The continuing evolution of the HMO market

The market for housing of multiple occupancy (HMO) has gone from strength-to-strength over the past year and there are good reasons to believe this trend will continue in the future.

Why? Firstly, landlords are seeking higher yielding investments as returns from the mainstream rental market continue to come under pressure. Having multiple tenants in one property generates more rental income and there is less dependency and risk for the landlord if income is derived from several sources.

Secondly, HMOs have become popular not only with student and social tenants who have been the mainstay of the HMO market to date, but also with a growing band of professional tenants. These tenants are choosing HMOs not just because of lower costs but also a range of lifestyle factors including location, proximity to transport links and a desire to live in a more communal environment with like-minded friends.

These developments have been driving a number of changes, both amongst landlords and lenders. Landlords have recognised the changing demand for HMOs and are starting to develop properties for the young professional market, with high quality finishes, internet access and wide-screen TVs in communal areas. This type of HMO is particularly popular in large urban areas such as London and Manchester where young professionals are less keen (and able) to get a foot on the first rung of the housing ladder.

Landlords are therefore seeking suitable properties capable of being converted into accommodation for typically 6-9 tenants. We’re also starting to see a new generation of landlords who have focussed to date on the traditional rental market but are now branching out into the HMO market.

There are issues HMO landlords need to take into consideration. HMOs may generate higher yields but take more time, effort and cost to manage. It’s not untypical for landlords to allocate 25-30% of rental income to management and maintenance costs. Landlords also need to be aware of the way in which HMOs are categorised and the rules regarding licencing and planning permission. Licencing and planning are not connected, so investors need to ensure they understand both, especially when seeking mortgage funding.

Technically a home becomes an HMO if it is occupied by 3 or more people forming 2 or more households, where more than one household shares amenities such as a toilet, bathroom and kitchen. From a planning perspective, the Town & Country Planning Act 1990 (TCPA) states that any change of use of a property requires planning permission, unless it is ‘non-material’ or permitted by General Permitted Development Orders (GPDO) which are based on the following classification:

• C3 Dwellinghouse – a normal house or flat occupied by a single person, couple or family.
• C4 House in multiple occupation – a normal house shared by between 3 and 6 unrelated individuals as their main residence. They will share facilities such as a lounge, kitchen and bathroom.
• Sui Generis HMO – these are larger properties which cannot be classified as C3 or C4 and they will accommodate 7 or more unrelated individuals.

For HMOs it is permitted to change use from C3 to C4 (and back again) unless what is called an ‘Article IV’ direction is imposed by a local authority, which removes the permitted development rights. Change of use to a Sui Generis HMO does require planning permission. The planning rules can quickly become a minefield and investors should take professional advice if in any doubt.

Licencing is a different issue and if a property is let to 5 or more tenants and has 3 or more stories with a shared kitchen, bathroom or toilet, then a mandatory licence will be required (unless the building has been converted into fully self-contained flats – in which case the property is not classified as an HMO!). Some local authorities will limit the number of HMOs in a particular area, so it’s worth checking prior to purchase. Again, if in doubt, investors should get professional advice.

Lenders have also responded to the emerging HMO market. Over the course of the past year, we’ve seen more lenders enter the HMO market and existing lenders announce more accommodating criteria and lower pricing.

For example:
• Axis Bank has improved its criteria to include students and its 2-year variable rate HMO product has no early redemption charges and no pricing differential from its mainstream buy-to-let range.
• Paragon Mortgages has launched its Premier range to compliment its core range of products, with the Premier range going up to 80% (rather than 75%) LTV. The Premier range is only available via select brokers including RLA Mortgages.
• Interbay Commercial will also lend up to 85% LTV on properties up to 8 beds, with no pricing differential from its mainstream buy-to-let range.
• Precise Mortgages has entered the HMO market and will lend on properties with up to 8 beds.

I have no doubt we’ll see more lenders responding to the greater level of interest in HMOs. This is a market for landlords to watch carefully.

For further information on Buy to Let mortgages both for individuals and Limited Companies please contact RLA Mortgages on 0844 858 4420 or visit the website

Please note lenders have different minimum criteria requirements and not all landlords and property types will qualify for this specific product. For further information contact RLA Mortgages.

This is a financial promotion and in no way should it be viewed as a personal recommendation or advice. Before a recommendation/advice can be given you should seek independant mortgage or financial advice.

RLA Mortgages is operated exclusively for the RLA by 3mc, which is authorised and regulated by the Financial Conduct Authority. FCA No. 302992. ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE. Although the FCA regulate the way the majority of mortgages are sold, in most cases they do not regulate buy to let mortgages. This means you may have less protection if things go wrong with a buy-to-let mortgage. All calls are recorded for training and monitoring purposes.

About Doug Hall

Doug Hall is a director of 3mc; a specialist mortgage provider within the buy-to-let sector. 3mc have been established for over 17 years working with lenders, mortgage intermediaries and the Residential Landlords Association (RLA) providing all types of buy-to-let mortgage solutions.
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