What’s the best type of mortgage for an HMO?

Category: hmo

When it comes to getting an HMO mortgage, getting the right type for your property can make a significant difference to the success of your investment and profit you make.

You will also need to choose which type of mortgage interest rate to take. This is an important decision from a financial planning perspective and to take into consideration movement in mortgage interest rates.

Fixed rate mortgages

Many HMO landlords prefer the stability of fixed rate mortgage products. With a fixed rate, your payments stay the same throughout the initial rate period, unaffected by wider changes to mortgage interest rates. This makes it easier to budget and plan for the future.

Fixed rate periods typically range from 2 to 5 years, though there are some longer outliers going up to 10 years.

Once you come to the end of the initial rate period, if you intend to keep renting your property under finance, is to remortgage to a new deal.

If you don’t, you will start to pay the lenders reversion rate. This is typically their Standard Variable Rate, and it is usually a lot higher than the interest rate on a product you could get by securing another mortgage deal.

Variable rate mortgages

Variable rate mortgages are an alternative option. They are tied to another rate, often the Bank of England Base Rate. If the rate they are tied to goes up, the mortgage interest rate will go up and your monthly mortgae payment will increase. But, if the rate they are tied to goes down, the mortgage interest rate will go down and you will pay less per month. This is why they are called “variable” rates. 

If interest rates are low – and are expected to stay that way for the foreseeable future – variable rate products can be an appealing option.

However, if interest rates start climbing higher, the same will happen to a variable rate mortgage – such is the risk of being on one. They require some faith in the market remaining steady for the full length of the mortgage, while also hoping that global social, economic and political factors don’t rock the boat too much.

For this reason, fixed rate mortgages are almost universally the more popular option, but a variable rate with a short term could be favourable in certain circumstances. These are just some of the options you can discuss with your mortgage advisor, before making a final decision.

Consider initial rate periods

When it comes to lengths of initial rate periods, 5-year fixed rate HMO products are an attractive option due to a solid balance of stability and affordability. 5-year fixed rates typically come with more flexible mortgage affordability calculations, allowing you to borrow more money than on a 2-year deal.

If mortgage interest rates are projected to come down in the coming year or so, a shorter 2-year fixed rate will give you the security of monthly payments, but not tie you in to a rate for too long.  This will allow you to remortgage to a better deal – should one come along - sooner than a five year fix.

Products with shorter initial rate periods may be more appropriate if you are keeping your options open for future refinancing, or sale of your HMO.

Buy to let for HMO and specialist HMO mortgages

There are two ways to mortgage an HMO property. If you have what is, in effect, a standard residential house of say 3-5 bedrooms, without significant modifications to it and all of your tenants will be signed up to one tenancy agreement, you could get a standard buy to let mortgage with certain lenders.

This is because, if the lender had to repossess, they could easily sell the property as a family home if selling it as an HMO property proved difficult.

A property like this poses less risk to the lender and can attract lower interest rates.

If you have a large HMO property with more bedrooms and the modifications a large HMO property requires (e.g. for health and safety reasons) a lender cannot really sell on the property as a family home. So, you will need a specialist HMO mortgage.

Specialist HMO mortgages carry more risk and as a result the interest rates tend to be higher.

Lower mortgage rates mean lower monthly payments, higher interest rates mean higher monthly payments.

Commercial Trust can help you

At Commercial Trust, we understand that every HMO investment is unique. Our expert mortgage advisors are familiar with the challenges of HMO financing and will work closely with you to identify the most suitable mortgage product. 

Whether you’re looking for a fixed-rate option with long-term stability or a variable rate for potential flexibility, we have access to a wide range of products to meet your needs.

The best type of mortgage for your HMO depends on your strategy and risk tolerance. With the right advice, you can secure competitive rates that support your investment goals. 

At Commercial Trust, we’re here to provide the expert guidance and tailored solutions that make securing an HMO mortgage easier and more efficient.

Talk to one of our experts on live chat, call on our Freephone number above or submit an enquiry for a call-back.