For landlords and investors
HMO Investment in London: Yields, the HMO Mortgage, Conversion Costs and the Risks
Sviatoslav JerdetchiiCEO & Founder of Craftex. Updated , 7 min read
The short answer
An HMO earns more rent per house than a single let, but the lender, the council and the tax rules all decide what you keep. Check the planning route and the licence before you buy, because the mortgage depends on both.
- HMOs had the highest average gross yield in Paragon Bank's Q3 2026 data: 8.80%, against 7.22% for all buy-to-let and 5.79% for Greater London.
- HMO mortgage lenders set bedroom limits, interest cover of 130% to 165% and loan to value of 70% to 75%; some ask for HMO experience.
- Our 2026 rates for an HMO conversion run from £1,040 to £2,200 per m², about £23,000 to £48,000 per letting room.
- Article 4, licensing and the restriction on mortgage interest relief are the risks to price in before you exchange.
An HMO mortgage is a buy-to-let loan for a house let room by room to people from different households. Lenders offer it only when the house meets the council's licence and planning rules, so those come first. In return, HMOs had the highest average gross yield of any property type in Paragon Bank's Q3 2026 data.
This guide is for the investor weighing up a London house. It covers 2026 yields, what HMO mortgage lenders ask for, the cost of the works and the risks. The works themselves are our job: we plan, design and build each HMO conversion under one contract. Found a house? Get a free HMO route check before you exchange.
HMO yields against single lets: the 2026 figures
Paragon Bank publishes average gross yields on its buy-to-let lending every quarter. In Q3 2026, HMOs came out on top again.
| Property type or area | Average gross yield |
|---|---|
| Houses in multiple occupation | 8.80% |
| Multi-unit blocks | 7.36% |
| All buy-to-let | 7.22% |
| Flats | 6.66% |
| Terraced houses | 6.46% |
| Greater London, all types | 5.79% |
London is the lowest-yielding region in that data, because prices are high against rents. A second source looks at HMOs alone. Lendlord's sample of 1,158 HMOs, published in February 2026, gave an average of 9.6%. Greater London was the lowest region, at 8%.
So the HMO premium is real, but it is a premium on rent, not on profit. Your own figures for one address decide whether it survives the costs.
How an HMO mortgage works: what lenders check
An HMO mortgage is underwritten as buy-to-let, with extra tests for the shared house. These are the five that change the numbers most.
- The size of the house. Lenders cap bedrooms or occupants. Family Building Society lends up to six lettable bedrooms; Leeds Building Society up to eight.
- The rent cover. The rent must cover the interest by a set margin, the interest cover ratio. On the pages we read it ran from 130% to 165%.
- The deposit. Maximum loan to value was 75% for small HMOs and 70% for large ones at YBS.
- Your experience. Some lenders want a track record with HMOs. YBS Commercial asks for 12 months managing HMOs.
- The licence and planning. Lenders want the house to comply. Leeds uses the mandatory licence to set the maximum number of occupants.
| Lender | Size of house | Max loan to value | Interest cover | Experience asked |
|---|---|---|---|---|
| YBS Commercial | 3 to 20 bedrooms | 75% up to 6 bedrooms, 70% above | 130% to 150% | 12 months managing HMOs |
| Leeds Building Society | Up to 8 bedrooms | 75% | 165% | Not stated on the page |
| Family Building Society | Up to 6 bedrooms, 6 occupants | 75% | Not stated on the page | Not stated on the page |
Criteria change often, so treat this as a snapshot, not a quote. A specialist broker will match your case to a lender.
Large HMOs are valued on the rent
Leeds values a small HMO like any buy-to-let, against comparable house sales. A large HMO is valued on a commercial, yield-based method instead. That is why the room count and the licence matter so much to the loan.
Landbay's 2026 guide for brokers is blunt about large HMOs. It says a first-time landlord has very few options, and a first-time buyer effectively none. It adds that most large HMO lenders want the licence in place before they lend.
A house still to convert has no licence yet
That last point shapes the purchase. A family house you plan to convert has no HMO licence on the day you buy it. Ask your broker early how the purchase and the works will be funded until the licence is granted. Our guide to renovation mortgages and refurbishment loans explains how short-term works finance is usually structured.
The route check decides what you can buy
Before the lender, the council decides what the house can become. The planning route depends on how many people will live there and on the street.
- Three to six sharers. This is a small HMO, Class C4. A family house can usually change to it under permitted development, Class L.
- An Article 4 direction. Where the council has made one, the same change needs a planning application.
- Seven or more sharers. This is a large HMO outside every use class, and it always needs planning permission.
London is where the directions are. On 2 November 2026 we verified HMO Article 4 directions in London in force in 17 boroughs borough-wide. Havering's covers most house types, and four more boroughs have them by ward or street.
The licence sets the room count
Planning says whether the house can be an HMO. The licence says how many people may live in it. A licence is compulsory for five or more people from two or more households. Many London boroughs also license smaller HMOs under additional licensing schemes.
Every licence sets minimum bedroom sizes: 6.51 m² for one adult and 10.22 m² for two. Councils add their own kitchen and bathroom standards. Our guide to HMO licence and regulations covers the inspection in detail.
We used Craftex for a shop-to-flat conversion in Chelsea — turning an old retail space into two rental units. Access wasn’t the easiest, but the guys handled it well, no drama. Quote was clear, no hidden extras, and they actually stuck to it, which is rare. Finish came out solid, exactly what we needed for rentals. Joe (PM) kept things ticking and communication was always on point. All in all, smooth job — would use them again for sure.👍
HMO conversion cost: our 2026 rates
The works are the biggest number you control. These are our 2026 rates for an HMO conversion, per m² of gross internal floor area. They cover construction only, ex VAT and fees.
| Tier | What it covers | Per m² | Per letting room |
|---|---|---|---|
| Light HMO works | Layout kept: fire doors, alarms, rewire, kitchen and bathroom upgrades | £1,040 to £1,300 | £23,000 to £29,000 |
| Standard HMO conversion | House reconfigured: new partitions, most rooms en-suite, a larger kitchen | £1,400 to £1,750 | £31,000 to £39,000 |
| Full HMO conversion | Back to the shell, or a shop, office or pub converted | £1,760 to £2,200 | £39,000 to £48,000 |
The per-room figure assumes about 22 m² of the building for each letting room. As an illustration, a 130 m² house at the standard tier comes to £182,000 to £227,500 for the build. Enter your own floor area in the HMO conversion cost calculator for a range straight away.
VAT at 5% on a qualifying conversion
Converting a single home, or a building never lived in, into an HMO is a qualifying conversion in HMRC's VAT Notice 708. The builder can then charge 5% instead of 20% on the work. Adding bedrooms to a house that is already bedsits does not qualify. Read more in our guide to VAT on conversions.
Planning, Building Control and licence fees come on top of the build. So do furniture and your finance costs. Your fixed figure follows a survey.
Tax and other risks to price in before you exchange
Four risks sit outside the build. Each one can turn a good gross yield into a poor return.
Mortgage interest relief is restricted
Since 6 April 2020, individual landlords cannot deduct mortgage interest from residential rental income. Instead they get a tax reduction at the basic rate of 20%. Landlords often call it Section 24.
From April 2027, property income has its own tax rates, set out in HMRC's Budget 2026 policy paper:
The relief on finance costs is then given at the property basic rate. Whether to buy personally or through a company is a question for your tax adviser before you buy.
Stamp duty carries a surcharge
If the purchase means you will own more than one home, you usually pay 5% on top of the standard Stamp Duty rates. On a London house that is a large, early cost.
Planning and licensing are enforced
Converting without the planning permission an Article 4 direction requires can lead to enforcement. Letting an HMO that should be licensed is an offence. Councils can impose a civil penalty of up to £40,000 per offence, raised from £30,000 on 1 May 2026.
Rules move while you own the house
Directions and licensing schemes are made borough by borough, and they change. Two more London boroughs had directions proposed on 2 November 2026. A house that is lawful as a small HMO today can face a new licensing scheme next year. Build that into the hold period, not just the purchase.
When an HMO works as a London investment
An HMO makes sense when four things line up for one address. The route allows the number of rooms you need. The rooms pass the licence. A lender will lend on the finished house. And the works cost what your appraisal assumed.
When one of them fails, the yield on paper never arrives. Most of these failures can be seen before you buy. That is why the route check comes first.
How we help HMO investors
We check the planning route for the address, free. Then one team draws the rooms to the council's standards, prices the works before you exchange and builds the conversion to handover. Around 60% of our labour is in-house, so the programme does not wait on subcontractors.
The method is the one we used at Allitsen Road, a vacant club in St John's Wood. We appraised it as four options of four to seven flats, each with a cost plan and programme. Our construction projects start at £100,000.
If you have a house in mind, get a free HMO route check and send us the address.
Before you exchange on an HMO
- Confirm the use class and whether an Article 4 direction covers the street.
- Count the bedrooms that meet 6.51 m² and the council's standards.
- Check whether the borough runs additional licensing.
- Ask a broker which lenders take the room count and your experience.
- Price the works per m² against our 2026 rates, plus fees and VAT.
- Run the tax figures with your adviser, including the 2027 rates.
