HMO Commercial Mortgages
Looking to use a commercial mortgage on a HMO property? Here’s what you need to know about getting a loan, how to qualify, and the rates you can expect to pay.
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Author: Pete Mugleston - Mortgage Expert, MD
Updated: July 19, 2022
If you’re a landlord and planning to rent out a property to multiple tenants, you might be exploring House of Multiple Occupation (HMO) mortgages. But, there are situations when a commercial mortgage could be more appropriate.
This guide covers whether you can get a commercial mortgage on a HMO. You’ll also find out about the interest rates you could end up paying on this type of loan, and how a specialist broker can help.
Keep reading for all the details or click on a link below to jump straight to a section…
The following topics are covered below...
What is a commercial HMO mortgage?
This is an investment mortgage used to purchase a specific type of commercial property. It’s a slight twist on the normal loan used for a House of Multiple Occupation (HMO).
You’d likely only need to explore this option if the property is quite large or has some sort of commercial aspect.
With these properties, you’re likely to have a larger turnover of tenants than a standard buy-to-let (BTL) property.
The variety and number of tenants in the property along with extra costs can lead to additional risk factors. So, it’s a slightly more complex situation for you as a landlord and for your income.
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When you might need a commercial mortgage for a HMO
It could be useful going down this route if the property is something like a converted pub, guesthouse, or even a post office. Another scenario is if the building has a commercial element, perhaps attached to a shop or warehouse.
You may also want to look into a commercial mortgage if the property doesn’t meet standard HMO criteria.
Using a tailored commercial mortgage instead of a standard BTL mortgage can give you greater flexibility and protection as a landlord. But, this type of mortgage can be harder to obtain and come with higher rates.
On the plus side, the income from a HMO is usually higher than a standard BTL, which means your extra effort can pay off.
How a broker can help with HMO mortgages
This particular type of mortgage will be created on a bespoke basis as there are plenty of unique factors that come into play; both to do with the property and your circumstances.
For example, your direct experience as a landlord and the type of construction will be important to lenders.
A commercial HMO mortgage can be an excellent tool for you to access larger income streams as a landlord. But, the type of building, larger number of tenants, and potentially high turnover can be viewed as riskier for lenders.
In response, you’ll often find that getting a commercial mortgage for a unique HMO can involve some extra legwork and higher rates.
Using an expert commercial broker who knows this market is going to be your best way of finding the right lender offering the most competitive deal for your investment.
If you’d like to discuss your plans with a HMO specialist we work with, just make an enquiry and we’ll set up a free, no obligation chat.
Lenders who offer this type of mortgage
Due to the specialised nature of these loans, you’ll find a more limited selection of options than with standard HMO or BTL mortgages. The commercial aspect means that only some lenders will have the capability to create a bespoke borrowing arrangement.
Here are some examples of major lenders who have the capacity to discuss a commercial HMO:
- Lloyds Bank
- Shawbrook Bank
Some lenders won’t have the resources to offer this unique type of borrowing facility. This is because each loan will need to be reviewed and set up on an individual basis. Also, for high street lenders open to this, their qualifying criteria can be fairly strict and rigid.
If you want to access the full range of commercial deals and lenders, your best bet is to discuss options with a specialist HMO mortgage broker.
They’ll be able to introduce you to niche lenders and private financing options that don’t tend to advertise their deals to the general public.
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What interest rates can you get?
This can vary depending on your circumstances and the property in question. That being said, it is possible currently (May 2023) to find rates from around 4.5% upwards.
Also, it’s worth keeping in mind that HMO mortgages tend to be linked to LIBOR or Risk-free rates (RFRs) rather than the Bank of England base rate.
The exact rates you’ll be dealing with are based on a whole host of unique factors. With such a wide range available, it’s really important you make arrangements with the most appropriate lender for your situation.
How much will the repayments be?
Now you have an idea what the typical interest rates are, you can use our calculator here to work out what the repayments could be for your mortgage, based on how much you need to borrow.
Commercial HMO Mortgage Calculator
Our commercial HMO mortgage repayment calculator can tell you how much your mortgage will cost you each month and overall. Enter the amount you’re borrowing, the term length and interest rate, and our calculator will do the rest.
Total amount paid at end of term:
Get started with an expert broker to find out how much they could help you save on your mortgage repayments.
Commercial HMO Eligibility criteria
As mentioned, qualifying for a commercial HMO mortgage can be difficult. But, it’s not impossible if you get the right advice.
Here are some important areas that lenders will review in-depth before offering you finance for this type of investment:
Your experience as a landlord
This will be a major factor for most lenders. You’ll need to provide evidence of past experience as a landlord. Often, it’s best to have a couple of years under your belt before you attempt to get a HMO mortgage.
However, there are some commercial lenders willing to discuss mortgages if you’ve no experience, or if you’re a first-time landlord.
Existing property portfolio
Lenders will want to know about your existing portfolio of properties. This allows them to review whether your new endeavour is worth their investment.
More specifically, they will want to review what the overall equity position is across your entire portfolio.
The more equity you have, the better your chances are of getting the approval you need for your new lending application.
Financial projections and stress tests
Most HMO mortgages will be set up on an interest-only basis. So, lenders will want to see thorough financial projections to make sure it’s a viable investment. As part of their calculations, they’ll also carry out certain stress tests.
To do this, they’ll look at an Interest Cover Ratio, making sure you can still afford payments if interest rates rise.
They’ll also dig into your rental income using the Rental Cover Rate to make sure your income will cover the mortgage payments. Usually, they look for a Rental Cover Rate of between 125% and 145% based on the annual interest.
Property type and size
The size of your commercial HMO will be important. Each lender will have its own way of judging size.
Some will look at the physical size in square metres or the number of storeys. Others will make assessments based on the number of bedrooms, kitchens, or units.
So, it’s worth dealing with the lenders who will treat your particular property in the most favourable manner.
The type of property will also be a major factor. Whether there’s a semi-commercial element or if it’s a converted commercial building can all play a big role in which lenders are comfortable offering a HMO mortgage.
Deposit and LTV
The deposit requirements for a commercial HMO mortgage will likely be stricter than other types of loans. Most lenders will only offer loan-to-value (LTV) ratios of 75% or lower. However, there is a handful that will consider up to 80%-85%.
This means you’ll need a deposit of between 15%-25% at a minimum.
The size of your deposit can reduce the risk for lenders, which can lead to lower rates. It’s important that you speak with the lenders who are capable of offering the best terms and rates for the deposit you can put together.
Whether the loan is interest-only or some sort of repayment, lenders will want to make sure you can afford the payments. Along with assessing the viability of the investment, they’ll also want to see your personal level of income.
So it’s worth speaking to the lenders who will take into account all your sources of income. Especially if you have multiple income streams and other properties.
Your credit scores can make a big difference during a lender’s assessment of your application. It’s worth downloading all your credit reports in advance and working through them with your broker.
This way you can fix errors or make improvements in advance. Hopefully increasing your odds of being successful and reducing the chance of unnecessary rejections.
Other factors to consider
This unique type of financing does come with plenty of additional areas of importance.
A few examples of factors that can make a difference to your plans include:
Local authority approval:
You may need to seek approval from your local authority or council. And, possibly need a HMO licence to get a mortgage.
This often applies to buildings with three or more storeys, or if there are five or more tenants sharing facilities.
It is possible to find lenders who’ll allow you to apply for a HMO licence whilst the mortgage process is underway.
Some commercial HMO mortgages can come with fairly expensive product fees.
These can range from 1% to 2.5%, so it’s worth factoring these costs into your calculations.
Owner occupied or investment:
Whether you’ll be living in the commercial property or if it’s purely an investment can impact the HMO mortgage options.
Certain lenders will only deal with commercial properties worth a certain sum.
The size of the bracket covers quite a range, and there are still some lenders with no minimum requirements.
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Get matched with a specialist HMO mortgage broker
Trying to determine whether a commercial HMO mortgage is right for you is difficult without the guidance of an expert.
Using a specialist broker means that they can direct you on the best course of action for your investment plans and find you the top deals.
We offer a free broker-matching service. This means we’ll quickly assess your needs and then pair you up with a skilled advisor.
One who knows this area of finance inside and out, allowing them to introduce you to the right lender from day one.
Just call 0808 189 0463 or make an enquiry. We’ll set up a free, no obligation chat between yourself and an expert commercial HMO mortgage broker today.
Get Started with a Broker
Maximise your chance of approval with specialist advice from an expert in HMO Mortgages.
Yes, this can be a tax-efficient way to set up a commercial lending arrangement. Not all lenders can cater to limited companies because they don’t have the expertise or resources to do so.
But, a specialist broker will be able to introduce you to the lenders who can arrange a commercial HMO mortgage through your company.
If you have multiple HMO properties, it can be possible to use a portfolio mortgage. This can help streamline your finances, making things easier to manage.
However, this type of product is fairly new and only a limited number of specialist lenders can create an arrangement. Using an expert advisor is the best way to look into this.
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We know everyone's circumstances are different, that's why we work with mortgage brokers who are experts in all different types of commercial mortgages. Ask us a question and we'll get the best expert to help.
Mortgage Expert, MD
About the author
Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.
Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!