: £2,700/month = £32,400/year

**Lender calculation** (assuming 145% ICR at 5.5% stress rate):

• £32,400 / 12 = £2,700/month
• Required mortgage payment: £2,700 / 1.45 = £1,862/month
• At 5.5% interest: £1,862 x 12 / 0.055 = £406,763 maximum loan

With 75% LTV, property purchase price could be up to £542,350.

Top Slicing

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.

HMO Types and Finance

Traditional HMOs

**Shared houses**: 3-6+ bedrooms with shared facilities

• Standard HMO mortgages apply
• Most straightforward to finance
• Widest lender choice

Professional HMOs

**Targeting professionals**: Higher specification, often ensuite rooms

• Premium rent achievable
• Some lenders offer better rates for professional HMOs
• Lower management intensity

Student HMOs

**Purpose-built student accommodation or student-targeted HMOs**:

• Specialist lenders required
• Parental guarantees often involved
• Longer void periods (summer)
• Lenders may restrict lending in oversupplied student markets

Large HMOs (7+ bedrooms)

**Larger multi-room properties**:

• Fewer lenders available
• May require semi-commercial or commercial finance
• Higher yields but more complex management
• Often need more experienced landlords

Serviced Accommodation

**Short-term lets** (Airbnb-style):

• Very few traditional lenders accept
• Often require specialist commercial finance
• Higher rates and fees
• Some lenders have specific SA products

Costs and Considerations

Setup Costs

**Licensing fees**: £500-£1,200 per property (varies by council)

**Refurbishment to HMO standards**:

• Fire doors and alarms
• Adequate kitchen facilities
• Bathroom provision (ratios vary by council)
• Emergency lighting
• Room partitioning

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**:

• Solicitor: £1,000-£2,000
• Valuation: £400-£800
• Broker: Often lender-paid

Ongoing Costs

**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).

Structuring Your HMO Deal

Example Deal Analysis

**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**:

• Mortgage (4.5% interest-only): £10,125
• Management (12%): £3,600
• Maintenance (15%): £4,500
• Utilities: £2,000
• Insurance: £600
• Licensing/compliance: £500
• Total costs: £21,325

**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%

Finding the Right Lender

Not all lenders offer HMO mortgages. Specialist lenders include:

High Street Banks

Some offer HMO products but with strict criteria.

Specialist Buy-to-Let Lenders

Purpose-built products for HMO landlords with more flexibility.

Building Societies

Some have competitive HMO products, often regional focus.

Using a Broker

Essential for HMOs - brokers know which lenders will accept your specific scenario, saving significant time.

Regulatory Considerations

Article 4 Directions

Some areas have removed permitted development rights for HMO conversions - you'll need planning permission to create an HMO.

Minimum Energy Efficiency Standards (MEES)

All rented properties must have minimum EPC rating of E. From 2025, this may increase to C for new tenancies.

Selective Licensing

Some councils require licensing for all rental properties in certain areas, in addition to HMO licensing.

Tips for Success

**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.

Common Mistakes to Avoid

• Underestimating setup costs: Refurbishment to HMO standards costs more than standard rentals
• Ignoring licensing: Operating without required licenses risks fines and prosecution
• Wrong location: Oversaturated HMO markets reduce rents and increase voids
• Poor tenant management: High turnover and problem tenants destroy profitability
• Inadequate reserves: Unexpected repairs and voids require cash reserves

Conclusion

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.