A well-run HMO can produce a noticeably higher yield than a standard let, but the mortgage behind it works differently: how the property is valued, how much you can borrow and whether it needs a licence all hinge on the detail.
Here’s what matters before you buy or remortgage.
A house in multiple occupation, or HMO, is a property let to several tenants who are not a single household, typically a shared house where each tenant has their own room and the kitchen and bathrooms are communal.
Because the rent is built up room by room, a well-run HMO can produce a noticeably higher yield than a standard single let, which is why so many landlords are drawn to them.
An HMO mortgage is a specialist form of buy-to-let lending built for exactly this kind of property. It is a different world from an ordinary buy-to-let: fewer lenders operate in it, the borrowing is worked out differently, and there is a layer of licensing and planning to understand before you commit.
This page walks through the essentials in plain terms.
HMO Mortgages
What actually counts as an HMO
In broad terms, a property is an HMO when at least three tenants live there forming more than one household, and they share facilities such as a kitchen or bathroom. A large HMO, the type that always needs a licence, is one occupied by five or more people from two or more households.
The distinction matters because it drives both the licensing you will need and the type of lender and valuation that will suit the property.
As a rough guide:
- Small HMO, typically three to six tenants. Often a fairly ordinary house adapted for sharers.
- Large HMO, seven or more tenants, or a purpose-designed sharer property. These are treated by many lenders as a more commercial proposition.
Licensing: the part people most often get wrong
Licensing is where new HMO landlords most often come unstuck, so it is worth understanding the three separate regimes before you buy.
They can overlap, and a single property can fall under more than one at once.
The practical point is that licensing is local. A property that needs only a mandatory licence in one town might need an additional or selective licence in the next, so the council’s own licensing pages are always the place to check before you offer on a property.
Operating an HMO without the licence it needs is a serious matter and can carry a substantial civil penalty, so lenders will expect the licensing position to be clear.
| Licence type | When it applies |
| Mandatory licensing | Applies across England to any HMO with five or more occupants from two or more households. There is no council discretion and no minimum number of storeys, a shared bungalow with five unrelated tenants needs one just as a three-storey house would. |
| Additional licensing | A discretionary scheme a council can bring in to cover smaller HMOs, usually those with three or four occupants, in a designated area. Whether it applies depends entirely on where the property is. |
| Selective licensing | Covers all privately rented homes in a designated area, not just HMOs. Councils use it in areas with particular housing or management concerns. |
Article 4 and planning: can you even create the HMO?
Separate from licensing is the planning question of whether you are allowed to turn a property into an HMO in the first place. In most of England, converting an ordinary family home into a small HMO for up to six people is a permitted development right, meaning no planning application is needed.
An Article 4 direction removes that automatic right in a defined area. Where one is in force, you must apply for planning permission to convert a home into an HMO, and permission is not guaranteed. Many established HMO areas, particularly near universities, sit under Article 4, so it is essential to check whether a direction covers the property before assuming you can convert it. An existing, already-established HMO in an Article 4 area is usually fine to buy and continue running, the restriction bites on new conversions.
Article 4 is a planning mechanism and licensing is a separate housing one. A property can be caught by both, one, or neither, and they need to be checked independently.
How much you can borrow, and how it is worked out
This is where HMO lending differs most from a standard buy-to-let, and it is worth understanding because it decides the size of loan the property can support. Two things drive it: how the property is valued, and how the rental income is stress-tested.
Valuation: bricks and mortar, or commercial
A lender will value an HMO in one of two ways, and which one it uses has a direct effect on how much you can borrow.
– Bricks-and-mortar valuation. The property is valued like an ordinary house, by comparison with similar homes sold nearby. Most lenders apply this to smaller HMOs, on the basis that the property could easily be converted back to a family home. Your borrowing is then tied to that residential value, however strong the rent is.
– Commercial, or investment, valuation. The property is valued on the income it produces rather than on comparable house sales. The surveyor takes the rent, deducts running costs such as management, voids and maintenance to reach a net figure, and applies a yield to arrive at a value. For a high-yielding, well-run HMO this can produce a materially higher figure than the bricks-and-mortar approach, and therefore support a larger loan. It is most commonly used on larger HMOs of around seven-plus rooms, or on high-specification, professionally managed properties.
In simple terms, the more the property behaves like a business, with more rooms, higher rent and professional management, the more likely a lender is to value it on its income and lend against that. The trade-off is that lenders using a commercial valuation often cap the loan-to-value a little lower to balance the higher value, so the two effects partly offset.
Loan-to-value: how much of the value you can borrow
Loan-to-value, or LTV, is simply the size of the mortgage as a percentage of the property’s value. For HMOs, lenders typically lend up to around 70 to 75 per cent of the value, so you should plan for a deposit of roughly a quarter to a third of the price. The exact ceiling depends on the property, its location, the tenant profile and your experience as a landlord, and first-time HMO landlords may find the range slightly tighter.
Rental stress-testing: the rent has to clear a hurdle
Even where the value supports a large loan, the rent has to cover it comfortably. Lenders apply a rental cover test, checking that the expected rent covers the mortgage interest by a set margin, and they do so at a stressed interest rate that is higher than the actual pay rate, to make sure the property still works if rates rise. Because this stress rate is applied to the whole loan, two lenders looking at the same property can arrive at quite different maximum loans depending on how cautiously they stress it. The strong room-by-room income of a good HMO is exactly what helps it pass this test, which is one reason the income-led approach suits these properties.
Personal name or limited company?
HMOs can be held in your personal name or through a limited company, often a special purpose vehicle set up purely to hold property.
Many HMO investors use a company structure for tax reasons, because mortgage interest is treated differently for companies than for individual higher-rate taxpayers, though the right answer depends entirely on your own circumstances and should be taken alongside advice from a tax adviser or accountant.
Lenders offer HMO mortgages under both structures, so this is a decision to settle early, as it shapes which lenders and products are open to you.
A short example
Ravi, an experienced landlord, wanted to buy a seven-bedroom shared house for £400,000. Each room let for around £575 a month, giving a gross rent of roughly £48,000 a year. Because the property was a larger, well-managed HMO, the lender valued it on a commercial basis rather than on comparable house sales.
After deducting running costs and applying a yield to the net income, the surveyor arrived at a value close to the purchase price, and the strong room income comfortably passed the lender’s stressed rental cover test.
At 70 per cent loan-to-value, that supported a loan of around £280,000, leaving Ravi a deposit of £120,000.
The property sat in an area with an additional licensing scheme, so a licence was needed even though similar houses elsewhere would not have required one, and Drake made sure that was factored in before the offer went in.
Had the same property been valued only on bricks and mortar, the borrowing could well have come out lower, which is why matching the property to a lender who would value it on its income mattered so much.
Points to weigh before you proceed
Bigger deposit than a standard buy-to-let. With LTVs typically capped around 70 to 75 per cent, expect to put down a larger share of the price.
More management. Several tenants means more wear, more voids to manage and more compliance, from fire safety to room sizes, than a single let.
Licensing and planning must line up. The licence position and any Article 4 direction should both be checked for the specific property before you commit.
Fewer lenders, more variation. The HMO market is specialist, and lenders differ widely on valuation approach, LTV, experience requirements and how they stress the rent. Matching the property to the right lender is where good advice pays for itself.
Experience can help. Some lenders prefer, or reserve their best terms for, landlords with a track record, though there are options for those buying their first HMO.
How Drake Mortgages can help
As a whole-of-market broker, Drake Mortgages works across the specialist HMO lenders, not just the handful of high-street names.
We look at the property and your plans together, work out whether a bricks-and-mortar or commercial valuation is likely and what that means for your borrowing, and match you to a lender whose LTV, stress-testing and experience requirements fit your situation.
We also make sure the licensing and planning position is understood before you commit, so there are no surprises later. We handle the case from enquiry through to completion.
To talk through an HMO purchase or remortgage, call us on 020 8301 7930
Why use Drake?
- We have been brokers, advisers and property owners since mainstream buy to let arrived in the UK
- As property investors and landlords ourselves we know the upsides and downsides to owning and renting property
- We are independent mortgage advisers, giving you maximum choice from both the high street lenders and specialist lenders
- We work for you so our advisors will do all they can to ensure a successful outcome
- We like problems! If your situation is a little tricky or not quite ‘the norm’, this is fine by us. We will try to help and provide strategies