HMO Mortgage Rates Are Falling, But Compliance Costs Are Rising Faster

Lower HMO Mortgage Rates Sound Great, Until You Do the Maths

This week, The Mortgage Works (TMW) cut rates on its HMO mortgage products by up to 0.20 percentage points, following Nationwide's broader push to reduce buy-to-let pricing across the board. If you are a London landlord with an eye on room-by-room letting, the headlines probably made your ears prick up.

And fair enough. Cheaper borrowing is always welcome. But before you rush to expand your HMO portfolio in May 2026, it is worth asking a blunt question: do those rate savings actually make it to your bottom line?

The honest answer, once you factor in the compliance cost explosion hitting London HMO landlords right now, is that they very often do not.

Let us walk through why.

The HMO Compliance Cost Crunch in London

Running an HMO in London has never been simple, but the regulatory landscape in 2026 is genuinely punishing. Here is what landlords need to budget for today.

Mandatory and Selective Licensing Fees

Every HMO with five or more occupants forming two or more households needs a mandatory licence. In most London boroughs, that costs between £1,200 and £1,800 per property for a five-year licence. Some boroughs charge significantly more.

On top of that, selective licensing schemes are expanding rapidly. Croydon's borough-wide selective licensing scheme, introduced in late 2025, now requires landlords of all private rented properties (not just large HMOs) to hold a licence. The fee sits around £750 per property. Other boroughs, including Newham, Waltham Forest, and Tower Hamlets, run similar schemes or are actively consulting on expansions.

If you operate across multiple boroughs, the fragmentation is a nightmare. Every borough has its own fee structure, its own application portal, its own set of additional conditions. Managing that compliance patchwork is practically a part-time job.

Fire Safety Upgrades

Post-Grenfell fire safety standards continue to tighten. For HMOs, that means interlinked fire alarm systems, fire doors to every habitable room and kitchen, emergency lighting in communal areas, and in many cases, professional fire risk assessments costing £300 to £500 each. Retrofitting a Victorian terrace conversion to meet current HMO fire safety standards can easily run £5,000 to £12,000 depending on the property.

The Renters' Rights Act and Periodic Tenancies

Here is the one that many HMO landlords are still underestimating. The Renters' Rights Act has abolished Section 21 and moved all tenancies onto periodic terms. For a standard AST, that is disruptive enough. For an HMO operating room-by-room lets, it is a structural problem.

Every tenant in your HMO can now give two months' notice and leave at any time. That means void risk is no longer something you can manage with fixed-term contracts. A well-run five-bed HMO might see two or three room turnovers per year. In the new periodic tenancy environment, you could see five or six, each one bringing void periods, re-advertising costs, referencing fees, and the inevitable redecoration between tenants.

The Reform UK HMO Manager Licensing Push

Although not yet law, Reform UK's proposal to require individual licensing for HMO managers (not just properties) is gaining political traction. If enacted, it would add another layer of cost, bureaucracy, and personal liability for anyone operating or managing an HMO. It is worth keeping on your radar as a risk factor when projecting returns over the next three to five years.

A Realistic London HMO P&L in May 2026

Let us put real numbers to a typical five-bedroom HMO in Zone 3, valued at £550,000.

| Line Item | Monthly | Annual | | - -| - -| - -| | Gross rent (5 rooms at £850) | £4,250 | £51,000 | | Mortgage (75% LTV at 4.89% after TMW cut) | £2,000 | £24,000 | | Mandatory HMO licence (amortised) | £25 | £300 | | Selective licence (amortised, if applicable) | £13 | £150 | | Insurance (HMO-specific) | £125 | £1,500 | | Fire safety compliance (amortised) | £67 | £800 | | Maintenance and repairs | £250 | £3,000 | | Void allowance (increased for periodic tenancies, 10%) | £425 | £5,100 | | Agent or self-management costs | £300 | £3,600 | | Council tax on void rooms | £50 | £600 | | Net profit | £995 | £11,950 |

That is a net yield of roughly 2.17% on the property value. The 0.20% mortgage rate cut from TMW saves you around £68 per month, or £816 per year. Meanwhile, increased void risk from periodic tenancies alone could cost you £1,500 to £2,500 more per year than the old fixed-term model.

The rate savings are real, but the compliance costs are growing faster.

Why London Landlords Are Looking at Short-Term Lets Instead

Here is where the conversation gets interesting. Many of the properties that work well as HMOs, think well-located three to five-bedroom homes in Zones 2 to 4, also work exceptionally well as short-term lets.

The key differences in your favour are significant.

Higher gross yields. A well-managed short-term let in London can generate 30% to 60% more gross revenue than the same property let as an HMO, particularly during peak tourist and business travel seasons.

No HMO licensing requirements. If you are operating within the 90-night limit for short-term lets in London (or have planning permission for more), you sidestep the entire mandatory and selective licensing regime.

No periodic tenancy exposure. Short-term lets operate on a booking-by-booking basis. There is no tenant notice period to worry about, no void risk from unexpected departures, and no referencing costs.

Simpler fire safety obligations. While you still need smoke alarms, CO detectors, and a gas safety certificate, the full HMO fire safety specification (interlinked alarms, fire doors to every room, emergency lighting) does not apply.

Borough-level fragmentation disappears. You deal with one set of rules for short-term lets rather than navigating the licensing conditions of every individual borough.

Of course, short-term lets come with their own operational demands. Guest communications, professional cleaning, dynamic pricing, listing optimisation, and check-in logistics all need to be handled well to maximise returns. That is exactly why landlords who make the switch tend to partner with a specialist management company like Airhosts.

The Airhosts Approach: Higher Yields, Lower Headaches

At Airhosts, we manage every aspect of short-term letting for London landlords. From professional photography and listing creation to guest vetting, 24/7 communication, cleaning coordination, and dynamic pricing that responds to real-time demand, we handle it all.

Our landlords do not chase licensing renewals across three boroughs. They do not budget for fire door installations. They do not lose sleep over a tenant giving notice in their best-performing room.

Instead, they receive consistent, transparent income reports and net yields that typically outperform HMO returns by a meaningful margin, all without lifting a finger.

The Bottom Line for London Landlords

Falling HMO mortgage rates are a welcome development, and we understand why they catch your eye. But in 2026, the true cost of running a compliant HMO in London, between licensing fragmentation, fire safety upgrades, and the structural void risk introduced by periodic tenancies, frequently wipes out those savings and then some.

If you own a property in London that could work as an HMO, chances are it could work even harder as a professionally managed short-term let.

Get in touch with Airhosts today for a free, no-obligation rental appraisal. We will show you exactly what your property could earn as a short-term let, and how we make the whole process effortless. Your property is already doing a lot. Let us help it do more.