Why lenders do not wish to lend on freehold flats

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Thinking of buying or selling a Freehold Flat?

This article sets out what you MUST know before buying or selling a Freehold Flat as well as tips and solutions to avoid being caught out:

A Freehold Flat is a rarity

A true Freehold Flat in the world of Conveyancing Solicitors is rare to find as flats are usually subject to leases.  Owners of Freehold Flats can run into difficulty when major structural problems arise with the property.

Unless there is a legal agreement in force between the owner of the freehold flat and the owners of adjacent properties there could well be huge problems in the future in agreeing on structural repairs and their associated costs.

What can a Conveyancing Solicitor do to make a difference?

Where someone owns a flat with a leasehold interest, the owners of the adjoining flats should have provisions in their respective leases for the dealing of repairs and maintenance  in relation to communal  parts and common walls etc. , the details of this arrangement should be confirmed by your Conveyancing Solicitor during their work.

Leases may also contain a 'Mutual Enforceability Clause' or 'Covenant'  (something  which is insisted upon by Conveyancing Solicitors drafting  leases these days) which means that if one leaseholder is in breach of the covenants contained in their lease, the other leaseholders can enforce those covenants thereby forcing the leaseholder to abide by them.

Failing that the landlord may consider forfeiting the lease due to there being a breach of the covenants in the lease.

There is therefore far more protection for the owner of a leasehold flat than there is for the owner of a freehold flat who has nothing to fall back on when things go wrong. For this reason lenders are unwilling to lend on freehold flats as most of them do not consider them to be ‘sound’ security.

Freehold flats are not to be confused with owning a share of the freehold.   Some leaseholders have a leasehold interest in their flat but also own a share of the freehold of the whole building. This is different to owning a freehold flat.

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What you MUST consider before buying a Freehold Flat

If you are considering buying a freehold flat serious consideration should be given to whether or not mortgage finance can be secured and how easy it will be to sell the property on in the future, i.e. taking into account a potential purchaser’s ability to secure a mortgage with which to buy the property.

At present, the range of lenders who will lend or even consider lending on a freehold flat is far from extensive and this should be taken into account when considering whether to buy a freehold flat particularly if you are considering buying a freehold flat as an investment property with a view to selling it on fairly quickly and without complications.

Hopefully the position will change in the future but at present a purchase of a freehold flat must be treated with caution. You should secure a mortgage offer on the property well in advance and ensure the lender knows everything there is to know about the freehold flat before proceeding.

Getting a Freehold Flat Mortgage

Turning to the Council for Mortgage Lenders Handbook (CML Handbook), most lenders including  well known high street lenders such as Abbey National, Nationwide and  Bank of Scotland will generally not lend on a proper freehold flat.  

HSBC Bank say that the lender should be contacted directly for instructions where a freehold flat is involved. (Note changes to HSBC Conveyancing Panel as from January 2012)

Skipton Building Society and Yorkshire Building Societies will lend on freehold flats based in Scarborough under certain circumstances.  

NatWest Bank, state in their CML Handbook  that they will lend on a freehold flat provided the loan is less than 95% of the valuation. They are currently one of the few if not the only lender who state in the CML Handbook that they will lend on a freehold flat.

Lender’s views on freehold flats are changing the whole time so please note that although this information is accurate at the time of this article the lender’s requirements change.

Fridaysmove are able to assist with Freehold Flat Conveyancing, knowing that the mortgage offer and mortgage valuation needs to be checked carefully before the Conveyancing work can continue.

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