In our Q&A, we answer some of the questions mortgage advisors answer regularly.
Question; I hear it is difficult to arrange a mortgage on a freehold flat; why is this, and is it possible to mortgage one?
In a freehold property, you are responsible for the maintenance and insurance of the building and own the land attached.
In the case of a typical house, this is a good thing. However, in the case of a flat, there may be no clear definition of who is responsible for various parts of the building.
Your ceiling may also be a neighbour’s floor, and your floor, another neighbour’s ceiling.
Imagine that your upstairs neighbour leaves his bath running and your roof collapses; whose responsibility is this now?
If your neighbour has no insurance, it could get pretty messy, and that is why it can be a no-go area for many mortgage lenders.
But, the question of mortgaging freehold flats can also turn into something reminiscent of a Monty Python sketch.
Where the plot thickens; is in what context may the property be considered a freehold flat?
Freehold flats in Scotland
If you are buying in Scotland, especially if you live in the rest of the UK, you may be unaware that there has never really been an equivalent to leasehold property in Scotland.
So a property listed as a freehold flat is not a big issue over the border.
Properties that own a share of the freehold
Properties that own a share of the underlying freehold are not themselves freehold.
The property will have a lease and may need to pay service charges and ground rent, just like any other leasehold property, although some have no regular charges payable.
When a lease requires an extension, it is still a costly process.
Their main advantage over a leasehold flat is that you have some say in managing the freehold with the other owners; you would hope this means that charges should be more fairly administered.
These properties are often sold and listed as freehold, with the blissful ignorance of the vendor, estate agent and even the lenders’ surveyors.
Who, for reasons unknown to science, are usually considered bastions of fact in complex legal matters; despite having no relevant qualifications in the field; instead of the lender checking the land registry.
What ensues is mortgage applications being rejected based on properties being freehold on the hearsay evidence of an estate agent.
If you have found yourself in this situation, we should be able to help. These properties are normally acceptable to many mainstream lenders.
Many still have complex rules about the share of the freehold and how it is owned and managed, so it is vital to select the right lender. But if you have found this problem, we should be able to help.
Properties with a long lease or lifetime lease
On occasion, a property with a long lease of 999 years, or thereabouts, will be described by a vendor as freehold, under the impression that it is ‘as good as freehold’.
Often, when there is no service charge, ground rent, or a ‘peppercorn ground rent’ of £1 per annum, sometimes a service charge or ground rent is payable, but the freeholder is absent.
If the freeholder is known and the vendor is just misrepresenting the property as freehold then the situation is readily fixed by asking the vendor and agent to tell it like it is.
An AWOL freeholder can present different problems beyond the scope of this post and is something to discuss with your conveyancer or solicitor, but aren’t the boon they may appear to be.
In most cases, we can help you arrange a loan on these properties; if the freeholder is absent, consider this problem before getting seriously involved in the purchase.
A freehold flat or maisonette where the remainder of the properties in the block are leasehold
A common area of confusion is a property that owns the freehold of a block, and the remaining properties within it are leaseholds.
These are not uncommon; often they are created when someone converts a house into flats and retains ownership of one of those properties. It is not possible to own a lease to a property when you also own the underlying freehold.
Legally speaking, we are repeatedly advised by conveyancers that such properties should be as good as any other leasehold flat from a mortgage perspective, but you will not find this in practice.
The vendor of such a property will usually make it very clear that it is freehold, as there is a public perception of this being preferable due to the often unfavourable costs of service charges, ground rent and for occasional lease extensions imposed by many freeholders.
Mortgage lenders usually make their staff very aware though, that they do not lend on what we might consider a truly freehold flat, where all the properties in the block have a freehold title.
That creates a situation where the lender immediately rejects any application and refuses to value the property, under the misapprehension that it is the more ominous type of freehold flat.
For this reason, you will find it very difficult to arrange a mortgage on such a property without a competent advisor.
Generally, a mortgage on these properties should be possible with mainstream high-street lenders, although many may still be unsuitable. Get in touch with us for help on these.
A freehold flat or maisonette where the remainder of the properties in the block are freehold
This is where things get more complex.
For these properties, complex rules are set out by lenders within their guidance notes to conveyancers on acceptable tenure in the Council of Mortgage Lenders Handbook.
Whilst enquiring directly to a lender will usually result in an endless slew of responses refusing to consider freehold flats, speak to any conveyancer, and you find that there are often acceptable legal instruments other than an actual lease over the property.
You should be led by your conveyancer on the properties suitability for a mortgage from the legal perspective; the property may still be unsound structurally or have other issues that make it complex to mortgage.
Such properties may often be marketed as cash purchase only or even sold at auction. In the case of a cash purchase, the agents may have agreed to sell the property this way based on other factors, such as property condition. Again, this may have caused a decision to sell at auction.
So do not treat an indication from a conveyancer that a property can be mortgaged as final, and you should be prepared to risk losing your deposit if you intend to purchase such a property at auction and require a mortgage.
If you are intrepid enough to try and mortgage such a property we can help, once a conveyancer has been through the legal side and confirmed that it is suitable.
But expect that such a purchase could take some time as it might have to be sanctioned by the lender’s internal legal team, which is a notoriously slow process that often takes several weeks.
I’ve decided to write about the real costs of advice to consumers, to dispel some of the myths and preconceptions.
As a forward, I thought I’d explain my misconceptions prior to getting involved in financial services sometime back in 2005.
A few years earlier price comparison websites had appeared in the market launching with the message that they “cut out the middleman” and offered better value to the customer by removing their “margin” on the deal.
So before I started working in mortgages I believed that a broker was someone who took a product, added their percentage on top and sold it on.
Since working in the industry though, I have realised there is a myriad of similar misconceptions floating around.
Some people think the arrangement fees on a mortgage deal are to pay the broker.
Some are convinced the lender will offer a better rate direct.
But are any of those assumptions even remotely based on reality?
Let’s start with the idea that middlemen just add margin onto a products price.
I’m a keen photographer and if you share my interest you might well be familiar with the absolutely awesome Sony a7 range.
I won’t waste your time taking you on a photography lesson. But I will show you what you already know.
This picture above is from the Sony UK website for an A7 with kit lens showing a retail price of £1509.00 today on 08-06-2018.
Now we have the same camera and lens on sale with a “middleman” called Jessops and it is, after cashback 50% of the list price on the same day.
Sony’s own retail shops are selling the body only for the same price Jessops offer with the kit lens and the lens is upwards of £400 on its own.
In short buying direct from the manufacturer could cost you twice as much.
But you already know this. You already know that the idea of middlemen adding cost to everything is a fallacy.
Distributors in every industry will often have superior deals. We all see this every day.
Most of us have seen Trivago girl a million times telling us how they compare all the different prices for thousands of hotels daily, but does anyone really think you would get the best deal by phoning the hotel?
So how does pricing in the mortgage industry really work? And how much does our advice cost you?
Lenders whose products are the same through every channel.
Some lenders offer the same range of deals through every channel and have made promises to the market to never do what we call dual pricing.
This means whoever you go to be it direct to the lender, or any broker the deals available will always be the same.
Examples of this are Barclays and Coventry Building Society but there are many others.
For these lenders, if the broker offers you a fee-free service the lender is paying the cost of our commission.
You need to be aware though, that we might recommend a product based on best value for money, and another adviser might just recommend the lowest rate.
You need to discuss with both parties to work out why two different deals might have been recommended.
But if you have access to all the same deals through both, then you cannot be paying the cost of advice unless the advisor is charging an additional fee.
And this should not be confused with a product booking or arrangement fee.
Lenders will usually release multiple rates at the same loan to value.
Some with a lower rate, and an arrangement fee (often around £999) and other deals with no arrangement fees and slightly higher rates.
This is just offering deals to appeal to different customers with different sized loans and has nothing to do with the broker.
You can see in the example below Natwest offering various two-year fixes with different fees and cash backs.
And the best value product for each customer would depend on their loan amount, term, whether it was a repayment mortgage, and whether they would have to add the fee to the loan.
Lenders who do offer different prices and product ranges.
Other lenders like Natwest, for example, do offer different ranges direct at times to those they offer through brokers.
So, the assumption is that using us is going to be more expensive, right?
Think again.
For various reasons lenders might offer much cheaper products via a broker than they do direct. As counter-intuitive as this may seem.
Below are two more screenshots from February this year.
Disclaimer – These rates and products were available in Feb 2018 but are used for example purposes only and are no longer available.
The first is from our sourcing system showing deals available with NatWest at 90% loan to value.
The product highlighted in black with yellow text and the product in blue text are both exclusive rates offered through various mortgage clubs for brokers at the time.
And then below are all the deals NatWest were offering to customers via their website at the same time.
Notice that our exclusive 2-year fixed was 0.5% cheaper than their direct deal, despite the lender paying us a commission of around 0.32% (the total is actually more as some will go to the mortgage club too).
So why on earth would the lender offer deals through brokers that in total cost them more than 0.82% in profits against their direct business?
You have to think about what we actually do because the lender would have to do all the same work.
That’s a professional adviser spending several hours on the phone to each customer. Hours spent processing documents, completing application forms, preparing compliance files and suitability reports.
They need the staff to cover this in a seasonal industry, so they would then have little to do half of the year. Those staff members go onto their pension scheme and pay national insurance and tax on their incomes.
They need to cover professional indemnity risks, telecoms cost, office space, computers, training, and development, staff turnover, and recruitment.
And then there is the fact that the broker market is also an advertising channel and comparative to paid advertising.
Now, this doesn’t mean that we will always have better deals with every lender. Often there will be little or no difference at all.
On occasion, their direct deals might be better.
Sometimes we will offer something a lot cheaper with the same lender. Other times our deals might not be as good.
Basically, there is no way to guarantee you get the best deal.
So the question really becomes one of time, stress, convenience and quality of service.
Do we end up pursuing the “best deal” when the cost of doing so outweighs the benefits?
I think the answer here comes down to the differences between using a broker and going direct.
In my view, with a good broker, you are going to be every bit as likely to get the best possible deal as you would be searching the market yourself with the difference being you don’t have to go through the hassle of doing that.
You’re also more likely to be protected from significant pitfalls.
I am going to follow this article with some others, one which highlights a life insurance provider whose contractual terms are so poor in comparison to their rivals I cannot justify recommending them and another one about the possible pitfalls of not taking advice.
Each article highlights how self-advising without a professional level of knowledge about implications like taxation, and different contractual terms could see you buy a cheap deal that incurs huge additional costs amounting to tens or hundreds of thousands of pounds over a lifetime.
Now we don’t want to scaremonger or imply that these risks apply to every transaction, but the point is to highlight the real benefits of advice that extend far beyond simply getting a good deal or better service and that even if that occasionally costs you more, it’s probably a cost worth paying for.
So make sure to come back and check out those articles over the next few weeks.
Whilst it remains unclear how close we are to a collapse of the Euro, one thing is clear; predicting how the fallout would affect financial markets is no easy task, even for seasoned financial experts.
In pure mortgage terms, one set of products appears to be particularly risky in the current market; is any which tracks a variable rate as opposed to the Bank of England base rate. These include discounted rates, variable rates and Libor-linked or Libor-rate deals.
All of these products could be subject to increases if the Euro collapsed, even if the monetary policy committee of the Bank of England decides to keep interest rates low.
When the BOE base rate was reduced heavily in 2008, many lenders did not pass these cuts into their variable rates for some time; as doing so would have seriously jeopardised their ability to remain afloat.
Similarly, in the scenario of the collapse of the Euro and or the default of a nation such as Greece, Spain or Italy, this would undoubtedly cause a similar crisis in the banks leading to a drying up of money markets and upward pressure on banks’ variable rates.
Most discount-rate mortgages are offered by smaller building societies, which typically have a much lower risk exposure and would be better insulated against having to raise their variable rates significantly in a similar scenario. However, they are not immune to this risk.
More concerning, though, are Libor-linked deals; these are linked to the going rate of lending between UK banks and could rise a lot if we saw more market turmoil.
Even so, tracker deals could still be a risk; who knows how the different repercussions of this kind of event could ultimately play out?
So when looking at current products, comparing the difference between fixed and variable rates, in general, is well worth doing. I would take a pragmatic approach where the difference is minimal, as it seems likely that the last string of bailouts may yet prove to be the tip of the iceberg.
There is a big difference between mortgage lenders assessment of income for self-employed applicants and those who are employed and paid on a PAYE basis.
This short guide explains how lenders typically calculate income and some of the pitfalls to be aware of when becoming self-employed.
Lenders usually class you as self-employed if you are a sole trader, in a partnership, or when you own more than a set percentage of a limited company (typically 25%).
Employees paid a PAYE salary who own a significant share of another company would have two incomes, one from employment and one from self-employment.
If classified as self-employed, most lenders require a minimum of two years of full accounts before lending; only a limited number may lend based on a single year.
There are certain exceptions, for example, where an applicant buys a share of a limited company that is a ‘going concern’.
If you are considering starting these types of employment, securing a new mortgage deal before switching to self-employment could be a good idea.
When classed as self-employed, the lender will base their affordability assessment on your pre-tax net profit, not your turnover.
That is essentially your money received minus all allowable deductions, typically the profits stated in your tax returns.
If you own or are a major shareholder of a limited company, you typically pay yourself a minimum PAYE income and dividends; the two added together would be considered your profit.
It is important to remember that leaving profit within the business as capital rather than drawing these funds as dividend income will limit the maximum borrowing potential available to you with most lenders. But we can help you arrange loans with lenders that consider this additional profit.
It may be worth taking a ‘tax hit’ in the accounting year before arranging a mortgage if the previous year’s drawings were low, as many lenders will refuse to look deeper into your accounts, basing their assessment on just your PAYE and dividend and ignoring excess profits.
If your profits or drawings have decreased, most lenders will work on the most recent year’s accounts; if increasing an average of two or three years is typical.
Proof of income for the self-employed usually comprises either your SA302 or self-assessment tax computations, or a copy of your company accounts for the last two to three years. Some lenders will request accountants’ certificates if these are not available.
For the sole traders or those submitting their tax returns it usually pays to keep your SA302s handy for coming mortgage applications, although you can request reprints from HMRC, or easily download these from HMRC online if you have access.
For help with your self-employed mortgage, get in touch on 0345 4594490.
Q&A; Mortgages for flats above shops and commercial property
Question; I am buying a flat above a shop or other commercial premises; I understand this can be difficult; what do I need to be aware of?
Lenders always have to be aware of risks that may affect the value of a property and its saleability should the loan go into default.
A flat above a shop or commercial premises has several risks that a lender will consider in making a loan.
These include the nature of the business the flat is above; if it would cause little disturbance to the owners (think florist or estate agent), it is less of a risk.
However, a flat over a fish and chip shop, where late opening hours and food smells may affect the ability of the lender to re-sell, would be challenging to mortgage.
The usual suspects are all varieties of hot food outlets, any kind of bar or off-license, shops with late opening hours or antisocial attributes, and more bizarrely; beauty salons and hairdressers.
Lenders will consider the location of the flat. A flat over commercial premises in an area like Chelsea or Knightsbridge would still command a significant value and appetite for lending.
But the same property in an unfashionable part of a city like Manchester or Liverpool would be far harder to mortgage.
Another issue is access; a mortgaged property must have independent access; if this is too close to the working areas of a kitchen or similar commercial activity, it is unlikely to be a compelling security for lending.
And it isn’t just flats that suffer this issue or properties with commercial premises directly below. Any commercial premises directly adjacent to a property or within a few hundred yards may present problems.
The main consideration is how it affects the desirability of a property. A haulier’s yard fifty meters from a house could limit your choice of lenders but probably wouldn’t leave you without mainstream options. A house abutting a giant scrapyard would likely be a challenge.
Be aware as a potential purchaser of such a property; hard to mortgage may mean hard to sell. And a property that might have a few interested lenders during a boom; may be harder hit by falling prices in a downturn due to a total lack of interested lenders.
For further information and advice on flats over or adjacent to commercial property, call one of our mortgage advisors on 0345 4594490 for independent mortgage advice.
