What is an HMO property?

What does HMO mean?

Under the Housing Act 2004, a property is an HMO in England when it’s let to three or more tenants who form more than one household and share a kitchen, bathroom or toilet. A household is a single person or members of the same family: couples, parents and children, and other relatives.

Some converted buildings are HMOs too. A block converted into self-contained flats that doesn’t meet the 1991 Building Regulations, where fewer than two-thirds of the flats are owner-occupied, is a section 257 HMO. This matters when you buy an older converted block.

Small and large HMOs: the planning classes

Planning law uses different categories from licensing:

• C3, dwelling house: an ordinary home, including a family or up to six people living together as one household.
• C4, small HMO: three to six unrelated people sharing basic facilities.
• Sui generis, large HMO: seven or more people. This always needs full planning permission.

Changing a house from C3 to C4 is normally permitted development, so no planning application is needed, unless the council has made an Article 4 direction.

Article 4 directions

An Article 4 direction removes permitted development rights in a defined area. Where one covers C3 to C4 changes, you need planning permission even for a small HMO. Many university towns and cities have them, and some cover a whole city.

• Check before you buy. Councils publish Article 4 maps on their planning pages.
• Existing HMOs in Article 4 areas can be worth more, because new ones are hard to create. Ask for evidence the use is lawful, such as a planning permission or a certificate of lawful use.
• No evidence, no premium. A house let as an HMO without the right planning status may have to go back to single-family use.

Licensing

Licensing is separate from planning. Larger HMOs (five or more people from two or more households) need a mandatory licence, and many councils license smaller HMOs too. See the HMO licence guide for when you need one, what it costs and the minimum room sizes.

How HMOs are valued

Lenders’ valuers use one of two approaches:

• Bricks and mortar: the value as a normal house, based on comparable sales. Common for smaller HMOs.
• Investment (yield) basis: the value based on the rent the HMO produces, like a commercial property. More common on larger HMOs, especially seven or more bedrooms, and it can produce a much higher figure.

The valuation basis decides how much you can refinance, so it shapes the whole deal. The HMO deal builder lets you run a refinance on an investment value and see how much money is left in.

How HMOs are financed

• Buying an existing, licensed HMO: an HMO mortgage. Many lenders want some landlord experience, and they look at room count, licensing and the planning position.
• Converting a house into an HMO: often a refurbishment bridging loan for the purchase and works, then a refinance onto an HMO mortgage once it’s converted, licensed and let. That’s the bridge-to-let route.
• Buying at auction: auction finance to meet the completion deadline, then refinance.

Mortgages are handled by a regulated firm. DasLend refers buy-to-let, limited-company, HMO and commercial mortgage enquiries to a firm authorised and regulated by the Financial Conduct Authority, with the permissions to advise on and arrange them. That firm, not DasLend, gives any advice and arranges the mortgage.

Frequently asked questions