Interest in HMOs is not going anywhere

Originally published by The Intermediary 

HMOs, and to a less degree, multi-unit freehold blocks remain a core element of the overall UK housing stock, and certainly in recent years many existing landlords have looked much more closely at this sector, particularly in a period where tenant numbers have risen and where multi-tenanted properties have become much more in demand.

Interestingly, and perhaps quite surprisingly given the disconnect between tenant demand and supply in the UK private rental sector (PRS), the last figures we have from the Office for National Statistics (ONS) back in February 2024 revealed that the number of HMOs in the UK – 476,076 – was down 9.5% from 2018.

Now, there are many potential reasons for this, not least in terms of the potential for HMOs to mean greater costs for the landlord in terms of upkeep, sourcing tenants, local authorisation and registration, mortgage costs, etc, but from the conversations we are having with both advisers and landlords, there is a growing interest in HMO business/transactions particularly due to the potential for greater rental yields.

Our own recent Fleet Mortgages Rental Barometer continues to show rental yields across England and Wales performing strongly. For Q4 2024 the average yield across the regions we lend in was 7.4% but this was only up 0.6% on the year previously, and even with demand still outstripping supply, there is a general feeling that yields are less inclined to outperform year-on-year going forward.

Which may leave some landlords looking at their options when it comes to purchasing and holding properties which are going to deliver a stronger yield for them. Which once again leads us down the road to HMOs because, of course, you have multiple tenants within a property on separate tenancy agreements which can often deliver a much higher yield than were you to be offering the same property to a family for example.

That being the case we’ve not just seen landlords looking to add HMO properties to their overall portfolios – particularly relevant in University towns and cities, but also increasingly for the professional market where younger people are much more likely to live together in this way – but we’ve also seen landlords seeking to convert their existing properties into HMOs where possible.

However, for those who have never prepared or offered, or indeed purchased, a HMO before, the move into this property space can seem a little daunting, with many additional factors to take into account, such as dealing with those multiple tenants, what should be included in the shared facilities, the stricter regulations that come with HMOs and the additional safety and maintenance standards required to meet the terms of any license.

And, of course, we can’t discount the different financing options, pricing, rates, criteria, that often come with HMOs, or multi-unit freehold block (MUFB), from different lenders. As advisers it’s clearly important to be on top of these, particularly in terms of your client’s understanding of the differences with HMOs, but also with regards to the different (often costlier) pricing that such mortgages tend to have.

If this all sounds like it could put off a landlord – especially those who are considering the HMO market for the first time – then there are ways and means by which you as the adviser can make things less complicated for them, while at the same time also potentially delivering them cost savings, both upfront and over the term of the mortgage.

To that end, you might wish to ask the landlord, ‘When is your HMO not a HMO?’ I don’t mean in the sense of the property itself, but in terms of whether it meets the criteria of a HMO for mortgage purposes.

For instance, at Fleet we can look to accommodate ‘HMO’ cases were there are four tenants (or less) in a property but which has, for example, locks on the doors and separate tenancy agreements, not on our specific HMO products but on our standard range (providing no HMO licence is required for the current or intended occupancy).

This would mean lower rates of course, but also the ability to secure free or discounted valuations, which are not available on our HMO product range, providing both an upfront saving and cheaper mortgage financing over the term of the loan.

Now, of course, it’s important for the landlord to know that this doesn’t make their property any less of a HMO in terms of the wider requirements that come with offering such properties, but it simply means that – for their mortgage purposes – they may have other, more standard, options beyond the specific HMO/MUFB range, which tend to be priced higher.

Overall, it seems likely that more portfolio landlords will, at the very least, be looking at the options available to them in the HMO space. To that end, it might not need a specific HMO mortgage option as such, but could potentially be accommodated elsewhere depending on number of tenants and/or the property set-up. If, however, a HMO product is definitely required, then there are a growing number of HMO mortgage options available.

Landlord are increasingly well-catered for in this space and we anticipate the growth in interest and activity for HMOs is not going away anytime soon.