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How to Convert Property into Houses of Multiple Occupation (HMOs)

How to Convert Property into Houses of Multiple Occupation (HMOs)

Amidst current tumultuous market activity, finding ways to boost your property portfolio is more important than ever. What are the benefits of owning an HMO, and what should you consider before converting existing vanilla properties?

Houses in Multiple Occupation (HMOs) offer landlords ample opportunity to enhance their property investment journeys. However, viewed as complex property types by many lenders, sourcing the right property finance can be complicated.

As political and economic influences continue to shift the mortgage market, maximising the return on your investments is, understandably, at the front of people’s minds. As such, it may be worth considering whether converting your current vanilla buy to lets into HMOs could be a profitable option for you.

What experience will you need?

If you’re thinking of converting an existing vanilla property into an HMO, it’s essential to remember you’ll need an HMO buy to let mortgage once works are complete. As buy to let lenders typically view HMOs as a more complex property type, the likelihood is that they will prefer to see applications from more experienced landlords. The level of experience required will vary between lenders, but, generally speaking, they expect one to two years of letting experience. There are, however, some lenders who could consider first time landlords, but this will vary dependent on your application. If you’re a new landlord, it might be worth running the property as a standard AST rental for a year or so before converting to ensure you don’t encounter issues securing the correct type of mortgage later down the line. 

What to consider before converting your property into an HMO

Understanding what constitutes an HMO is paramount for your application. HMOs are defined as a property where three or more tenants share bathroom or kitchen facilities and are unrelated. For the most part, local authorities will require landlords to obtain a specific HMO licence to ensure they meet regulatory standards. However, like lenders, local authorities will have different criteria on when a licence is necessary, so it’s best to do your research prior to your application.

Another aspect to check when making your application is your local authorities’ criteria for room sizing. As with licencing rules, different areas will vary on their property requirements. These regulations could dictate whether you need planning permission for structural changes, so checking in advance is essential.

Why are HMOs so popular?

When deciding whether converting your buy to let into an HMO is a good investment decision, it’s worth considering what makes these complex property types so popular in the first place. Our latest data from our Buy to Let Mortgage Index shows that average HMO yields for Q2 this year were at 7.75%. Vanilla buy to lets, on the other hand, generated yields of just 5.25%. According to research from specialist lender Paragon, 42% of landlords with HMOs report net yields of over 10%, and 64% report above 8% per year. With impressive yields on offer, it’s no wonder many landlords diversify into this type of investment.

Taking steps to ensure your property appeals to prospective tenants is crucial if you are looking to move into this property investment type. With rising rents, tenants are looking for much higher quality facilities in their properties. Some of the top tenant requirements for HMOs include high-speed broadband, larger bedrooms, and office facilities for working from home.

How to finance the conversion

Several different avenues to finance your property works may be available to you. The first would be to undertake a remortgage with a capital raise against one of your existing properties to fund the refurbishments. This is suitable if you’ve got enough equity in a property to cover the costs. If you’re going to use savings, you can recoup your cash this way too.

If you’re not due to remortgage for a while and don’t want to pay early repayment charges (ERCs), you could seek refurbishment finance. This tends to fall into two types: either light refurbishment for aesthetic works to the property or heavy refurbishment, including structural changes.

Alternatively, another option available to you could be bridging finance to fund the work you intend to carry out. You would then look to repay these short-term loans when you remortgage the property at a later date.

Speaking with an expert mortgage broker will help you to understand which route is best for your particular situation and help you to work out expected costs.

Current HMO rates

Mortgage interest rates are starting to re-stabilise following Jeremy Hunt’s amends to the mini-budget. Rishi Sunak also succeeded in bringing back a level of confidence in the money markets, which in turn has also helped to settle rising interest rates.

Currently, rates for HMO applications in personal names start from 5.59% for a two-year fixed and 5.55% for a five-year fixed deal. For limited company applications, rates start from 5.89% for a two-year fixed and 5.69% for a five-year fixed.

If you are considering diversifying into HMOs, then please get in touch with one of our expert brokers. With extensive experience working in the complex buy to let market, our brokers are uniquely positioned to help support you through the application process. For any advice you may need, contact our brokers on 0345 345 6788 or by submitting an enquiry here.


Rates as at 8th November 2022.