What Counts as an HMO?
The legal definition of an HMO in England and Wales (Housing Act 2004) covers properties occupied by three or more people forming two or more households (i.e. not all related) sharing facilities such as a kitchen or bathroom. Mandatory licensing applies to HMOs of five or more people from two or more households across three or more storeys. Many local authorities also apply additional or selective licensing to smaller HMOs - always check local authority requirements for any specific property.
Standard vs Large HMO Mortgages
Small HMOs (3-4 Tenants)
Three and four-bed HMOs occupy a middle ground in the mortgage market. Some standard buy-to-let lenders will accept these where the property does not require mandatory licensing and the rental income assessment works at standard ICR thresholds. Specialist HMO lenders offer better flexibility on income assessment and LTV.
Large HMOs (5+ Tenants, Mandatory Licence Required)
Properties requiring mandatory HMO licensing are exclusively the domain of specialist HMO lenders. The lender panel narrows considerably for large HMOs, but the lenders who do accept them understand rental yield calculations based on per-room income rather than a single AST, and are comfortable with the licensing framework.
How HMO Rental Income Is Assessed
HMO income is typically assessed on per-room rental income - the aggregate of all room rents - rather than on a single tenancy agreement. This can produce a much higher rental income figure than a single AST for the same property, allowing greater borrowing. The stress test ICR for HMOs is the same as for standard BTL (typically 125% for basic-rate taxpayers, 145% for higher-rate taxpayers and Ltd Co borrowers), but the higher income base can support significantly higher LTV amounts.
HMO Mortgages via Limited Company
HMO purchases via a limited company SPV are available from specialist lenders. The Ltd Co structure is particularly popular for HMO investors due to the combination of higher yields and the tax efficiency of company ownership for higher-rate taxpayers. SPV structures for HMOs require lenders who are comfortable with both the HMO property type and the company structure simultaneously.
Licensing and Mortgage Conditions
Most HMO mortgage lenders require, as a condition of the mortgage: an HMO licence (where mandatory) to be in place and valid; the property to be in a lettable condition meeting all HMO management regulations; and evidence of tenancy agreements at the point of drawdown (for a purchase of an operational HMO). New HMO conversions may have different requirements during the licensing and letting-up period.