Are you looking to buy a freehold flat but feeling overwhelmed with the complexities of the mortgage process? Are you worried about the risks associated with owning a freehold flat, such as disputes with leaseholders and the lack of maintenance obligations?
Do you feel discouraged by the fact that mainstream lenders are not willing to lend on freehold flats? If so, don’t worry! It is completely natural that after you find out that a property is a freehold you are interested in buying it and there are certainly ways in which you can.
In this article, we will discuss what a freehold flat is, the different types of freehold flats, and the complexities of getting a freehold mortgage and how to overcome them.
What even is a freehold flat?
A freehold flat is a property which gives you complete control over what is done because you own the land that the flat is built on. This means you may also have control of a block of flats that are all built on the land too and you lease these flats out as leasehold agreements.
Are there any other types of freehold flat?
If you have a freehold flat that is a true freehold which is the complete opposite of a share of a freehold flat, the freehold will likely be less valuable. This is because freehold flats that are shares of a freehold have the same owner for the leasehold and the freehold.
This means they have more control over the entire development so the development is more likely to go up in value and the owners will have greater control over what goes on.
As well as this, there are situations where there are a series of flats that have been converted from one single house by splitting up the rooms of the house for instance. Then, the owner of the house is able to lease the rooms of the house separately.
When referring to the room in the house that is owned by the owner of the house, this room is sometimes also called a freehold flat. Having said this, this type of flat is not able to be mortgaged, it is just that this is what could be being referred to.
Can you get a freehold flat mortgage?
You can get a freehold mortgage but the process is a bit more complex than if you were to take out a mortgage conventionally in a house for instance because lenders view a freehold fl[at mortgage as significantly more risky.
Why would they lend money to an asset that carries a significant amount of risk when they can hand out mortgage to a much safer asset like a house that is paid for by one owner without there being a leaseholder involved or the possibility that the freehold expires?
In addition, the owners of the flats (leaseholders) have no obligations to take care of the flat they are in because they are owning the leasehold for a set period of time before they move on.
Adding to this, there is the risk that the neighbours of the property do not pay for any remediation work as they aren’t necessarily obliged to do so.
They may choose to protest the cost because they are already paying a significant amount of ground rent for example or it could be the case that they simply can’t afford it.
Furthermore, if this wasn’t enough, there is the possibility of there being disputes between the individual leaseholders of the building in terms of who is responsible for repairs and this may even happen between freeholders which is a big problem if you have a flying freehold.
Who will lend on freehold flats?
It’s difficult to find a mainstream lender who will lend on freehold flats. Even if you do, there are usually stringent requirements to meet.
Some lenders, for example, may only consider this type of mortgage if the entire building is included in the deal and they get ownership of both the leasehold and the freehold. This would give the mortgage lender more control which is what they would want.
If the lender has more control there is less that can go wrong and as if the freeholder is also the owner of the leasehold then they can always step in to conduct repairs if necessary as you won’t have to consider the option of any leaseholders.
Furthermore, loan-to-value ratios are typically lower and this is even more of the case for new construction projects with some lenders offering a maximum of 75% or 85% for projects that have been newly constructed.
As of 2023, there are only three mainstream lenders willing to lend on true freehold flats and they are the lenders HSBC, Nationwide, and NatWest. However, the list of lenders on the market is endless and there is a good chance you may still be able to find one.
To begin a search for a mortgage, you can start by going online. But to truly, find the more niche and specific lenders on the market, read on in this article where we discuss how to take advantage of brokers to find the deal you want.
How much will it cost to buy a freehold flat using a mortgage?
The cost of getting a freehold mortgage will likely be the same if not more than the usual conveyancing fees associated with buying any type of property. Whenever a mortgage is processed, they will charge a processing fee.
This is separate to any other fee that may be charged by an estate agent, financial advisor or solicitor who you are also working with to buy the freehold.
However, if you want to get away from these fees adding up and you have to pay a fee even if the freehold purchase doesn’t complete, then you should take out homebuyer insurance for freehold property.
Finally, you may also want to avoid freeholds that are shared freeholds as these may be hard to negotiate on due there being multiple owners of the freehold who all may have different interests.
How long will it take to buy a freehold flat using a mortgage?
If you try to buy a freehold flat, you may wonder how long it takes to complete the purchase and whether it will take longer than buying a normal house or perhaps the conveyancing process is even shorter.
To answer this question, there are a few factors that come into the picture but in general, you can expect a freehold mortgage to be completed within a couple of weeks if no issues arise.
How long will it take to get a mortgage offer for a freehold?
If you have all the information at hand and you’re able to find a freehold mortgage lender that is able to lend money for your flat straight away, you may be able to get an offer in a matter of hours.
This can be done through the website of the freehold flat mortgage lender or by calling on the phone. Alternatively, you can check out a comparison website by going to a comparison website here where you will be given a series of options to choose from generated through the website’s software.
What will be checked by freehold flat mortgage lenders?
What is checked by a lender who is lending money for a freehold rather than a house is not that different but there are still some things that are individual to freehold properties that a lender will look out for.
While it is the case that banks and lenders will in fact view a freehold property as more risky, there are not many additional checks that they can do to reduce this risk.
Hence some lenders avoid lending on freehold flats altogether. However, if they do end up lending, they will generally look at the following factors.
The affordability of the freehold flat
Most of the time, a homeowner will be able to take out a mortgage for a property if they have a salary that is two to two and half times smaller than the amount of mortgage that they are attempting to take on.
For example, how this would work in real life, if there is a house that is worth £200,000, then the person would likely need a £50,000 deposit as this is a typical 25% of the value of the house.
This means the remaining amount of money that will be used to buy the house must be taken out in the form of a mortgage which will be £150,000 and therefore the salary that would be needed to qualify for this type of mortgage would be two to two and a half times less.
So, the salary that would qualify would be around £70,000. However, as this is far above the national salary, lenders are also able to take into consideration the combined salary of two people in order to meet the right requirements.
So, two people who are both on a salary of £35,000 would therefore be able to meet the criteria for the mortgage on the freehold flat.
Having said this, some lenders may require there to be more of a stringent test by making the salary even higher. For instance, some lenders may have a requirement of a salary that is one and a half to two times the value of the mortgage.
Using the same example of a house that has a £150,000 mortgage, there would therefore need to be a salary that is between £75,000 and £100,000 to meet the requirements of this property.
The eligibility of the freehold
There are a multitude of reasons for a mortgage lender or bank to not want to lend money to buy a freehold because of its eligibility. First of all, they would want to be looking for a clear title where the lender will want to ensure that the freehold title to the flat is clear.
This means there are no legal disputes or ownership issues that could affect the property’s value or the lender’s ability to foreclose on the property if the borrower defaults on the loan.
Another thing that goes into consideration regarding the eligibility of the freehold is if there has been an independent valuation of the flat to determine its current market value. This helps the lender ensure that the amount being loaned is not more than the property is worth.
Such checks can be carried out by a surveyor who is accredited such as from the RICS seen here or they could be done by someone that is only trusted by the lending company and is sent out on behalf of the lender with the lender’s best interest in mind.
A further factor that is looked into is the minimum credit score of the buyer as this is something that has a large weighting and prediction on whether the mortgage is able to be paid off. A good credit score shows that you’re able to handle money well and is a good sign for lenders.
The lender may have a minimum credit score requirement for borrowers seeking a mortgage on a freehold flat as a result.
The type of property you are looking to buy
Just like lenders will be able to specialise in certain types of buyers and categories of property such as leasehold or freehold, they are also able to select their requirements based on the type of freehold it is.
They may therefore not lend money if there is a flying freehold as these can come with additional risk. Also, if it is a reversion freehold, this could also be seen as risky by banks and lenders.
Will a flat freehold mortgage broker help you?
You may be able to find a freehold flat mortgage by yourself but you can cut down the time you spend searching and the time you spend organising things by using a broker. They will be able to advise you on the best type of freehold flat mortgage for you.
On top of this, they will have access to all of the lenders in an area and therefore be able to know which ones accept the type of deal you have and save you the time of calling them all up individually or visiting their website.
However, it is also important to approach dealing with brokers with a bit of caution as they may be incentivised to recommend certain types of lenders or receive commissions for recommending one over the other.
Therefore, to get around this, as a freehold flat buyer, you should look to take the opinion of multiple brokers to get the best options for you and reduce the risk of being set up with a deal that isn’t ideal.
In order to find the right type of broker, you will also need to find out all of the right types of information to tell the broker like if the property is a flying freehold or another type of freehold such as a reversion freehold.
So, ensure you have all the information gathered before you buy and be as honest as you can with your broker because this will aid them in helping you being rejected from a lender and make the process that much easier.
How to find a specialist flat freehold mortgage broker
In order to find a specialist, you may have to search around a lot online as they all may not have the best website or be the most advertised. However, you should be able to find the right specialist broker by looking in the following places:
- Search online for mortgage brokers who specialise in freehold flats
- Ask for recommendations from friends or family members who have purchased freehold flats
- Contact a mortgage broker association, such as the National Association of Commercial Finance Brokers (NACFB) here, who can provide you with a list of accredited mortgage brokers
In general, it is a good idea to research the background, experience, and customer reviews of brokers too to ensure you choose the right one for your needs.
To finalise
To summarise, there are clearly very different types of freehold flats which each have their own complexities and impact how easy it is to get a freehold mortgage.
It is also worth noting that there are other disadvantages of buying a freehold so read our article on if it is worth it to buy a freehold to gain even more of an understanding on the topic
However, overall, there are things you can do to overcome this such as taking out homebuyer insurance to help cover the fees associated with buying a freehold and with the right knowledge, the process of purchasing a freehold flat may not necessarily be longer than buying a house.
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