A quick guide to getting a mortgage on a flat
Property market trends change with the seasons. We regularly see house prices rise quicker than those of flats and apartments, and as recently as in the lockdowns of the Covid pandemic. House prices rose as they became the in-demand property of the moment. Why? Well, with businesses switching to remote working and without the restrictions of their daily commute, buyers raced for out-of-town properties with gardens to spread out in and nearer to those wide-open green spaces.
Flats are in demand – for the time being
Recently, however, we’ve seen a switch in pace. With property prices higher than ever and larger deposits and LTV requirements making it harder for buyers to get on the property ladder, smaller homes at more affordable prices are creating demand in flats and apartments, bumping up prices as they go.
However, when it comes to landing a mortgage to buy a flat or an apartment, things aren’t always so straightforward. First, there’s the freehold/leasehold issue; then, there are all kinds of reasons lenders consider them high enough risk to reject them outright.
Today, we’ll look at some of the issues flat buyers face and why some lenders reject particular properties.
The freehold vs leasehold conundrum
Freehold or leasehold—what’s the difference? All property is built on land. With a house, that isn’t a problem, as it’s likely that its buildings and gardens sit neatly within that space. That’s known as freehold and leaves owners entirely responsible for everything within its grounds.
With a flat, it’s a bit more complicated. As multiple owners share the land space, deciding who’s responsible for the upkeep of the building, communal areas, gardens, access paths, and more is a little more challenging.
Leasehold flats: With leasehold flats, a separate agent owns the land and sub-leases a share of the expense to each flat owner. With each owner paying an annual charge, the leaseholder is responsible for the communal areas and the upkeep of the building.
Freehold flats: In freehold properties, each apartment is responsible for its area, property, and spaces. That means organising arrangements to cater for communal areas and areas that affect everybody despite being connected to one specific property. Without a designated body making decisions and managing the upkeep of the building, things can get messy between owners, and with that lenders consider it quite a risk.
The main issues with leasehold and freehold flat mortgages:
Many lenders will reject freehold flat mortgage applications straight away. However, plenty are still happy to engage with freehold properties if buyers meet their specific criteria.
It’s not all plain sailing for leasehold flat-buyers, though, as they come with a few pitfalls of their own.
Lease length: Despite leasehold durations lasting between 99 and 999 years, lenders like to see as long a term as possible. Many will expect at least 70 or 80 years left to run to cater to the duration of the loan. So, what’s the big issue? Extending the leasehold term can be a costly process—costly enough to put off lenders.
Ground rents and services charges: Building ground rents and service charges into each buyer’s affordability assessment alters the amount lenders are happy to allocate. It can often be enough to make a loan too high risk.
Additional expenses for freehold flat-owners: In the same way that ground rents affect leasehold flat buyers’ affordability, maintenance and upkeep costs apply to freehold owners. It can help to sway some lenders if a property or maintenance management company is employed to handle its welfare, charging a fixed fee each year to cover insurance, building work, gardens and grounds, etc.
Deposits and LTV ratios
Saving money for a deposit, especially for younger first-time buyers, is challenging for many in the current high-cost market. Fortunately, many lenders offer 95% LTV rates requiring smaller deposits and fewer savings. However, lenders often expect a minimum of 10% or 15% when buying a flat.
Why? If a buyer defaults and their flat is repossessed, lenders believe it’s harder to sell it to recoup their losses, so expect a more substantial investment from buyers to lower that risk.
Buy-to-let mortgages on flats
BTL and commercial mortgages are subject to all the issues of residential mortgages and a few additional requests. Finding a lender for a BTL mortgage on a flat shouldn’t be too challenging, but buyers need to meet further legal conditions on the property, such as ensuring EPC ratings and other rental property rules.
Commercial mortgages include the loans required to buy an entire block of rental flats. Known as multi-unit mortgages and generally aimed at commercial developers, you’ll need a strong business plan and a specialist broker to track down lenders willing to put up such a loan.
Red flags for flat mortgages
Too new – New build properties lose value the moment they’re sold
You’d think there’d be less risk with a brand-new property than with an old one. But, sadly, for new flat buyers (a bit like buying a new car), they lose value the minute someone moves in (or drives them off the forecourt).
Why? Well, they’re not brand new anymore and potentially less attractive when reselling.
Because of that, lenders counter this drop in value by requiring higher deposits, ranging anywhere between 10 and 25%. A new build is considered new for at least 24 months after completion or conversion.
Not new enough – Ex-authority flats come with their own problems
If new flats are a risk, then old flats shouldn’t be a problem, right? Wrong. There are plenty of cases with old buildings for lenders to consider, including ex-authority apartment buildings. Every mortgage requires a survey highlighting practical points that flag up additional expenses or issues, many of which are found in older properties than in relatively recent builds in better condition.
Too small – Studio apartments don’t meet minimum floor space
There is a minimum acceptable space for most homes in the UK—around 37 square metres. A flat or apartment with a small floor space will have a far smaller market and be harder to sell if a lender needs to recoup losses on repossessions. With that in mind, many lenders have a minimum floor area even to consider them for a mortgage.
Too high – The issues with hi-rise block apartments
Hi-rise-block apartments come with a few issues, and one of the standard ones is that lenders see flats above the seventh floor as problematic. But, again, it all boils down to re-saleability. If owning a flat above the 7th floor may put a lot of buyers off, it will put lenders off too. If there’s a lift, that can help, but not always. And if apartments are reached by outside deck access? That flags up issues with lenders too.
Too low – The problems with basement flats
Again, basement flats are subject to issues in property surveys and reselling, as they’re notorious for damp problems and, in some areas, regular break-ins.
Too popular – Too many flats in one building
If a property in a block of flats were in high demand, you’d have thought that would translate into a safe bet for lenders. Well, that’s not always the case.
If a lender holds mortgages on too many properties in a single block, it's quite a risk if anything happens to the building. A flood, fire, or other communal problem exposes them to higher losses in a single hit, so they limit the number of mortgages per block accordingly.
Too much activity – Flats above shops, restaurants, or attached to commercial properties
Flats above shops, restaurants or commercial outlets are notoriously tricky to get a mortgage for in some areas. With so much activity around a property, it flags issues for reselling repossessed homes.
The latest trend to affect this is blocks where multiple units are used as Airbnb rentals. With increased footfall from short-stay visitors, they’re less likely to respect the area and other tenants.
Too quirky – Custom properties and conversions
Lenders love a safe bet, so anything non-standard in construction will raise a red flag with them. Quirky conversions, non-standard buildings, and anything that isn’t a traditional brick-and-mortar build create potential issues with lenders.
Too many building risks – The cladding issue
The Grenfell Tower tragedy in 2017 drew the issue of dangerous cladding to the nation's attention. It’s now high on the list of red flags for mortgage lenders dealing with flats and hi-rise block apartments, yet it’s not the only thing. Lenders are consistently on the lookout for issues, including various areas based on building regulations.
Don’t despair – there’s always hope
As a leading mortgage broker, we can assure you that mortgages are available for almost every home. Mainstream lenders might be a little choosier about who they lend to and the properties they invest in, but with specialist lenders that deal with flat buyers every day, amidst all the quirks smaller properties bring, there’s a mortgage for every buyer.
