New HMO mortgages launched for buy-to-let landlords: how do they compare?

A major high street lender has launched new mortgages for landlords letting houses in multiple occupation (HMOs), but how do these deals compare with those on offer from specialist providers?

Leeds Building Society has unveiled new five-year fixed-rate HMO mortgages, potentially offering greater choice to thousands of landlords who have seen their properties reclassified as HMOs after recent rule changes.

Here, we explain how HMO regulations work and assess the mortgage market for landlords letting out shared properties.

What is an HMO?

A property let to three or more people from more than one household (such as a shared student property) is classified as a HMO in England and Wales. If the property is let to five or more people it's classified as a 'large' HMO.

Large HMOs require licences from the local council, which are subject to an inspection and must be renewed every five years.*

Lenders consider HMOs as specialist properties, which means getting a mortgage on one can be more complicated and expensive than if you were letting a standard home.

Previously, a property was only classified as an HMO if it was at least three storeys high, but this rule was removed in England and Wales last October, pushing thousands of rented homes into the HMO category.

In Scotland, an HMO is considered to be a property let to at least three unrelated people who share a bathroom, toilet or kitchen. These properties must have a licence, which is reviewed every three years.

In Northern Ireland, HMOs must be registered with the Housing Executive.

*Editor's note:This article was updated on 18 February to clarify that properties with three or more unrelated tenants are classified as HMOs.

Leeds launches HMO mortgages

Leeds Building Society has unveiled a series of new five-year fixed-rate mortgages for landlords operating small and large HMOs.

The move follows its launch of two-year fixed-rate products last month, which made Leeds the first major high street lender to offer specialist HMO products.

The Leeds range is available at maximum loan-to-value (LTV) ratios of 60-75%. The productscome with upfront fees ranging from £999-£1,999, and all offer cashback of £500.

Leeds says the products 'meet the needs of landlords looking to diversify their portfolios and move into this sector'. It also says that it has started offering cashback rather than free conveyancing following feedback that most landlords prefer to use their own solicitors for this side of the process.

HMO mortgages from Leeds: the specifics

The Leeds range is split into separate deals for 'small' and 'large' HMOs, with borrowers able to take out loans of up to £750,000.

Leeds defines a 'small' HMO as a property inhabited by up to six people, while a 'large' HMO is a property occupied by seven or more.

In both cases, however, the lender will only offer mortgages on properties with a maximum of eight bedrooms.

Leeds says it will assess 'small' HMO applications in the same way that it would a traditional buy-to-let property (based on projected rental income and to what degree this covers the cost of the mortgage), while 'large' HMOs will be assessed commercially (based on their projected rental yield in relation to the value of the property).

Do any other lenders offer HMO mortgages?

There are currently 11 providers of specialist HMO mortgages, with a total of around 200 products on the market.

The majority of deals come from specialist buy-to-let lenders, and many require you to apply through a mortgage broker (something that is common with buy-to-let mortgages in general).

The table below shows which lenders offer specific HMO mortgages, and how you can apply for them.

_{Source: Moneyfacts, 14 February 2019.}

Best-rate HMO mortgages

Below, we've listed the cheapest introductory rates currently available on two and five-year fixed-rate HMO mortgages.

As you can see, the rates from Leeds come out on top by a significant margin in both categories.

Bear in mind, however, that you shouldn't judge deals by initial rate alone, as there may be some limits that make the 'best' deals less attractive or unobtainable.

For example, the Leeds two-year fixes below require the rental income to cover a minimum of 140% of the mortgage payments, while the deal from Precise Mortgages allows applications at 125%.

Two-year fixed-rate

Five-year fixed-rate

_{Source: Moneyfacts, 14 February 2019.}

What you should know about HMO mortgages

• Mortgage lenders will generally assess potential rental income as if you were letting the property as a family unit, rather than to unrelated individuals.
• Mortgages for HMOs can be more expensive than traditional buy-to-let deals.
• Fees can be more expensive, too, as lenders will make HMOs undergo a specialist valuation process.
• Variable rates on HMO mortgages are usually linked to Libor rates rather than the Bank of England base rate.
• HMO lending often goes hand in hand with buy-to-let for limited companies. This is where experienced landlords set up companies to manage their portfolios, rather than acting as individual investors.