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The HMO opportunity
2016 is likely to be a steady year for the buy-to-let mortgage market, following on from a successful 2015 which saw an increase in the number of lenders and products available to landlord clients. Although the impending tax changes could cause some dampening of the market and may deter amateur landlords from investing in rental property in the UK, it is expected that professional landlords will adjust to the new tax regime and continue with their buy-to-let property businesses.
As professional landlords are running their businesses to make a profit, it is reasonable that they should aim to maximise the return on their property investments. For this reason, some landlords choose to purchase Houses in Multiple Occupation (HMOs) which can often deliver higher rental yields than standard buy-to-let properties. Standard properties earn between 5 and 6 percent rental yields whereas HMOs can earn around 9 per cent, on average.
An HMO is defined as a house or flat which is let to 3 or more tenants who form 2 or more households and who share a kitchen, bathroom or toilet. As an HMO contains multiple tenants, the landlord is able to receive more rental income for one property which accounts for the higher rental yield.
However, despite the potential rewards for investing in HMOs, it remains a niche area in the buy-to-let sector. Some landlords are hesitant about dealing with the additional obligations involved including HMO licensing laws and the maintenance requirements for such a property.
Mandatory licensing affects all HMOs that have three or more storeys and are occupied by five or more persons forming two or more households. However, each Local Authority may also impose additional discretionary licensing which varies widely around the UK. Landlords should apply to the relevant Local Authority for a suitable licence for each of their HMO properties.
Many HMO properties service the student population who are sometimes perceived to pose a higher risk of damage to property and being unreliable tenants, although there is no real evidence to support this. However, it is prudent for landlords to anticipate maintenance costs for all of their buy-to-let properties, including HMOs, and budget accordingly.
For those landlord clients who are looking for an HMO buy-to-let mortgage there are plenty of options available to them.
Axis Bank entered the market last year offering a range of specialist buy-to-let products for HMO properties, although applicants must be experienced landlords with at least three existing buy-to-let properties. Axis will consider a maximum of 6 bedrooms, non-licensed HMOs, individual ASTs and up to 75 per cent loan-to-value.
Fleet Mortgages will lend to landlords with a minimum of 3 years’ experience, up to 75 per cent loan and will accepted multi-unit blocks with up to 10 self-contained units. HMOs must be licensed where required and properties with 2 kitchens will also be considered.
Paragon Mortgages remains one of the key lenders for professional landlords with HMO properties, offering fixed and variable rate products up to 75 per cent loan-to-value. Paragon will consider up to 20 tenants with multiple or single ASTs and assess the rental income on a room by room basis. Paragon has a maximum new lending aggregate of £5 million.
Kent Reliance is also a popular lender for HMO properties with an unlimited aggregate lending policy for professional landlords and the only current provider of 85 per cent loan-to-value mortgages. Kent Reliance also has no minimum income requirement and accepts first time landlords.
Other lenders servicing the HMO sector include The Mortgage Works, Leeds Building Society, Precise Mortgage and Shawbrook Bank.
Examples of products currently available for HMO properties:
Axis Bank – 3.99% 2 year fixed rate up to 75% LTV with a 1.5% arrangement fee. Rental calculation of 125% at 5%.
Fleet Mortgages – 4.19% fixed until 31/05/2018 up to 75% LTV with a 2%arrangement fee. Rental calculation of 125% at 5.59%.
Kent Reliance – 5.39% fixed for 2 years up to 85% LTV with a 2.5% arrangement fee. Rental calculation of 130% at 5.74%.
Leeds B.S. – 2.49% fixed until 30/06/2018 up to 70% LTV with a £1999 arrangement fee. Rental calculation of 125% at 5.99%.
Paragon Mortgages – 4.10% fixed until 31/03/2019 up to 65% LTV with a 1.5% arrangement fee. Rental calculation of 130% at 7%.
Precise Mortgage – 4.29% fixed until 30/04/2018 up to 75% LTV with a 1.5% arrangement fee. Rental calculation of 125% at 5.01%.
Shawbrook Bank – 5.60% 3 year tracker up to 75% LTV with a 1.5% arrangement fee. Rental calculation of 125% at 7.6%
The Mortgage Works – 3.14% fixed until 30/06/2018 up to 65% LTV with a £1995 arrangement fee. Rental calculation of 150% at 4.99%.
Tel: 029 2069 5480
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