Remortgage an HMO Property

What Is an HMO?

A house in multiple occupation is a property rented out by at least three people who are not from one household but share facilities such as a bathroom, kitchen, or living area. The formal definition varies slightly depending on context, but for mortgage and licensing purposes, the key factors are the number of tenants and whether they form separate households.

HMOs fall into several categories that are relevant when remortgaging:

• Small HMO -- A property occupied by three to four people forming two or more households. These may or may not require a licence depending on the local authority, but they are still classified as HMOs for mortgage purposes.
• Large HMO -- A property occupied by five or more people forming two or more households. Since October 2018, all large HMOs in England require a mandatory licence regardless of the number of storeys.
• Purpose-built HMO -- A property specifically designed or converted to accommodate multiple tenants in separate rooms with shared facilities.
• Converted HMO -- A property that was originally a single dwelling and has been converted to accommodate multiple tenants.

The distinction between these categories matters because lenders apply different criteria depending on the type and size of HMO. Some lenders will consider small HMOs under their standard buy-to-let criteria, while large or purpose-built HMOs may require specialist lending.

It is also worth noting that some local authorities operate additional licensing schemes that cover smaller HMOs or specific areas within their boundaries. You should check with your local council to understand the licensing requirements that apply to your property.

HMO Licensing Requirements

Licensing is one of the most important factors in an HMO remortgage. Lenders will almost always want to see evidence that your property is properly licensed, and operating without a required licence can be grounds for declining an application.

Mandatory licensing

In England, any HMO occupied by five or more people from two or more separate households must have a mandatory HMO licence. This applies regardless of the number of storeys. The licence is issued by the local authority and typically lasts for up to five years.

Additional and selective licensing

Many local authorities operate additional licensing schemes that extend the licensing requirement to smaller HMOs or to specific geographic areas. Some councils also have selective licensing schemes that cover all privately rented properties in designated areas. Check with your local authority to find out what schemes apply.

What the licence covers

An HMO licence sets out the maximum number of occupants, the standards the property must meet (including fire safety, room sizes, and amenity provision), and the obligations of the licence holder. The licence holder must be a fit and proper person and must comply with a range of management regulations.

What lenders expect

When you apply to remortgage an HMO, lenders will typically require:

• A copy of the current HMO licence
• Confirmation that the licence is valid and not subject to revocation
• Evidence that the property meets all conditions attached to the licence
• Details of the maximum number of permitted occupants

If your licence is due for renewal, it is worth starting the renewal process well before you apply to remortgage. Lenders are unlikely to proceed if the licence is about to expire or if there is any doubt about its continuation.

Lender Criteria for HMO Remortgages

HMO mortgages are a specialist area, and the number of lenders willing to offer competitive deals is smaller than for standard buy-to-let properties. However, the market has grown significantly in recent years, and there are now more options available than ever before.

Number of tenants and rooms

Most HMO lenders set limits on the number of lettable rooms. Some will consider properties with up to six rooms, while others will go higher. The number of tenants relative to the size of the property is also relevant, as overcrowding is a concern for both regulators and lenders.

Property type and condition

Lenders will assess the condition and suitability of the property for HMO use. Purpose-built HMOs with self-contained facilities may attract more lender interest than converted properties, though both are financeable. The property must meet all relevant fire safety, electrical safety, and gas safety standards.

Rental income and yield

HMO mortgages are typically assessed on rental income coverage. Lenders usually require that the gross rental income covers the mortgage payment by a specified ratio, commonly 125 to 145 percent at a stress-tested interest rate. Because HMOs generate income from multiple tenants, the rental coverage can be stronger than a single let, which may work in your favour.

Landlord experience

Many HMO lenders require the applicant to have landlord experience. Some require you to have owned and managed buy-to-let properties for a minimum period, often one to two years. First-time landlords may find their options more limited, though some lenders are more flexible, particularly with strong income and a well-prepared application.

Loan-to-value

Maximum loan-to-value ratios for HMO remortgages are generally lower than for standard residential mortgages. Most lenders offer up to 75 percent LTV, though some specialist lenders may go slightly higher in certain circumstances. The more equity you have, the better rates you will typically be offered.

Portfolio considerations

If you own multiple properties, lenders may consider your overall portfolio exposure. Since 2017, the Prudential Regulation Authority's portfolio landlord rules require lenders to assess the entire portfolio of any landlord with four or more mortgaged properties. This means providing details of all your properties, not just the HMO you wish to remortgage.

Remortgaging to Convert to an HMO

Some landlords remortgage to release equity for converting a standard rental property into an HMO. This can be a sound financial strategy, as HMOs typically generate higher yields per room than single-let properties, but it requires careful planning.

Planning permission

Converting a property from a single dwelling (use class C3) to an HMO (use class C4 for small HMOs, or sui generis for large HMOs) may require planning permission. Some local authorities have introduced Article 4 directions that remove permitted development rights for HMO conversions, meaning you will need to apply for planning permission in these areas.

Building regulations

HMO conversions must comply with building regulations, particularly regarding fire safety, means of escape, sound insulation, and the provision of adequate amenities. You will need to work with a building control officer to ensure compliance.

Financing the conversion

If you are remortgaging to fund the conversion, you will need to plan the timing carefully. Most buy-to-let lenders will not allow you to increase the number of tenants beyond their standard criteria without switching to an HMO mortgage. You may need to remortgage first on a standard buy-to-let basis to release equity, carry out the conversion, and then remortgage again onto an HMO product once the work is complete and the licence is in place.

Costs to consider

The costs of converting a property to an HMO can be significant. Beyond the building work itself, you will need to budget for fire safety installations (alarms, doors, emergency lighting), kitchen and bathroom facilities for the increased number of tenants, furniture if letting rooms as furnished, the HMO licence fee, and potentially an energy performance certificate for each letting unit.

It is sensible to create a detailed budget and cash flow projection before committing to a conversion. A specialist property accountant can help you assess the viability of the project and the tax implications.

How to Get the Best HMO Remortgage Deal

Securing a competitive remortgage deal on your HMO property requires preparation and, ideally, the assistance of a broker who specialises in this area.

Keep your licensing up to date. Ensure your HMO licence is current and that the property complies with all conditions. If your licence is due for renewal within the next six months, start the process now. Lenders will not proceed without a valid licence.

Maintain compliance records. Keep up-to-date records of all safety certificates, including gas safety, electrical installation condition reports (EICR), energy performance certificates, and fire risk assessments. Having these ready demonstrates to lenders that the property is well managed.

Document your rental income. Provide clear evidence of your rental income, including tenancy agreements, rent collection records, and bank statements showing regular rental receipts. Strong and consistent rental income strengthens your application.

Maintain the property well. The lender's valuer will inspect the property and assess its condition. A clean, well-maintained HMO with good quality fixtures and fittings will receive a better valuation than one that shows signs of neglect.

Consider the timing. As with any mortgage, timing matters. Start looking at remortgage options around six months before your current deal expires to avoid rolling onto a potentially expensive standard variable rate.

Use a specialist broker. The HMO mortgage market is specialist territory. A broker who focuses on buy-to-let and HMO lending will have relationships with the relevant lenders and will know which ones offer the best terms for your specific property type and portfolio size. They can also help you navigate the portfolio landlord assessment process if you own multiple properties.

Common Challenges and How to Overcome Them

Remortgaging an HMO can present challenges that are not encountered with standard residential properties. Here are some of the most common issues and how to address them.

Limited lender choice

The number of lenders offering HMO mortgages is smaller than for standard residential or buy-to-let products. This can make it harder to find competitive rates. Working with a specialist broker who has access to the full range of HMO lenders is the most effective way to overcome this limitation.

Valuation issues

HMO valuations can be complex. The valuer needs to assess the property both as an HMO and on a vacant possession basis. If the valuation comes back lower than expected, it can affect your LTV and the rates available to you. Ensuring the property is in good condition and providing evidence of strong rental income can help support a higher valuation.

Portfolio landlord assessment

If you own four or more mortgaged properties, lenders must carry out a portfolio assessment under the PRA rules. This requires you to provide details of all your properties, including rental income, outstanding mortgage balances, and property values. Having a well-organised portfolio spreadsheet can make this process much smoother.

Licensing complications

If your HMO licence has conditions attached that have not been met, or if there is any enforcement action pending, lenders are likely to decline your application. Address any licensing issues before applying to remortgage. If your licence application is pending, some lenders may proceed with evidence of the application, but this varies.

Article 4 directions

If your HMO is in an area where an Article 4 direction applies and you do not have planning permission for HMO use, this could be a problem. Lenders will want to see that the property has the correct planning consent. If you have been operating as an HMO since before the Article 4 direction was introduced, you may be able to apply for a lawful development certificate to confirm your existing use rights.

Changing regulations

HMO regulations are subject to change, and new requirements can affect both your licensing position and your mortgage options. Staying informed about regulatory changes and maintaining compliance is essential for successful ongoing portfolio management and future remortgaging.