While a lot less common than leasehold flats, freehold flats offer the unique advantage of owning both the property and the land it stands on outright.
This means no ground rent fees or lease expiration worries, giving you more control over your property. However, securing a mortgage for a freehold flat is more complex than for a leasehold flat.
This guide will walk you through the ins and outs of freehold flat mortgages, we’ll cover everything from understanding the key differences between freehold and leasehold flats to finding the right mortgage lender and explaining the application process.
What is a Freehold Flat?
In England most flats are leasehold, meaning you own the property for a fixed term but not the land it’s on.
This often comes with additional costs like ground rent and service charges, and the lease term will gradually reduce.
However, a true freehold flat is different.
When you buy a freehold flat, you own it outright, including the land beneath it. This means no ground rent, no lease expiry to worry about, and more control over your property.
This is different to a flat that has a share of the freehold.
Freehold vs. Leasehold: Key Differences
Freehold flats offer several advantages over leasehold flats:
- Ownership: You own the property and the land it stands on outright.
- No ground rent or service charges: You won’t have to pay ongoing fees to a landlord.
- More control: You have greater control over decisions regarding your property, such as renovations or alterations.
However, there are also some potential drawbacks to consider:
- Maintenance responsibilities: You’ll be solely responsible for the maintenance and repairs of your flat and the building’s exterior.
- Potential for disputes: In buildings with multiple freehold flats, disagreements can arise over shared responsibilities.
- Mortgage challenges: Securing a mortgage for a freehold flat is more difficult.
Why Lenders Hesitate with Freehold Flats
While the prospect of owning a freehold flat outright is enticing, it’s important to understand why most lenders approach these mortgages with caution.
The primary concern revolves around the shared responsibility for the building’s upkeep. Unlike leasehold flats, where a landlord or management company typically handles maintenance of the overall building, freehold flat owners are collectively responsible for the building’s structure, common areas, and exterior.
This shared responsibility can lead to potential complications.
For instance, if major repairs are needed, securing agreement and financial contributions from all owners can be challenging. Disputes may arise over who is responsible for what, and there’s no guarantee that future owners will uphold existing agreements.
This lack of clarity and potential for conflict makes freehold flats riskier to lenders.
Additionally, some lenders worry about the resale value of freehold flats. As they are less common and can be more complex to manage, they may not be as attractive to buyers as leasehold flats, or as easy to sell. This could make it harder for the lender to recoup their investment if the borrower defaults on the mortgage.
However, it’s important to note that these concerns are not universal. Some lenders specialise in freehold flat mortgages and understand the nuances involved.
What about a flat that has a share of the freehold?
While freehold flats offer complete ownership of the property and land, there’s another option that blends the benefits of freehold and leasehold ownership:
share of freehold flats.
This type of ownership can offer a balance between control and responsibility, making it an attractive option for many buyers.
Share of freehold flats are more common than freehold flats.
Lenders prefer them because the management company structure provides more clarity and security regarding the building’s maintenance and financial stability.
A flat with a share of the freehold is different from a freehold flat in a few key ways:
Ownership Structure
In a share of freehold, you own a share of the freehold of the entire building along with a lease for your individual flat. This means you and the other flat owners collectively own the building and the land it sits on. In a freehold flat, you own your individual flat and the land it sits on outright, with no lease involved.
Management
Share of freehold properties are typically managed by a company owned by the flat owners. This company is responsible for the building’s upkeep and maintenance. Freehold flats may or may not have a management company, and the responsibility for maintenance can be more complex.
Mortgages
Mortgages for share of freehold flats are more common and easier to obtain than those for freehold flats. Lenders often have stricter criteria for pure freehold flats due to the potential for disputes and uncertainty over maintenance responsibilities.
Value
Share of freehold flats can be more valuable than leasehold flats because you have a share in the ownership of the building and more control over its management. Freehold flats can also be valuable, but their unique ownership structure can sometimes make them less attractive to buyers and lenders.
Finding the Right Lender and Mortgage
While many lenders shy away from freehold flats, several are open to considering them.
These include mainstream lenders like HSBC, Nationwide, and NatWest, as well as specialist lenders who focus on niche property types.
When you apply for a freehold flat mortgage, lenders will carefully assess several key factors to determine your eligibility and the terms of your loan. Understanding these factors can help you prepare a strong application and increase your chances of approval.
Property Value and Condition
A professional valuation is a standard requirement for any mortgage application. For freehold flats, the valuation serves two main purposes:
- Determining Market Value: The valuer will assess the property’s current market value, which is crucial for the lender to determine the loan amount they’re willing to offer.
- Assessing Condition: The valuer will also inspect the property’s condition, looking for any obvious structural issues, defects, or potential problems that could affect its value or pose a risk to the lender.
Most lenders state that they will lend “subject to satisfactory comments from their valuer”.
Management Arrangements
Lenders will be interested in how the building is managed and maintained, especially if there’s no formal management company in place.
They want to ensure that the building is well-maintained and that there are clear procedures for handling repairs, maintenance, and financial contributions from all owners.
If there is a management company, lenders might want to review its financial records, insurance coverage, and maintenance plans. If there’s no formal management company, you’ll need to demonstrate how the building is managed, who is responsible for maintenance, and how decisions are made regarding repairs and shared expenses.
Your Financial Situation
Yes, your financial situation plays a pivotal role in the lender’s decision.
They will assess your:
- Income: Lenders need to verify your income to ensure you can afford the mortgage repayments. They will typically request your recent payslips, P60 (if employed), or tax returns (if self-employed).
- Credit History: Your credit report provides insights into your financial responsibility and how you’ve managed credit in the past. A good credit score can significantly improve your chances of approval and may lead to better interest rates.
- Deposit Size: The size of your deposit is a big factor. A larger deposit reduces the lender’s risk and can lead to more favourable terms. Lenders may have specific requirements for freehold flats, such as a minimum deposit percentage.
You will find more useful information in our article: How to get mortgage ready.
Using a mortgage specialist
Given the complexities of freehold flat mortgages, it’s highly recommended to work with a specialist mortgage broker.
An independent mortgage broker (like the ones we work with) have access to over 100 banks, building societies and specialist lenders.
They understand the intricacies of these properties, the concerns lenders may have, and the specific criteria they look for in applicants.
This expertise allows them to:
- Assess your situation: They’ll take the time to understand your financial circumstances, goals, and the specific property you’re interested in.
- Identify suitable lenders: They have access to a wide range of lenders, including those who specialise in freehold flats, and can match you with the right one for your needs.
- Explain complex terms: They’ll break down the jargon and legalese, ensuring you fully understand the terms and conditions of your mortgage.
- Advocate for you: They’ll negotiate with lenders on your behalf, striving to secure the best possible deal for you.
They can also help you:
- Prepare a strong application: They’ll guide you through the paperwork, ensuring your application is complete and compelling.
- Overcome obstacles: If any issues arise during the process, they’ll work with you and the lender to find solutions.
- Save time and stress: They’ll handle the time-consuming tasks, allowing you to focus on other aspects of your property purchase.
Given the complex legal structure of freehold flats, it’s highly recommended that buyers seek legal advice from a solicitor specialising in property law.
This ensures you fully understand the legal implications of freehold flat ownership, including the intricacies of shared ownership, management arrangements, and potential for disputes. A solicitor can also review all relevant legal documents, safeguarding your interests and ensuring a smooth purchase process.
Ready to explore your options?
If you’re just about to start your mortgage journey and could use the guiding hand of a professional, don’t hesitate to reach out to a reputable mortgage broker.
An independent mortgage broker can access over 100 lenders on your behalf. They will make the process smoother and more profitable than going it alone.
Keep reading, keep asking questions. The more you know, the better decisions you can make.
