Budgeting For Costs in an HMO Mortgage Agreement

Whenever you’re applying for a new HMO mortgages, it’s essential to understand all of the costs involved in your investment.

The mortgage itself will carry charges, such as:

  • Interest fees
  • Arrangement costs
  • Valuation expenses

Aside from these overheads, it’s also important to calculate your rental yield, monthly profit, and how viable the investment is over the long term.

In this guide, our mortgage brokers explain a little more about how HMOs work in practice and how to ensure your initial HMO mortgage calculations are accurate.

Please get in touch on 0330 304 3040 or via email at info@revolutionbrokers.co.uk for further information about budgeting for the costs of investing in an HMO.

What Are HMOs – The Basics

An HMO is a house in multiple occupation, also referred to as a house share. An HMO mortgage is suitable for properties let to multiple people, forming more than one household.

There isn’t any cap on the number of people who might live in a house share, but you need to consider HMO licensing requirements, which stipulate conditions such as the minimum size of each bedroom.

Many investment landlords look for HMO investment opportunities since the rental yields can be attractive – particularly when letting to professional sharers who tend to be reliable, quality tenants.

Rental Yields on HMO Mortgages

Lenders offering HMO mortgages will need to look at the projected rental income and expenses to be confident you can afford the regular interest costs.

A great place to start is to work out your anticipated rental yield and see how much profit you can reasonably expect to make each month.

To calculate rental yield, you’ll need to:

  • Add up the total rental income over an average year.
  • Identify the purchase value of your prospective HMO or the current market value of an existing HMO asset.
  • Divide the annual rent by the property price.
  • Multiply that figure by 100 to arrive at a rental yield percentage.

For example, if you buy a property for £180,000 and receive £800 in rent a month, your rental yield is (£9,600 / £180,000 x 100) 5.3%.

However, one of the common issues is that this method doesn’t consider running costs, such as council tax, utility bills, maintenance and licensing charges.

We’ll explain some of the costs to budget for shortly. Still, as a rough indication, most landlords use a contingency of up to 25% and deduct these expenses from the projected rental income to get a more realistic idea of their profit levels.

It’s important to consider since although an HMO mortgage lender might approve a loan based on affordability, you still need to be confident that the investment is financially worthwhile.

The average rental yield on an HMO is between 9% up to 20%, so investing in a great property with competitive HMO mortgage rates can produce a beneficial return.

Costs to Consider in an HMO Mortgage Calculation

As we’ve mentioned, mortgage costs are just one of the elements of purchasing an HMO. You’ll also need to account for:

  • HMO licensing costs
  • Advertising or letting agent charged
  • Management expenses
  • Repairs and maintenance
  • Paying income tax

Landlords can choose what to include in their HMO rental agreement – you might offer services such as cleaning communal areas or gardening. However, some tenancy agreements may mean that you’ll need to give notice before carrying out maintenance in spaces where a tenant has exclusive possession.

Mandatory HMO licenses are managed by local councils and depend on how many people live in your property and how many storeys it has.

Costs begin at £300 and go up to around £1,000 per new application, although renewal fees are usually from £150.

Failure to have an appropriate HMO license can attract steep fines up to £20,000, with penalties of up to £5,000 for any offence where you don’t comply with licensing conditions, so it’s crucial to have the correct license in place.

Covering HMO Utility Costs and Council Tax

Normally, a landlord decides to keep utilities in their name if they have an HMO where the costs are split between multiple tenants. The agreed rental price should include an element to cover utilities.

Groups living in an HMO on one tenancy agreement will usually pay the utility bills directly, in addition to their rent.

If you rent an HMO by room, you are responsible for council tax and again can include a charge in the rent to account for the expense.

HMO Insurance Considerations

Every landlord needs compulsory buildings insurance, which most mortgage lenders will require as standard.

Once you have a local authority HMO license, you can apply for specialist HMO insurance, which provides broader protection for the building, contents and public liability.

Landlord Safety Requirements to Apply for an HMO Mortgage

Most HMO mortgage providers will want to value the property themselves, either as a commercial investment asset or based on the expected annual rental revenues.

They may also inspect the property to ensure it is compliant with local authority regulations – although these factors are more usually covered as part of the licensing assessment process.

Some of the safety requirements include:

  • Fire prevention and detection equipment.
  • Smoke detectors on every habitable floor, in good working order
  • An annual gas safety inspection certificate.

There may be other requirements, depending on the conditions applied by your local authority licensing department.

However, it remains crucial to evaluate all of the costs involved in running an HMO to ensure that you are confident that you can afford the interest costs and all the other associated expenses when you apply for an HMO mortgage.

For more information about calculating rental yield, finding competitive HMO mortgage lending, or selecting the right insurance for your HMO, please contact Revolution Brokers as the independent UK HMO experts.

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I am Daniel Owner and CEO of techinfobusiness.co.uk & dsnews.co.uk.

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