"Simply put, HMO mortgages demand more from both the borrower and the property."
- Joseph Lane - Mortgage Lane
As pressures on profit margins tighten and regulation around landlords increases, many investors are shifting their focus from traditional buy-to-let mortgages to HMO mortgages.
With yields typically higher and demand for affordable shared housing on the rise, HMOs are proving a popular route for experienced landlords looking to maximise return on investment (ROI). But as the opportunity grows, so does the complexity, especially when it comes to finance.
Why landlords are shifting to HMOs
Traditional buy-to-let (BTL) properties have seen profitability squeezed in recent years. Tighter tax treatment, rising interest rates, and more stringent stress testing mean that many landlords are reviewing their portfolios for higher-yielding opportunities.
That’s where HMOs - Houses in Multiple Occupation, come into play. By renting out rooms individually, landlords can increase rental income significantly, often achieving yields of 8–10% or more compared to 4–5% for standard BTL. Additionally, HMOs allow landlords to diversify tenant types, which can offer more stability in challenging markets.
For many, it’s no longer just about owning more property; it’s about making every property work harder.
Key differences in lending criteria - buy-to-let mortgages vs HMO mortgages
While the fundamental principles behind buy-to-let mortgages and HMO mortgages are similar - loan-to-value (LTV), rental income, and affordability - the criteria diverge considerably when it comes to complexity and borrower expectations.
With a standard BTL mortgage, lenders typically assess affordability using a rental income stress test, often based on 125% to 145% of the mortgage interest, depending on the borrower's tax status. For HMOs, lenders tend to use a more detailed approach. They may assess the rental income on a room-by-room basis and require evidence that the property meets local licensing or planning rules.
In addition, most HMO lenders require borrowers to have landlord experience, typically 12 months or more. Larger HMOs (5+ tenants forming more than one household) often require commercial valuations. Minimum property values and room sizes are strictly enforced, especially in high-demand areas. Simply put, HMO mortgages demand more from both the borrower and the property.
What specialist lenders are prioritising in 2025
In 2025, we’re seeing lenders tighten their focus on quality. For HMO mortgages, that means:
Management experience: Lenders prefer borrowers who manage their own portfolio or use licensed agents.
Licensing compliance: Proof of valid HMO licensing is essential.
Exit strategy clarity: Particularly important when funding refurbishments or conversions into HMOs.
Rental income: Lenders want to see strong demand and sustainable rental levels, backed by local comparables.
Some specialist lenders have also started offering more flexible stress rates for higher-yielding HMOs, making them more accessible for experienced landlords looking to expand.
Article 4 and planning restrictions
A growing hurdle for HMO investors is Article 4 Directions. These planning restrictions, implemented by local councils, remove permitted development rights that would otherwise allow a landlord to convert a property into an HMO without full planning permission.
If you're investing in an Article 4 area, it's essential to:
Check with the local authority before purchase or conversion.
Factor planning risk into your financial projections.
Secure written planning consent (where required) to satisfy lender requirements.
Many lenders will not fund unlicensed or unapproved HMO conversions in Article 4 areas, which can make financing fall through late in the process.
How to improve eligibility for HMO mortgages
Lenders are becoming more selective, but that doesn’t mean finance is out of reach. Here are practical ways borrowers can improve their eligibility:
Build landlord experience: If you’re new to HMOs, consider starting with smaller properties or partnering with an experienced landlord.
Maintain clear records: Up-to-date ASTs, income statements, and refurbishment invoices help streamline underwriting.
Use limited companies: Many lenders prefer to lend to SPVs (Special Purpose Vehicles) set up for property investment, especially for larger HMO portfolios.
Have a strong business case: Presenting a clear strategy - why the property works as an HMO, your plan for licensing, and how you'll manage tenants, builds confidence with lenders.
Working with a broker who understands HMO mortgages is also vital. Some of the best products are only available through intermediaries, especially those offering yield-based valuations or no early repayment charges.
Predictions for the next 12 months
Looking ahead, we anticipate several key trends in HMO finance:
Yield-based lending will grow: More lenders are expected to adopt flexible valuation models that reward higher-income properties.
Tighter regulation: Expect more scrutiny around licensing, EPC compliance, and minimum room standards - especially in university towns and urban centres.
Stable interest rates: If inflation continues to ease, rates could remain steady, which would support more predictable HMO lending and allow landlords to refinance more confidently.
More lender choice: As HMOs become more mainstream, expect new lenders to enter the space with innovative products tailored to this growing niche.
Words: Joseph Lane - Mortgage Lane
