Although the initial pandemic was centered on the need for more space, there is evidence that flats have returned to favor.

According to Halifax’s latest house price index, the average price for an apartment rose by 10.8% in the year ended November. However, detached property prices increased only 6.6%.

This is due to first-time buyers who are returning to the marketplace, and the stamped duty holiday’s subsidence. 

Many first-time buyers prefer flats, particularly those who reside in large cities. However, many people do not realize the difficulties involved in getting a mortgage to finance a flat. The ongoing cladding scandal is just one example. 

Flat out: Apartments are having a resurgence, but they can be more difficult to finance

Flat Out: Although apartments are experiencing a revival, it can sometimes be difficult to finance them.

Two reasons first-time buyers buy flats: They are typically less expensive than buying a house, and you can usually get a larger deposit if you are looking to purchase a new or an existing flat.

Financial Analyst at AJ Bell Danni Hewson says that first-time buyers could be making use of lockdown savings. This cash is money they don’t have to spend on vacations or entertainment. They’ll also keep one eye on Bank of England. 

“The risk of rate increases will increase the current passion for property.”

They aren’t standalone buildings so lenders may be concerned about factors that might lower a flat’s value but which are beyond the buyers’ control.

It is not easy to know why. For example, apartments that are too close to shops, too small, or too high have had their mortgages denied.

Adrian Anderson, director of Anderson Harris mortgage brokerage, says that when considering a mortgage for a flat, there are more factors to take into consideration and different criteria. 

The bank might not be interested in flats because of the increased interest rate chase. This is Money highlights the reason flats may no longer be an option for many people. 

Minimum deposits 

Although mortgages can be obtained with deposits up to 5% of the property’s worth, lenders may not lend as much for flats due to their greater risk. 

They could instead set the minimum deposit at 10, or even 15%. 

Because if the borrower of a mortgage couldn’t pay their monthly payments, the bank would have to take possession of the flat. They believe that it is more difficult to sell the house than to get their money back. 

Anderson says that Barclays has a lower limit on the amount of a mortgage for flats than for houses, buy-to-let mortgages or residential mortgages. Nationwide, however, will accept a 10% deposit for a home and a 15% flat or maisonette deposit.  

Too new 

New-build apartments are subject to higher deposit limits. Newly built homes lose some value within the first year after they are sold. This makes them less appealing to lenders. 

Mark Harris, the CEO of SPF Private Clients Mortgage Brokers says that while pre-owned properties may be eligible for at least 5% in a deposit mortgage, new builds are more likely to get between 10 and 25%. 

“Generally, a flat can be considered new construction for up to 24 months after completion or conversion.

Lenders might have comcerns that brand-new apartments will quickly drop in value

Some lenders might be concerned that the value of brand-new apartments could quickly decline in price.

This issue should not be an issue for properties sold under Help to Buy. 

This could lead to problems with mortgages if a new block is constructed from other materials than bricks or mortar. 

“Properties built with concrete or brick, and not the standard brick-and mortar constructions of brick, can often have issues,” says Nick Mendes (mortgage technical manager at John Charcol).

Too small

Although 37m2 is the minimum standard, there are some exceptions.

A bank will typically not approve a mortgage if a property is smaller than 30 sqm, or 323 sqft.

It is risky because there is not a lot of interest in these flats. 

Some lenders may find studio flats controversial. 

Harris says that although some lenders don’t require minimum square footage from borrowers, many insist that the size of the property be between 30 and 35 square feet. 

“Sadly other organizations, like the Coventry building Society, don’t lend at all on studio flats.” 

Too high

Lenders might be anxious about lending on high-rise flats with more than two floors.

Angus Stewart (chief executive at Property Master), says it is sometimes difficult to secure a mortgage for a flat within a block that has ten floors. In some cases, even seven floors can cause lenders to be reluctant. 

“If the lender is willing to lend money on a block that has seven floors or more, they might want your flat below the seventh.

A lift may be required if the flat is at the fifth floor. 

For lenders, it is possible to have trouble accessing former flats of local authorities that were accessed via exterior decks instead of internal hallways. 

Ex-local flats with access to the deck aren’t preferred by banks. Anderson says Anderson that HSBC was considered for this situation in the past. 

Popular block

You might find that the lender who you approach to lend money on a larger block is concerned about you being too exposed if you’re buying a flat. 

If something were to happen, mortgage providers won’t have enough money to cover it. The mortgage providers could restrict the amount of flats that they loan mortgages to within the same building. 

Stewart states that lenders who have lent to flats in buildings a specific amount will be reluctant to extend additional exposure. 

Flats above commercial premises may be more difficult to finance because of noise and smells

Due to noise and smells, flats located above commercial buildings may prove more challenging to finance.

Above the shop

Lenders often hesitate to lend money on apartments above or near commercial premises, especially if they are concerned about noise, smells, and antisocial behavior.  

Anderson says that flats over commercial buildings can be a problem, particularly if they are a salon or pub, or because of fumes. 

These flats may be considered by ‘Challenger Banks’, however they will likely charge higher interest rates than mainstream banks.

These lenders are known as challenger banks, and include Metro Bank (Virgin Money), Atom Bank (Atom Bank), and Atom Bank. 

It can be difficult to mortgage flats located in blocks that contain many AirBnb rentals.  

Mendes said: “Neighbors around you may be changing frequently so lenders worry they might not respect your space. This could cause damage or noise pollution.” 

Possible cladding issues

Building societies and banks are being cautious in lending money to buy flats because of the recent fire safety and cladding scandals. 

Many lenders require EWS1 forms when considering properties that are newer. This document proves the building’s exterior cladding was professionally evaluated and details any repairs or maintenance.  

Unfortunately, this could make it difficult for applicants to mortgages because not all blocks have been tested. 

An EWS1 form may be necessary to get a mortgage approved on a newer flat

To get a mortgage approval on a newly built flat, an EWS1 form might be required 

Knight Frank Finance partner Hina Bhudia says that buyers should be aware of potential concerns regarding cladding in the block or building they are interested in purchasing.

‘At least once a week we have borrowers struggling to get finance as the home they would like to purchase is lacking its EWS1 form – many lenders now require this before they will consider offering a mortgage.’   

Length of the lease 

Blocks are generally sold leasehold. Lenders accept this. They will ask about the remaining lease term of the flat that you’re buying to determine if it is still available for sale.  

Stewart states that it is important to consider the term of your lease. The lease term for a flat below 70 years will make it difficult to find lenders. Extending the lease at a later date will increase the costs.

Buyers of leasehold flats should usually get the go-ahead from their lender if there are 80 years or more left on the lease. However, some will consider shorter periods

If the lease is for 80 years or longer, buyers of leasehold apartments should get approval from the lender. Some will allow for shorter terms.

One flat may have a lengthy lease. This can go up to 125 year. Although this is quite a lengthy time, it can be offset by the fact that a mortgage could last 35 to 50 years. This would leave you with 85 years of lease. 

“Many lenders will require a minimum of 85-year lease on an application. With 60 years left at the term’s end, there are no exceptions.”

There are some lenders that will approve a mortgage, provided there is at least 40 years remaining on the mortgage term. 

Ground rents, service fees

In addition to the term of your lease, lenders may also ask about ground rents, service charges and other information that could be relevant to their calculation when deciding whether or not you have the funds to finance the mortgage. 

Stewart states that this is not only an expense to be prepared for but also a risk to lenders who will consider it a potential threat to your ability repay loans. 

Some banks have even set caps for the amount of ground rents that they will allow on property properties.  

 ‘With some developments, onerous service charges and ground rents – particularly where they escalate significantly – can also affect the attractiveness of the property to a lender,’ says Harris. 

“Some places have ground rent caps, while other countries will set percentage limits. You may have to agree on ground rent inflation guidelines.

Even if they do get a mortgage, buyers should think carefully about their flat's future saleability

Buyers need to think about whether or not they can get a mortgage.

Although the above guidelines aren’t all easy and quick, decisions often depend on the lender or valuer’s judgement of a particular property. This is not to say that they will make sweeping policy decisions.

As they are able to underwrite all of their mortgages by hand, small building societies and challenger bank might be more open than large lenders that rely heavily on automated systems. The argument is that the first method is better.

Buyers should consider all factors that might make the flat less desirable in the future, regardless of whether they can get a mortgage. 

Negative equity would result if the owners don’t pay back the price they paid. 

Even if the property’s value rises, they may find it difficult to sell a house that has a narrow appeal. 

Anderson says, “I advise buyers to be cautious when looking at a property that presents a special challenge for a lender,” 

“When someone sells, there are chances that they will face similar problems. Therefore, they must always think about the resale price.

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