Through 2021, we’re taking you through the alphabet of property-related terms, explaining what they are and how they’re relevant to you, as a landlord. This month:
Gearing (also referred to as leverage) involves borrowing a proportion of the money needed to buy an asset, so you’re not funding it all yourself. When you take out a buy to let mortgage, you’re ‘gearing’ your investment.
While many people quite simply couldn’t afford to buy a property without a mortgage, the concept of gearing is more about using borrowing to generate a better return on your capital. For example:
You buy a property for £200,000 using all cash. If the market rises by 5%, you’ve made £10,000, a 5% return. But if you buy the same property with a 25% deposit and a 75% mortgage, you’ve only had to put in £50,000 of your own money. That 5% rise in the market and £10,000 gain is now a 20% return on your money. Even factoring in the mortgage borrowing costs and the impact of monthly repayments on your rental profits, gearing has the potential to make property investing much more profitable over time.
An HMO is a House in Multiple Occupation. In England and Wales, a property is an HMO if it houses at least three tenants, who form more than one household and share toilet, bathroom or kitchen facilities. If there are five or more tenants under the same conditions, it’s a ‘large’ HMO. (See specific rules for Scotland and Northern Ireland.)
HMO legislation is complex, not least because each local authority can place its own requirements on landlords. For example, national legislation requires all large HMOs to be licensed, but your local council may require even smaller HMOs to have licences and possibly planning permission as well. So, if you’re thinking of investing in an HMO, it’s essential you speak to your local council housing department before going ahead, to find out what regulations you’ll need to comply with and the cost implications. HMOs also have to comply with specific health and safety standards, particularly those concerning fire safety.
Finance-wise, if you want to buy an existing HMO or a property that you’re planning to convert and let as an HMO, you’ll need a specialist mortgage. Only a small number of buy to let and commercial lenders offer this, so it’s advisable to speak to a mortgage broker who is experienced in the HMO market and can make sure you have access to the best and most appropriate specialist products.