Multi-unit freehold block mortgages
Multi-unit freehold blocks (MUFBs) can represent a very good investment opportunity. They can provide extra security by reducing your exposure to rental voids. Furthermore, they can typically give a better yield when compared to a single residency Buy-to-Let property.
However, they are not to be confused with a House of Multiple Occupation (HMO). An MUFB will have self-contained units with their own kitchen and bathroom facilities.
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What is a multi-unit freehold mortgage?
A multi-unit freehold block (MUFB) is one freehold property that is typically split into multiple individual self-contained units. The most common example of this is a mortgage secured on a building with the intention of turning it into multiple flats.
It can also apply to circumstances such as a row of terraced houses, again under one title. Typically each unit will have its own entrance, kitchen, bathroom and outdoor space like a balcony.
Your Buy to Let Situation
Why you would like a Buy to Let mortgage is unique to you. We approach mortgages for your individual needs.
What types of Buy to Let mortgages are there?
There are a variety of things to consider when looking into a Buy to Let mortgage.
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The best way to find out if you qualify for a buy to let mortgage is to speak to a mortgage advisor.
How do I apply for a multi-unit freehold mortgage?
When looking to obtain an MUFB mortgage, typically you will not be able to use a standard high street lender. Instead, you will need to use a specialist lender that was created in order to lend on these properties.
The reason for this is due to the complex and slightly risky nature of these mortgages. A lender will need to assess the potential rental income and overall block value in addition to their normal checks. Furthermore, they will need to account for any void periods where you may not receive any rent.
These specialist lenders have underwriting criteria specifically designed for multi-unit freehold properties. Therefore, their bespoke products are usually the best bet for most individuals.
Not all of these lenders can be directly accessed without a broker or intermediary. Therefore, if you’re interested in whether a multi-unit freehold property could be an option for you, feel free to reach out today.
What to consider when looking for an MUFB mortgage?
Being a relatively specialist area of the Buy-to-Let sector, obtaining a multi-unit let mortgage can come with its difficulties.
However, for most it is definitely possible, it’s all about knowing where to look.
Some things to keep in mind when looking for a MUFB mortgage should be:
- Usually available up to a maximum of 75% of the property value or purchase price. However, on occasion lending up to 80% may be possible.
- They are typically available to first-time landlords (FTLs), but usually not first-time buyers (FTBs).
- Restrictions typically apply to the number of units in each freehold property. Although, it may be possible to find finance on unlimited numbers.
- You can obtain a loan through limited companies or as an individual.
- There are both interest-only and capital and interest repayment methods available.
The interest cover ratio (ICR) is calculated using the overall rentable value of a property, rather than the actual rental income being received. This is because the rentable value is a more reliable measure of the property’s potential income, as it considers factors such as vacancy periods and rent increases.
What are the benefits of an MUFB?
Choosing to obtain an MUFB mortgage can come with a variety of benefits for a property investor. Some of these benefits include:
- Increased rental income: Owning a block with multiple units allows you to collect income from several tenants, therefore maximising your potential returns.
- Reduced void risk: Even if one unit becomes vacant, you still have rental income coming from the others. This reduces the overall risk compared to a single-let property.
- Potential for individual unit sales: With separate titles, you have the flexibility to sell units individually in the future.
- Simplified management: Compared to managing multiple separate properties in different locations, an MUFB can offer benefits of consolidated management and maintenance.
- No licensing requirements: Unlike Houses of Multiple Occupation (HMOs), MUFBs with self-contained units typically don’t require additional licensing.
What costs are involved with MUFBs?
Understanding the potential costs involved with a MUFB is key and can allow you to budget and prepare effectively. Below we have highlighted some of the most common costs you face when trying to get a mortgage on a MUFB.
- Deposit: typically around 25% of the property’s value is required.
- Stamp Duty Land Tax (SDLT): this is a tax that is paid on any property purchase in England or Northern Ireland. Use our Stamp Duty calculator to find out how much you might pay.
- Legal fees: covers legal work like contracts and property searches.
- Valuation & survey fees: this is required by lenders to assess the property’s value.
- Mortgage broker fees: fees charged by mortgage broker for their services, certain brokers will charge a flat fee, while others charge a small percentage of the loan amount.
On top of these costs you should also keep in mind that MUFB buildings are typically more expensive when compared to other residential Buy-to-Let properties. Furthermore, there will be ongoing costs for things like maintenance and renovation that should be kept in mind too.
If you want to get an understanding of what costs you may end up paying, feel free to get in touch today. One of our expert advisors will be happy to discuss your needs over a free initial consultation.
Benefits and drawbacks of a MUFB mortgage
Choosing to obtain an MUFB mortgage can come with a variety of benefits for a property investor. Some of these benefits include:
- Increased rental income: Owning a block with multiple units allows you to collect income from several tenants, therefore maximising your potential returns.
- Reduced void risk: Even if one unit becomes vacant, you still have rental income coming from the others. This reduces the overall risk compared to a single-let property.
- Potential for individual unit sales: With separate titles, you have the flexibility to sell units individually in the future.
- Simplified management: Compared to managing multiple separate properties in different locations, an MUFB can offer benefits of consolidated management and maintenance.
- No licensing requirements: Unlike Houses of Multiple Occupation (HMOs), MUFBs with self-contained units typically don’t require additional licensing.
As well as having some great benefits, MUFBs also come with some drawbacks:
- Lender availability: Many lenders shy away from financing MUFB properties due to the perceived complexity and increased risk. This significantly narrows down your options in finding a mortgage provider.
- Higher interest rates: Those lenders who do offer MUFB mortgages may impose higher interest due to the perceived risk.
- Larger deposits: You’ll likely be required to put down a larger deposit, sometimes as much as 25% or more of the property’s value.
If you’re interested in obtaining an MUFB mortgage, why not reach out today? Our expert advisors can discuss your needs and help you find the right deal.
MUFB mortgage interest rates
When looking to get a mortgage on a MUFB there are typically four different product types you can opt for. All having their own pros and cons, making certain products more suitable for certain individuals compared to others.
The four different product types are:
With a fixed rate product the interest rate will stay the same for the duration of the mortgage term. It is common for fixed rate products to last anywhere from 2–5 years, however, it is possible for them to last longer in some cases.
Once the term has ended, you will either be put on to the lender’s standard variable rate, or you could look to remortgage to a better deal.
Fixed rate products allow you to easily budget as the monthly payments will stay the same due to the interest not changing.
A variable rate product is essentially the opposite to a fixed rate one, this is because the interest rate can change over time. Lenders will use a reference interest rate, most commonly the Bank of England base rate, as a guide when pricing your products rate.
These products can make it hard to budget as there is always the chance of your monthly payment changing. On the other hand, you could save money if the reference rate was to decrease.
A tracker rate mortgage is a type of variable rate mortgage where the interest rate tracks a specific benchmark. In the UK, this benchmark is most likely going to be the Bank of England base rate. Therefore, the interest on your mortgage will move up, down, or stay the same depending on what the benchmark is doing.
To work out your interest rate a lender will typically add a small percentage on top of the benchmark rate. For example, if the Bank of England base rate was 5.5%, the lender would add 1% on and charge you 6.5% interest.
Typically, tracker rates can last anywhere from 2–5 years, although it’s possible to get tracker rates that last your whole term. However, keeping a tracker rate for that long may not be the best idea as there is always the chance that the base rate can increase significantly, increasing your monthly payment.
With an interest-only mortgage, your repayments each month only cover the interest charged on the loan amount, rather than the interest and the loan amount like a standard repayment mortgage.
This means that the outstanding loan amount will stay the same over the term. For this reason lenders will require you have a ‘repayment vehicle’ in place in order to ensure you are able to pay off the loan amount at the end of term.
The main advantage of an interest-only mortgage is that the monthly payments are less than those for a standard repayment mortgage. In turn, your monthly payments are lower, which can work very well for Buy-to-Let investors.
Phil Scott
Director
About the author
Phil has worked in the financial services industry since 1992, having started with a large insurance company. He went self employed in 1996 as an Independent Financial Adviser before setting up his first company, Needham Market Home Financial in 1999.
After four years, he decided to concentrate solely on mortgages and related insurances, and The Mortgage Centres was born. Since then, Phil has been influential in the opening of several new offices as the business continues to grow.
Qualifications
Financial Planning Certificate: 1,2 & 3
Year Attained: 1992
Certificate in Mortgage Advice and Practice (CEMAP)
Year Attained: 2001
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