I don’t doubt that you will have been reading the recent headlines citing how mortgage interest rates could top 7% in the coming months. This is the highest we’ve seen in over 14 years and something that strikes fear into the heart of homeowners and landlords alike.
If we consider that every 1% increase adds a significant amount to monthly repayments, it’s certainly not an ideal scenario. I’ve outlined what a 1% increase could mean for various sizes of loan below and you’ll see how the numbers really do stack up!
Looking at average loan sizes on the latest Mortgages for Business report, you will see how single lets and HMOs tend to have loan sizes ranging from £200k – £374k. At the top end (an HMO with a £374,978 loan), each 1% increase would add £311 to monthly repayments.
Whilst reading around the topic, I found it interesting that the Financial Times reports how HMOs could be one answer to the challenge of increased mortgage rates.
Certainly, HMOs have a better average yield, are more profitable, more reliable with less risk of impact due to voids and in a cost-of-living crisis, much more affordable for tenants. The question I’ve been asking is whether HMOs could help provide one solution to investors looking to get the best returns.
Personally, I would agree with the Financial Times on points such as how HMOs generate stronger returns and whilst landlords may face things such as increased energy and maintenance bills, HMOs are excellent at generating cash returns.
When it comes to ROI, I wrote an article back in January 2021 that looked at how HMOs generate the best return and this is still the case, with our enquiries from new landlords at a record high!
So, back to interest rates. We need to remember that property is a long-term investment and that whilst we may be in the midst of the storm at the moment, the sun will shine again!
Here’s the thing… we’ve got used to historically low mortgage rates and perhaps the days of the sub 2% rate are now long gone?
Average interest rates for mortgages in the United Kingdom (UK) from March 2000 to August 2022, by type of mortgage
It’s quite a worrying situation, but thankfully one we have seen before! When we look back at around 2008 where mortgage rates tended to be over 5%, we should be able to enjoy some level of comfort.
As well as higher yields, it’s helpful to remember how increasing your room rates by only a small amount can make a big difference overall. For example, if you had a six-bedroom HMO and increased room rates by £35 per month that would be an additional £210 (which is much more than you can increase in one go for a single let!).
For HMO investors needing to remortgage and lower their repayments, I would suggest considering lowering your overall LTV. I suspect that over the coming months and years we will start to see a downward trend in LTV for both single let and HMOs as investors balance out the increase in payments.
Remember that rates will almost certainly go down again and you will be able to pull your money back out (but it’s important to balance out the increased cost of repayments and potential returns from re-investing that cash elsewhere and absorbing the increased cost).
Another consideration for HMOs is demand. I mentioned above how HMOs are more affordable in the midst of a cost of living crisis and this is certainly the case. We’ve already seen a spike in demand for rooms and I don’t doubt that demand will remain high for the foreseeable future. This is certainly a positive point for HMO investors!
Where will we be in 12 months time… it’s anyone’s guess but if you have unanswered questions about how you can maximise your returns by investing in an HMO, the best place to start is by booking an in-depth discovery session where we can cover off everything you need. You can book through the Home Share website.
Alternatively, do message me on LinkedIn and I will be in touch to discuss further!