New HMO Mortgage Guide For Landlords: UK 2025

In this guide, we can help you to navigate HMO regulations and legislation to find the best specialist HMO mortgage for you. Often the type of HMO you choose, can have a direct impact on the funds you can access so it is important to be fully informed before you take the next step.

What is an HMO?

An HMO (House of Multiple Occupation, also sometimes referred to as house shares) are properties that are occupied by three or more tenants who are not from a single household. 

The government definition is broken into two types:

• Small HMO (at least 3 tenants) sharing facilities such as bathrooms and kitchens
• Large HMO (5 tenants or more) sharing facilities such as bathrooms and kitchens

Doing your due diligence

There are many considerations when deciding to invest in an HMO for the first time. Firstly, you need to ensure you can convert the property you are acquiring, assess the location and the demographics, as well as the potential yields and return on investment. Other considerations include management of your HMO and most importantly, funding.

Choose a location and get in touch with your Local Authority

The definition of an HMO changes depending on how the local authority defines it in a specific area of the country. Some regions require the landlord to obtain an HMO licence which also has an associated cost. Therefore, it’s very important to do your research to identify your chosen location and also your target market at the outset. This will have implications on how you run and service your HMO as well as the return on your investment. 

Should I create a small or large HMO?

The number of rooms in your HMO is another consideration. Whilst it may be tempting to try to create as many rent-generating rooms as possible it should be noted that individual bedrooms must meet a minimum size to be compliant (at least 6.51 sqm for 1 adult & 10.22 sqm for 2 adults). 

The number of bedrooms that you plan to create can also be restricted depending on where your property is located. For example if the property is located in an ‘Article 4 Area’ you may find that it takes longer to get consent from the local authority or you may even need to apply for a change of use.  This is particularly relevant if you intend to have 7 or more bedrooms as you will also need to obtain sui generis planning consent, which is something that the lenders who operate in this space will review as part of any application that you make. 

Converting to an HMO

If you are purchasing a property that has not previously been set up as an HMO then you will need to factor in the costs to modify the property to meet regulatory requirements such as adhering to the additional fire safety regulations in place for HMOs. You may also require a licence from the local council, need to meet certain obligations such as timely gas and electrical checks as well as providing sufficient washing/cooking facilities as well as enough bins.

The long-term rental yields

Whilst the initial costs to make your HMO compliant may be significant when compared to a traditional BTL, the long-term yields on an HMO tend to be higher than properties let on Single Assured Tenancy Agreements. An average HMO in the UK in 2021 generates a yield of around 7.5% compared to an average yield of 3.63% for standard BTL properties. As such, HMOs are a preferred model for many landlords and investors.

There are two ways in which they produce a higher ROI:

1.  Rental yields 
2. Monthly cashflow 

HMOs provide more stability in void periods as the rent roll from each occupied bedroom is normally sufficient to cover periods where there are any empty rooms in the property.

HMO management

Whilst some landlords choose to successfully manage their properties themselves, many will utilise the services of a letting agent. This can help manage their time efficiently; particularly for larger HMOs with more tenants in place.  The easiest and most effective solution will be to appoint a management agency who can market the property and get it occupied (on a consistent basis).  They can also manage any issues that arise and keep things at arms-length for the landlord.  Agents can also assist in drawing up robust tenancy agreements. Management agencies will charge fees for the service they provide, usually around 10% of the rental fees.  

Selecting the right agent to find tenants and manage the property on your behalf can be crucial to maximise the income you generate from your HMO.

Management fees will vary depending on the location of the property but one of the key points to consider when choosing your agent is to get a good gauge of their experience in attracting tenants from your target market. Your target tenant market can also impact the number and type of lenders you can use if you plan to finance the property. For example not all lenders will accept student let HMOs. 

This is where the services of an experienced broker can really help make your HMO as profitable as possible in the long term. 

Funding your HMO

Are HMO mortgages different to standard Buy-to-Let mortgages?

 HMO mortgages are usually more expensive than standard Buy-to-Let (BTL) mortgages both in terms of the interest rate and the set-up fees.  This will usually be seen in the upfront costs such as valuation fees, which will commonly be more expensive for HMOs. This is particularly relevant when there are more than six bedrooms and arrangement fees normally range between two and three percent of the loan amount you are applying for.  

There are several financing routes available for landlords and investors who are not cash buyers, which are outlined below.

Bridging loans for HMOs

The financial product you choose will largely depend on your vision and goals for your investment and the current state and use of the property. For example, if you plan to purchase a property that is not currently set up and running as an HMO, you may initially need to use a bridging loan to purchase the property. You will need to use these funds to make any necessary alterations in order to comply with the regulations for HMOs (see examples above). 

Following the works to ensure your HMO is compliant, you can exit the bridging loan and move onto a term mortgage product, usually (but not always) a fixed rate product for two or five years. 

Historically bridging loans are regarded as expensive forms of finance and whilst this is true, in comparison to the standard mortgages on the market, bridging loans are a very common and cost-effective route to acquire a property before undertaking any necessary building works to convert the property to an HMO. 

You may also need to use a bridging loan if the property is not currently habitable or you need to complete the purchase quickly when buying at an auction.  

The exit strategy

An exit strategy for bridging finance is the way to repay the lender. It is one of the most important elements for the client and the lender when considering bridging finance. It is important for the lender as they will require their finance to be repaid at some point and it is also important for the client because bridging finance is one of a number of costs that can impact the success of the project. Completing the works on the property in a timely manner is paramount as it will save money on the finance costs. Using an experienced HMO mortgage broker to assist with this aspect will not only save you time but potentially a lot of money.

Commercial finance for HMOs 

There are not really commercial mortgage options for HMOs, this only applies if there is a commercial aspect to the HMO. For example, if your HMO includes a retail element, is above a shop (on the same title) or does not fit within standard criteria, This would mean a semi-commercial mortgage would need to be taken or the title split. However, the latter can mean tax implications and it is important that the client’s tax adviser and legal representative talk with the broker so they can collectively decide how to proceed.

There is an exception of one lender who will lend on a standard AST (Assured Shorthold Tenancy) basis as long as 60% of the floor space is classed as residential. Splitting the title has many pro’s and con’s and having the right professional team on board will quickly enable clients to make the right decision.

There are also two ways that HMOs are valued:

1. Bricks and mortar – standard valuation practice as per any residential or buy to let property
2. Investment value – some lenders will lend against the return the HMO is generating and this would usually produce a higher valuation figure meaning more funds can be released for future projects. This type of valuation is only offered by a few providers and is not always available as it depends on area and other valuation factors.

HMO Mortgage

If you are purchasing a property that will only require moderate works to convert it to an HMO or if you are purchasing a property that is already set up as an HMO then there are a variety of standard HMO mortgage products available. These typically take the same form as standard residential or BTL mortgages with lenders offering fixed rates (normally for two or five years) and variable rates. They can be arranged on a capital repayment or interest only basis.

HMO Limited Company Mortgage

Some lenders will also lend to Limited Companies via a Special Purpose Vehicle (SPV) and the director(s) will then have to provide an additional personal guarantee(s). HMO mortgages are usually priced separately from standard buy- to-let mortgages and will generally have higher valuation fees than standard BTL mortgages where no valuation incentive is included as part of the product. Lenders that offer HMOs will usually also have separate pricing in place for small HMOs and large HMOs.

Mortgage lending criteria for HMOs

Lending criteria varies quite widely from lender to lender which is why using an experienced broker will be invaluable but the main points to consider are:

1. Minimum income 

Many lenders will require you to have an income in addition to the rent that you will receive from your HMO property. Usually this tends to be around £25K per annum but does vary from lender to lender. 

The make up of your income can also be a consideration,  for example some lenders will require your income to be what they determine as ‘earned income’, which is income that is derived from employment or self-employment.  Unearned sources or passive income such as rental payments you receive from another property may not be taken into account. 

It is a good idea to speak to a broker to get clarity on this to avoid submitting applications needlessly.  The set up fees for some HMO mortgages can be expensive and the costs escalate if you make multiple applications that ultimately get declined. Notwithstanding the possible impact it could have on your credit score.

2. Experience 

Most lenders will not accept HMO mortgage applications from first time landlords. There are some lenders who will consider inexperienced investors, however it is sensible to speak to a broker to help identify the lenders that are available to you. If you are already a landlord, with over 12 months of letting experience (with standard BTLs) but are now diversifying your portfolio with HMOs then you will have more options.

3. Target tenant market 

Lenders will always want to know who you intend to rent the property to. Some providers may not lend if the tenants that will be living in the property are classed as vulnerable, for example DSS tenants or asylum seekers. 

Student lets are commonly the first target group that come to mind when thinking of HMOs and as previously noted not all lenders will lend in this case. However, HMOs are becoming a more common and considered choice among young professionals due to affordability in relation to rising costs of the private rented sector. Renting in a shared property is often a more viable option than purchasing a first time home due to increasing house prices and rates simply making alternative options unaffordable for many tenants.

4. Number of lettable rooms 

Many lenders will not lend on HMOs that have more than 6 bedrooms due to the additional sui generis planning consent requirements. It is also a requirement for many lenders that there is a communal living space within the property. Some lenders will be happy to accept a kitchen/dining area as the only communal living area within the property but others may also require another common area to be available such as a lounge/living room. This can be problematic for some investors who convert the living room into an additional bedroom. 

Also, local authorities have different requirements depending on the number of lettable rooms and this is particularly relevant for properties of 6 or more bedrooms. A local authority may insist that the property is equipped with more than one kitchen which could be problematic for many lenders.  

Why you need to work with a specialist HMO mortgage broker who has first-hand experience

The regulations regarding buy-to-let mortgages have become increasingly complex in recent years and HMOs are no exception to this trend. An application submitted to the wrong lender could result in landlords incurring significant fees to no avail. Using a whole of market, HMO mortgage broker will almost certainly assist landlords to navigate this convoluted area and ensure that they find the most competitively priced product to meet their requirements as well as saving them both time and money.

Not all lenders like the idea of mortgaging an HMO – many lenders who will lend fall into a ‘specialist’ category.

• Some specialist HMO lenders will only allow a broker to act on the customer behalf.

• HMO mortgages tend to have more complex fee structures.  These need to be taken into account when assessing the best deal, which a broker will do.

• An HMO mortgage broker will have the necessary know-how and experience, as well as the ability to communicate directly with lenders to pinpoint the lender that fits.

• Brokers will also be able to work with the lender to ‘package’ the documents required for the case, saving the applicant time and effort.