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.
10-year fixed-rate mortgages have been reducing significantly in cost, and for the first time in the UK, it’s now possible to get a pretty competitive rate fixed for ten years. But the big question is should you get one?
Question 1: Is a fixed rate even appropriate for you?
Forget ten years. Should you even have a fixed-rate mortgage?
Lots of people get caught out by significant early repayment penalties due to not properly considering the question of their long-term plans before buying.
Will you be moving home, repaying large balances early, hoping to raise significant additional finance from the property or could you be eligible for better deals in the short term if your circumstances improve?
Before considering a fixed-rate mortgage, look at our guide to fixed-rate products and see how they work versus other rates. Pay real consideration to whether the points above could leave you paying redemption penalties of many thousands of pounds.
You should speak to an independent mortgage broker like us as well.
Question 2: Will fixing for ten years be competitive long term?
If you had a crystal ball, you could answer this question, but no one can see into the future.
When a lender prices a product, it’s either based on the cost of borrowing that money from another bank or investor and turning it into mortgages, or on the expected interest rate they will pay to their depositors over that time.
So the simple fact is that a fixed-rate mortgage will be priced based on the expectations of what will happen to interest rates over the term & the lender will expect to profit.
That means the current glut of competitive long-term fixed deals indicates that the banks expect a prolonged period of relatively low-interest rates in the UK well into the future.
So like odds given by bookies, most banks will not expect average interest rates over the fixed period to be higher than the rate they are offering you. So you are in effect betting against the bank, but they have been known to be quite spectacularly wrong in the past.
The smaller your mortgage though, and the shorter the remaining term (for someone on a repayment or capital and interest mortgage) the less differences in rate will impact the long-term cost.
Because of this, for each loan, there will come a point as the remaining term decreases when small differences in rates are outweighed by the repeated fees involved in refinancing a mortgage, and changing products regularly offers poor value for money.
This is very case-specific, but once your mortgage reaches that point the potential downsides of long-term fixes may become insignificant.
Question 3: So, who should take a 10-year fixed-rate mortgage?
If you are concerned about increases in costs, have no circumstances that might better suit variable rates, and are sure that the early repayment penalties won’t be likely to cause an issue, then you need to decide whether you feel it’s worthwhile gambling long term and risk paying more than you might need to, or whether to take a short-term product in the hope that you can secure another competitive rate again in a few years.
This decision is mainly going to come down to the margin between short-term fixed rates and long term ones. Also, the probability that changes to your circumstances make better deals available to you in the short term (such as better income making more competitive lenders available, or works to a property decreasing your loan to value), and whether you feel the additional cost is good value for the extra security.
A mortgage advisor such as ourselves will discuss your circumstances with you and give guidance on whether a fixed product is more appropriate for you. If a fixed rate is the best option for you, but it comes down purely to a decision between long and short-term deals then this is very much a decision best made by the customer, but at least we can present you with the best options available over the different periods so you can make a more informed decision between them.
If you’d like to know what the best deals available to you both in the short and long term could be then complete our enquiry form and an advisor will contact you, to discuss your options and provide you with advice.
Do:
Your research…
Go to at least one property auction before you intend to purchase, just to see how they work.
Go and view the property you’d like to buy, at least once.
Compare the price and condition of the property to others that are similar that have recently sold or are currently on sale in the street/area. This will help you determine what you think the true market value of the property is and how much you are prepared to bid for it. Websites like Zoopla offer lots of information on previous purchase prices and average prices in the area.
Get a survey/valuation of the property in advance of the sale if this is possible.
Get hold of the Legal Pack and get a solicitor to check it prior to the auction. This pack contains all the information that your solicitor would normally check if you were buying a property in the more conventional way and usually includes key information such as special conditions of sale, title deeds, searches, leases and any legal issues.
Take advice from a mortgage broker or adviser on the suitability of the property for raising a mortgage.
If you can get a mortgage approved on the property prior to the auction or if not get a Mortgage Decision in Principle and an application near ready to submit, before you go into the auction room as you will usually need to complete within 28 days or forfeit your deposit.
Get initial quotes for remedial work if the property needs considerable work. You might be surprised at how much these jobs will cost – better to know up front than after you’ve made your purchase.
Ensure you have sufficient funds available for costs and remedial work if considerable as your mortgage lender will very likely retain part of the mortgage amount until these works are completed.
Have your deposit ready for payment on the day – usually 10% of the hammer price.
Don’t:
Bid on a property at auction that you haven’t seen and looks to be a real bargain in the auction room – there’s probably a reason why no-one else is bidding on it.
Get carried away in the auction room – know your maximum bid before you arrive and don’t get into a bidding war that pushes you beyond this maximum – be prepared to walk away.
Presume you’ll be able to get a mortgage after the event – you may need to shop around or get independent advice. If you can’t pay the balance within 28 days of the auction you will pay hefty interest and possibly forfeit your deposit.
For mortgage advice on short term finance for property auctions visit us here rightmortgageadvice.co.uk
An offset mortgage has a linked savings or current account, and rather than receiving interest on money paid into that account; you don’t pay interest on the same balance of your mortgage.
You can typically set an offset facility to work in one of two ways. It can either; act as an overpayment facility reducing your mortgage term or reducing your monthly payment.
The main benefit of using an offset account against overpaying your mortgage is that you can readily access the funds in the future without having to refinance; although this would affect your payments or term.
You can also use it to borrow money in advance and only pay for it when you take it out of the offset account; however, you must consider how borrowing extra money will affect interest rates, loan-to-value and arrangement fees.
Offset isn’t technically a type of product, so you can still get all the usual types of rates with an offset facility such as fixed, discount and tracker deals, for example.
The main thing with any mortgage is to make sure any additional cost you pay to get this option justifies the benefits you receive. That’s something we can consider for you in the advice process. You can get more information or to get expert advice on offset here.
This is an interesting question for me as it crops up quite a lot; however, remember that borrowing from a bank is not the same as depositing money.
Firstly, on the reasons you should use small regional lenders, they are currently leading the market in terms of mortgage and savings rates, and you may well find their customer service slightly more endearing than the bigger banks.
Small building societies are releasing very competitive products currently, and there is little reason to shy away from them.
Were your mortgage lender to fail, though, there would be very little likelihood of the administrators coming around with repossession orders (if the law even permitted them to do so).
Selling all the properties in an entire loan book would be ludicrously complex and likely produce a much lower return than simply selling the book of loans to another institution, which is commonplace trading among banks and institutional investors.
Even if no buyer were forthcoming to purchase the loan book, the administrators would likely let the book run and pass administration to an outsourcing firm; again quite common.
The current UK government has made it clear that it will not allow any financial institution in the UK to fail, regardless of its size. The FSCS or Financial Services Compensation Scheme, currently does not discriminate between the size of institutions either, so as long as the provider is a part of this scheme and falls under UK regulation, your protection as a consumer is equal regardless of an institution’s size.
