HMO mortgage rates

In this guide, we will explore everything you need to know about HMO mortgage rates, including what they are, factors that influence them, and tips for securing the best rates.

Whether you're a first-time buyer or an experienced HMO (House of Multiple Occupation) investor, understanding interest rates is crucial for making informed decisions, and maximising your profits.

What are HMO mortgage rates?

HMO mortgage rates refer to the interest rates associated with loans designed specifically for Houses in Multiple Occupation (HMOs).

HMO properties are rented by multiple tenants who share common facilities. When you get a mortgage for an HMO, the lender charges you interest on the loan. Interest is a charge the lender applies per month for borrowing the money. This interest rate determines the cost of borrowing and affects the total amount you will repay over the mortgage term

Factors that influence HMO mortgage rates:

Several factors can influence the interest rates offered by lenders. It's important to understand these factors to assess your eligibility and make sure you get the best rates.

Here are the key considerations:

Credit score: Some lenders will work with applicants who have credit issues, others won’t. A higher credit score generally leads to lower interest rates.

This is because lenders who work with those with impaired credit, will typically have higher interest rates, to mitigate the risk of working with someone who may face challenges in keeping up with payments.

Maintaining a good credit history by paying bills on time and managing your finances responsibly will help ensure you are eligible for the most competitive rates.

Loan-to-value ratio (LTV): The LTV ratio is the percentage of the property's value that you borrow versus its value.

A lower LTV ratio may result in you being able to access more competitive rates. This is because the lender is having to take on less risk, by you putting down more of the money, and taking a bigger proportion of the risk as a result. Saving for a larger deposit can reduce your LTV ratio and potentially lead to better rates.

Property type: Different HMO property types may carry varying levels of perceived risk. Some lenders may consider certain property types riskier than others, which can impact mortgage rates.

For example, a 4-6 bedroom house used as an HMO might easily be changed back to a property fit for a single-family unit. This would make it far easier to re-sell, if the lender had to repossess a property, due to missed mortgage payments.

By contrast, a larger HMO, with more bedrooms and facilities and special requirements for HMO properties would be harder for a lender to sell on, as it may only be suited for use as an HMO property. Where this is the case, lenders mitigate this risk by charging higher interest rates.

Market conditions: Mortgage rates are influenced by broader market conditions and economic factors. Changes in interest rates set by the Bank of England and fluctuations in the housing market can affect the rates you may be offered for your HMO mortgage.

Tips for getting the best HMO mortgage rates:

To increase your chances of securing the best HMO mortgage rates, consider the following tips:

Improve your credit score: As mentioned above, maintaining a good credit history will help you access more competitive HMO mortgage interest rates. Pay your bills on time, minimise outstanding debts, and manage your credit responsibly to improve your credit score.

Save for a larger deposit: Saving for a larger deposit will lower your LTV ratio. This can potentially help you get a better interest rate. Consider setting aside more money for your down payment.

Compare lenders: Shop around and compare mortgage offers from different lenders. Each lender may have different rates and terms, so take the time to research and find the most competitive rates. A mortgage broker can help you with this.

Consider using a mortgage broker: Mortgage brokers can help you navigate the mortgage market and find the best rates tailored to your needs. They have access to multiple lenders and can provide expert advice.

As a specialist HMO mortgage broker, we can search over 80 specialist lenders for you. Some lenders only accept applications made via an intermediary, so this is likely to open up more deals to you.

Review mortgage terms: Carefully review the terms and conditions of any mortgage offer before committing. Ensure that the mortgage meets your needs and that you fully understand the terms and can afford the payments.

Calculating HMO interest rates

The interest rate of your mortgage will depend on the loan to value of the deal, i.e. the amount you will be investing of the value of the property versus the loan you require.

With an HMO mortgage, the size of your property and the number of tenants you plan to house will also affect your interest rate. For example, mortgages for smaller HMO properties with up to 6 bedrooms can often get lower interest rates, whereas large HMO mortgages (of over 6 bedrooms) may have higher interest rates.

Our online HMO mortgage calculator can help you get a feel for what rates may be possible, but to understand which rates are for large HMOs versus which rates are for small HMOs, you will need to speak to one of our mortgage advisors.

“Interest only” versus “capital repayment” mortgages for HMO’s

An interest-only mortgage is a type of loan where borrowers only pay the interest accrued on the loan amount over the term. Interest is charged on a monthly basis. At the end of the term, the principle amount borrowed will remain outstanding. The options at this point are:

1. Get another mortgage
2. Sell the property and use the money made to pay off the mortgage (assuming the property is work more than the amount outstanding)
3. Pay off the mortgage with another source of funds

Capital repayment HMO mortgages:

By contrast, a capital repayment mortgage involves monthly payments that cover both the interest and a portion of the principal amount borrowed. Over time, the borrower reduces the outstanding loan balance until it is fully repaid by the end of the mortgage term.

Pros and cons of interest-only mortgages

Pros:

• Lower monthly payments.
• Higher income from rent, which could free up cash for other investments or expenses.

Cons:

• You will not own the property at the end of the term.
• If the property value has declined, and you want repay the capital by using the proceeds of selling it, you may have a shortfall.

Pros and cons of capital repayment mortgages

Pros:

• Over time, the borrower gradually reduces the principal balance, building equity in the property.
• The loan is fully repaid by the end of the mortgage term, so you will own the property.

Cons:

• Higher monthly payments compared to interest-only mortgages, as both interest and principal payments are required.
• Less immediate cash flow flexibility, as the full payment is directed towards the loan.

Considerations for choosing the right mortgage payment type for your HMO

Your financial situation:

Evaluate your current and future financial situation, including income stability, long-term goals, and investment opportunities. Consider whether you want to prioritize lower initial payments, or building equity and fully repaying the loan over time.

Property plans:

Consider your plans for the property. If you intend to sell or refinance in the near future, you may want a mortgage with a shorter initial rate period (the timeframe over which you are tied into a particular deal).

For example, if you were to take a five-year fixed rate deal, but were likely to want to refinance within two-years, it is likely you would be subject to Early Repayment Charges (ERCs) for repaying the loan early.

Or, if mortgage rates are low and you want monthly payment security, fixing for five years may be to your advantage. A mortgage broker can explain all the pros and cons and compare them to your needs, ensuring they recommend the product that best suits these considerations.

“Fixed” versus “variable” interest rates for HMOs

Understanding the differences between fixed and variable interest rates is crucial when considering a mortgage for an HMO. Below, we will explore the key aspects of fixed and variable rates, including tracker and discount options, helping you make an informed decision based on your financial needs.

What is a fixed interest rate?

A fixed interest rate remains constant for a certain period, called the “initial rate period” or “deal period” of the loan. This will typically be over two or five years and sometimes up to seven or ten years. Regardless of market fluctuations, the interest rate and monthly payments remain the same throughout the fixed-rate period.

Don’t confuse the initial rate period with the mortgage term, which is the total amount of time you want the mortgage for. This can be a lot longer than the initial rate period.

Benefits of fixed interest rates:

• Certainty and predictability: Borrowers have peace of mind knowing their interest rate and monthly payments won't change.
• Budgeting and planning: Fixed rates provide stability, allowing borrowers to plan their finances with confidence.
• Affordability calculations: When a borrower fixes a rate over a longer, five-year period (or greater), some lenders will offer more flexibility on the amount the rent needs to cover the mortgage by, meaning the borrower can raise more money than they might do otherwise.

Disadvantages of fixed interest rates:

• Lack of flexibility: If mortgage rates decrease, borrowers with fixed rates won't benefit from the lower interest rates until they come to the end of their initial rate period.
• Early repayment charges: Fixed-rate mortgages typically have penalties for repaying the loan before the initial rate period ends.

What is a variable interest rate?

A variable interest rate fluctuates over the entire term of the mortgage. It is usually tied to an underlying benchmark, such as the Bank of England base rate. As the benchmark rate changes, the interest rate and monthly payments adjust accordingly.

Benefits of variable interest rates:

• Potential cost savings: When market rates decrease, borrowers with variable rates may benefit from lower interest payments.
• Flexibility: Some variable rates may offer more options for repayment and early loan settlement without incurring early repayment charges.

Disadvantages of variable interest rates:

• Uncertainty: As rates can rise, borrowers should be prepared for increases in monthly payments.
• Budgeting challenges: Fluctuating rates can make it harder to plan finances, particularly for borrowers on tight budgets.

“Tracker” and “discount” mortgages for HMOs

Other options for financing your HMO include “tracker” and “discount” mortgages. There are benefits and disadvantages to each option:

What are tracker HMO mortgages?

Tracker mortgages are a type of variable rate mortgage that follows an external benchmark, typically the Bank of England base rate, plus a fixed percentage. The difference from a variable rate mortgage is that this arrangement will be in place over a specific initial rate period (typically two or five years). As the base rate changes, the interest rate and monthly payments on a tracker mortgage adjust accordingly.

Benefits of tracker mortgages:

• Transparent pricing: The interest rate is directly linked to a known benchmark, ensuring transparency and clarity.
• Lower initial rate: in a stable mortgage market, or when rates are trending down, tracker rates are typically lower than equivalent fixed rates at the time of application. However, if rates are likely to, or are currently increasing, this may not be the case.

Disadvantages of tracker mortgages:

• Market volatility: Changes in the benchmark rate can impact monthly payments significantly, making budgeting more challenging.
• Potential higher costs: If the benchmark rate rises, borrowers are likely to experience higher interest rates and increased monthly payments.

What are discount HMO mortgages?

A discount mortgage offers a reduction, or discount, on the lender's standard variable rate (SVR) for a specified period. The interest rate and monthly payments are calculated as a percentage below the SVR.

Benefits of discount mortgages:

• Initial cost savings: Borrowers enjoy a lower interest rate during the discount period, reducing monthly payments.
• Potential flexibility: Some discount mortgages allow overpayments or early repayment without penalties.

Disadvantages of discount mortgages:

• SVR dependency: As the interest rate is linked to the lender's SVR, borrowers should monitor changes in the SVR to anticipate potential rate increases.

At the end of any initial rate period, regardless of the rate type, your payments will revert to your lenders reversion rate. This rate is typically higher than other deals available in the marketplace. For this reason, you should always look at refinance options at this point. As a broker, we can help you do this.

How Commercial Trust can help you get a great HMO mortgage rate

Understanding HMO mortgage rates is crucial when considering financing your property. By understanding the factors that influence rates and following the tips mentioned in this guide, you can make informed decisions and secure favourable mortgage terms.

Given the large number of lenders and products in the marketplace, including some lenders who will only accept applications submitted via an intermediary, working with a broker like Commercial Trust can help ensure you get the best HMO mortgage rate for your needs and circumstances.