One building; three flats

THE QUESTION

I am aiming to buy a freehold BTL property that has three separate flats.   I am unable to find a mortgage provider who will give a mortgage on this type of property.  I was advised that I must have three separate leases in order to get a mortgage.

How can I get a mortgage on this property?

THE ANSWER

It’s no surprise that you are having trouble finding a lender for this; BTL lenders have a very 'vanilla' approach to what they want to lend on.  This is based on their view of the worst case scenario i.e. how easily could they dispose of it if they had to repossess it?  They look for properties with broad market appeal.  Mostly, if it is not a regular freehold house let on a single AST, they start to put up the barriers.

These ‘unmarketable’ properties include:

• Non-standard construction
• Flats above commercial units
• Flats in high rise blocks
• Properties let by the room and many other quirky features
• Houses divided into flats

If you’re requesting a mortgage for any of these they prefer to play safe and decline to lend.

You have two solutions to this if you want to purchase this property, but you also have one basic pre-requisite to allow you to move forward at all

Is the property a legal or illegal conversion? In other words, does planning permission exist with the local council for it to be three flats rather than one house?

Don’t assume this is case as numerous property owners have decided that their property could achieve a higher rental income as multiple flats rather than a single house so, without seeking permission, they just convert it – making it unmortgageable as an illegal conversion.

No mortgage lender will touch an illegal conversion with a bargepole.  You may think that is rare but it certainly is not, I frequently get investors trying to buy illegally converted houses.

Don't be fooled by thinking if each flat pays separate council tax it must be a legal conversion. Council tax and planning department don’t cross reference each other

Your solutions

1. Split the titles to create three separate flats on long 100 year plus leases.
2. Let it remain on its single title and use the type of lender who will lend on it

1: Split the titles

You will face a number of barriers in both trying to do this and to get BTL lenders to lend on it.

You may decide that the result outweighs the cost of the legal fees involved, but you need clarity that it will before proceeding.

When creating the leases, the same entity cannot be both freeholder and leaseholder. Typically a Ltd Company is used to own the freehold, with the ability to charge both ground rent and a service charge

BTL lenders work on an over-exposure rule.  This means they will not lend on typically more than 25% to 35% of flats in a single block.  In your case that means that you will need a different lender for each of the three flats

At least one of those three lenders will decline to lend when they discover that the leaseholder of all three flats is the same person.  So the leases must be held in different people’s names

At the point the new leases are created, that is deemed to be the start of that period of ownership.  The implication of this is that the majority of BTL lender will not accept an application for a remortgage until the property has been owned for six months.  That will mean six months from the day the new lease started, so you will have difficulty refinancing until six months have elapsed from creating the leases.

2: Remain on a single title

Commercial or specialist lenders will lend on a property split into separate flats, but still on one title.

You will have saved the cost of the legal work to create leases and split the title. These lenders do not have a six month ownership restriction, but there rates and set-up fees are generally higher than BTL lenders.  They are also much more geared to only lending to landlords with at least 12 months experience.

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