Roger Morris – Group Distribution Director
As a regular speaker at industry events around the country, I’m often approached by brokers keen to pick my brain about Houses in Multiple Occupation (HMOs).
It’s not surprising they want to talk to me about HMOs. With average rental yields of 6.9%1, more than a full percentage point above the overall average rental yield of 5.7%, as well as offering the peace of mind that rental income is more secure if one tenant leaves a void, HMOs have become one of the most popular investment options with landlords in recent years.
However, I’m aware that there’s still some confusion about exactly what an HMO is and when they need to be licensed with a local authority.
Many brokers believe a property only becomes an HMO when five or more people forming more than one household are living in it. Not only is that wrong, it could potentially have very costly consequences for landlords.
A property is actually classified as an HMO when it’s occupied by at least three unrelated tenants forming more than one household who share toilet, bathroom or kitchen facilities.
While HMOs with five or more unrelated people are subject to mandatory licensing with all local authorities, some councils insist on landlords with fewer residents obtaining a licence too. Landlords failing to apply for a licence when one is required could face a fine of up to £20,000 plus costs.
Let me give you an example of how a landlord can become an accidental HMO landlord without them even realising it.
Let’s say our landlord is renting out a two bedroom terraced house to a couple of NHS workers in a city in the UK where landlords with smaller HMOs are required to license them with the local authority. Unbeknown to the landlord, one of the tenants has asked their partner to move in with them, meaning there’s now three people living in the property and, as they’re unrelated and form more than one household, in the eyes of the law, the classification of the property changes from a C3 dwelling house to a C4 small HMO. Fortunately on this occasion, the landlord realises what’s happened and is able to apply for a licence before they receive a letter from the authority.
It really can be that easy to fall foul of the regulations and your customer may not be so lucky.
But it’s not just the local authority regulations for you and your customer to be mindful of, there’s also the application process for you to consider. If it turns out your customer has let their property as an HMO and you’ve placed them on a standard buy to let mortgage, then it’s very likely that their mortgage terms won’t allow this, which could result in your customer being in breach of their mortgage terms and some potentially costly charges being incurred.
That’s why it’s so important you know exactly what constitutes an HMO and why your customer should always check with the relevant local authority to find out what their licensing regulations are. Making sure you offer the right advice is vitally important.
If you’ve got any questions about HMOs, don’t forget a member of our Sales Team is always happy to help or you can call our dedicated support service on 0800 116 4385.
Source: 1 BVA BDRC Landlords Panel Report Q3 2020