I had a question concerning this from our reader Dan today, but many Buy to Let investors I talk to are unprepared when looking to purchase a flat about considering what lenders will take as suitable security. Banks often have a surprisingly vast array of criteria that needs to be considered when lending.
I have compiled a list of questions a lender will ask and factors to consider when purchasing a flat. Although fairly in depth, I would not consider this exhaustive as after 15 years I know it is still possible to run across circumstances not seen before.
Detailed description required of the Block
How many stories is the block? Over 4 can be considered as high rise by some lenders and affect criteria.
If over 4 stories does it have a lift?
Is it inside or outside the M25? Lenders can have different property criteria depending on this.
Does the property have deck access? This is often perceived as lower quality by lenders.
Exposure in a single block of flats
If you are looking to purchase or finance more than one flat in a block you need to consider the maximum level of exposure a lender will consider. Normally a lender will express the maximum number of flats it will finance in a block as a percentage e.g. if there are 8 flats and the lenders exposure limit is 25% they may consider a maximum of 2 properties, but be careful that they have not already financed a flat for another client in the same block.
Ex-Local Authority flats
How long ago was the property purchased under a council right to buy and is it outside the 3 year pre-emption period where the council still has a legal charge?
What percentage of flats in the block are private compared to council owned? Lenders will have individual criteria usually requiring over 50% private.
Above or adjacent to commercial premises
Flats, especially inside the M25, are often built above commercial premises.
Some lenders will accept properties above a business, but it always depends upon the type. Often outside criteria is what they term as “smelly or noisy” such as take-away restaurants, bars, pubs etc. where there is likely to be the smell of food or noisy footfall outside normal working hours. Businesses such as a bakery present a particularly high fire risk and I have spoken to a lender in the past that would not consider a hairdressers because of the chemicals involved. Preferred business types are usually offices that work normal hours such as a travel or estate agents.
Commercial premises near or adjacent to the block can also affect the valuation and lenders security such as a petrol station. I once tried to assist a client that had already placed a large deposit on an off plan flat. When it was time to secure a mortgage offer no lender would help because the building next door to a multi-story car park had its development put on hold and became disused. No surveyor would then recommend the property in their report as suitable security.
Leasehold is the most commonly accepted tenure (outside Scotland) on flats for a buy to let lender. However, you do need to consider the length of the outstanding term left on a lease. If it has less than 50 years left after the end of the term of the mortgage you will need to check the individual lender’s criteria, and the lowest acceptable remaining term I have seen is 35 years. The length of term left will also be considered by a surveyor when assessing the value of a property for mortgage purposes.
Most lenders will not consider a single freehold flat but some do accept a freehold house split into individual self contained flats, usually up to a maximum of 4 based on one loan covering the whole building. If you own the freehold of a building where you are looking to finance an individual leasehold flat, buy to let lenders will usually insist that you have a separate management company set up to look after the building before they will release funds.
Flats are very popular with buy to let investors with potentially good returns on capital employed and high rental demand. While most properties clients look to finance do fall within lenders criteria it is always best to be aware of what to look out for when completing your due diligence.
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About Neil Patterson
Neil's career began in banking in 1990. He has also managed a building society branch and worked in business development. He became an Associate Partner of The Money Centre in 2003 and subsequently took on the role of Head of Operations which included training, quality control, project management and compliance. Neil has been a Partner of Property118.com since day one, responsible for operational management which includes, amongst many other things, updating the buy to let mortgage sourcing calculator and quote engine.