This information should not be interpreted as financial, tax or legal advice. Mortgage and loan rates are subject to change.
Summary of case
- 3 bedroom licensed HMO remortgage
- Locks on doors and individual ASTs
- Capital raising required
What we achieved for the client
- Low high-street rate despite separate ASTs and door locks
- Raised required capital
- 3.54% 2 year tracker rate with switch to fix facility
Yes, absolutely. The process for remortgaging is the same as any buy to let. You can remortgage a property that was a single rental unit on to an HMO mortgage too, but check with your local council as there may be restrictions on the change of use of the property.
The client in this case was looking for an HMO remortgage deal, as they were approaching the renewal date of their existing product.
The security property was a three bedroomed house, which was formally a single-let property that had been transformed into an HMO.
The property had an HMO license and there were locks on the bedroom doors. Each tenant was on their own Assured Shorthold Tenancy Agreement (AST). For the uninitiated, you might ask why these details area relevant, which I’ll come on to later.
HMO mortgages generally take us down two routes. With just a few details, we can usually tell if we need to approach high street or specialist HMO lenders.
To qualify for HMO mortgage rates from high street lenders, you often have to present your property as though it is a single tenanted unit.
This means things like, a maximum of 4-6 bedrooms, no locks on bedroom doors and a single tenancy agreement that all tenants sign up to.
This ensures the property remains saleable as a single home, which means that if a lender had to repossess, the property could immediately be put up for sale to recoup unpaid mortgage debt.
The benefit to the borrower is the cheaper HMO mortgage rates on offer.
Specialist HMO lenders accept larger properties with more bedrooms (sometimes there are no limits set on the number), set up for house-share living, where tenants are on separate AST’s.
Larger properties like this tend to be more expensive so, if in exceptional circumstances it came to a repossession and sale, the market for the property is smaller and works (incurring costs) would commonly have to be done to put the property back to a single unit home (if it were to be sold on as a residential property).
This poses risk to the lender, which is why large HMO mortgage rates from specialist HMO lenders tend to be higher.
HMO properties typically offer higher buy to let yields, because they attract multiple rents, which in combination tend to generate a greater income than letting a like-for-like property to one tenant or family unit.
A standard 3 bedroomed house might attract a rent of £1200 per month
But, if you let each bedroom individually you might achieve 3 x £550 per room per month
On the same property, resulting in a total rental income of £1650 per month
This is £450 per month or £5400 per year, extra, for the same house.
If the house had two reception rooms, for example a dining room and a living room, one of those may be able to be converted into an extra bedroom to increase the rental income further.
3 bedroom house, reception room converted to +1 bedroom 4 x £550 per room per month (£2200 total)
Houses of Multiple Occupation, or ‘HMO’ mortgages, are not reserved for only experienced landlords. You can secure an HMO mortgage as a first time landlord too.
This is not common to all HMO lenders, as some may look for experience as a landlord (e.g. from renting a standard buy to let property to one tenant or family unit).
As has been demonstrated above, even if you start out with a standard buy to let property, it is possible to convert it into an HMO and switch to an HMO mortgage.
HMO mortgage investments may feel like an intimidating prospect, admittedly they do sit within an area of lending that is more complex because of the extra administrative work involved. But, there is significant variation in HMO mortgage rates.
Whilst as a general rule HMO mortgages are more expensive than standard buy to lets, you may be surprised to learn that some high street lenders (generally known for offering lower mortgage interest rates than specialist lenders) offer standard buy to let mortgages on HMO properties.
The client in this case was surprised to find that we were able to find a high street rate for the remortgage, despite there being locks on the internal doors and each tenant being on individual AST’s.
The deal we found was a 2 year tracker rate, which at the time of application was a rate of 3.54% per annum, tracking the Bank of England Base Rate. We were comfortably able to raise a modest amount of capital that the client required too.
What’s more, the mortgage comes with a ‘Switch to Fix’ facility, which means if the Base Rate increases to a point where the tracker rate is no longer competitive, the client can move to a fixed rate product with the lender’s range, to protect themselves against further rate rises.
This is a significant selling point, at times when rates are on the rise. The client benefits straight away from a low tracker rate when fixed rate deals are a lot higher, but has the flexibility to change without having to pay early repayment charges if needed.