Why buyers of flats can be REFUSED a mortgage

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The early days of the pandemic might have been all about the race for space, but there are now signs that flats are back in favour.

The price of the average apartment increased by 10.8 per cent in the year to November, according to the latest Halifax house price index, while detached properties were up only 6.6 per cent.

It has been driven by first-time buyers returning to the market, as the rush of movers spurred on by the stamp duty holiday subsides. 

Flats seem the natural choice for many first-time buyers, especially those living in cities. But many do not realise that getting a mortgage on one can be trickier than on a house – something the ongoing cladding scandal has not helped. 

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

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

The reason first-time buyers are snapping up flats is two-fold: their cost is typically cheaper than a house and they are more likely to be able to buy with a smaller deposit, either new-build off-plan or existing flats.

According to Danni Hewson, financial analyst at AJ Bell: ‘First time buyers may well be making the most of lockdown savings, cash they didn’t spend on holidays and entertainment, and they’ll definitely have one eye on the Bank of England. 

‘The threat of rate rises will add to the current fervour for property.’

Because they are not a stand-alone building, lenders can get nervous about things that could dent a flat’s value, but are out of the buyer’s control.

And their reasons are not always easy to predict. Apartments have been turned down for mortgages for being above a shop, being too small or being too high up, for example.

‘When considering a mortgage against a flat there are often more challenges to consider, and banks have different criteria,’ explains Adrian Anderson, director at mortgage broker Anderson Harris. 

With more people now looking at flats, and potentially buying in a hurry as they chase cheaper interest rates, This is Money outlines the reasons that flats might be ruled out by the bank. 

Minimum deposits 

While mortgages are generally available with deposits as low as 5 per cent of the property’s value, some lenders refuse to lend that much on flats because of their higher level of risk. 

Instead, they could set the minimum deposit at 10 or even 15 per cent. 

This is because, if the mortgage borrower couldn’t keep up with their payments and the bank had to repossess their flat, they belive that selling it on to make their money back would be harder than selling a house. 

‘Barclays limits the mortgage amount for flats compared to houses for residential and buy to let mortgages, while Nationwide will consider a 10 per cent deposit for a house and 15 per cent for flats and maisonettes,’ says Anderson.  

Too new 

Deposit limits are even more common on new-build flats. Brand-new homes typically lose some of their value in the first few years after being sold, so lenders see them as potentially less attractive when they come to be sold on. 

Mark Harris, chief executive of mortgage broker SPF Private Clients, says: ‘Pre-owned properties can potentially get a minimum 5 per cent deposit mortgage, while new build can get 10 per cent, but more likely 15 to 25 per cent. 

‘Generally, a flat is considered to be new build for 24 months post-completion or conversion.’

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

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

Properties sold under Help to Buy should not have this issue, however. 

If a new block of flats is built from materials other than traditional bricks and mortar, this could also lead to mortgage problems. 

‘Properties that are not standard brick and mortar constructions, for example those built from concrete, often face issues,’ says Nick Mendes, mortgage technical manager at John Charcol.

Too small

The minimum space standard for most homes in the UK is 37 square metres, though there are a few exceptions.

If a flat is less than 30 sq m or 323 sq ft, banks will generally not be keen to provide a mortgage.

This is because the number of buyers interested in this kind of flat is usually small, which makes it a risky investment. 

Studio flats can also be controversial in the eyes of some lenders. 

Harris says: ‘Some lenders have no minimum square footage, but many require the property to be at least 300 or 350sq ft. 

‘Sadly others, such as Coventry building society, do not lend on studio flats at all.’ 

Too high up

Lenders can also get nervous about lending on flats that are more than a few floors up in high-rise blocks.

Angus Stewart, chief executive of online buy-to-let broker, Property Master, says: ‘It can be very difficult to get a mortgage on a flat in a block with ten or more floors, and sometimes even seven floors are enough to put lenders off. 

‘If a lender will lend on a block with seven or more floors, they may well want the flat you are buying to be below the seventh floor.’

They may also require that there is a lift, if the flat is on the fifth floor or above. 

Former local authority flats that are accessed by external decks rather than internal hallways can also cause a problem for lenders. 

‘Many banks do not like ex-local flats which have deck access. We have considered HSBC in the past in this scenario,’ says Anderson. 

Popular block

If you are buying a flat in a large block, you may find that a lender you approach is worried about being over-exposed. 

In case something was to happen to the building as a whole, some mortgage providers will not want to have too much money tied up in it. This means they could limit the number of flats they they will lend mortgages to in the same building. 

‘If a lender has already lent to a certain proportion of flats in a building, they won’t want to take on any additional exposure,’ says Stewart. 

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

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

Above a shop

Lenders are often reluctant to provide loans on flats above, or close to, commerical premises; especially those that might attract noise, smells or anti-social behaviour.  

‘Flats above commercial premises often presents a challenge, especially if the commercial below is a hair salon (because of the fumes) or a pub or restaurant,’ says Anderson. 

‘Challenger banks may consider these flats, but will charge more interest than a mainstream bank.’

Challenger banks are newer lenders such as Metro Bank, Virgin Money and Atom Bank. 

Flats within blocks containing lots of AirBnb lets might also be tricky to mortgage.  

Mendes says: ‘Neighbours around you might be changing regularly, so lenders fear they might not respect the space they are in, causing damage or noise pollution.’ 

Potential cladding issues

The cladding and fire safety scandal that has emerged over the past few years has also made banks and building societies cautious about lending on flats. 

When considering newer properties, many lenders will require an EWS1 form: a document which proves that a building’s external cladding has been professionally assessed and details whether any work is needed to replace it.  

However, it could prove difficult for a mortgage applicant because not all blocks have yet been tested. 

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

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

Hina Bhudia, partner at Knight Frank Finance, says: ‘When buying a flat, and subsequently looking for a mortgage, buyers need to be mindful of any potential cladding concerns with the building or block they hope to purchase within.

‘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.’   

Lease length 

Most flats in blocks are sold leasehold, which lenders accept. However, they will want to know the time left on the lease of the flat you are buying, as this could drastically affect the flat’s saleability in future.  

Says Stewart: ‘The length of the lease is crucial. If the flat has a lease below 70 years lenders will be harder to find because extending the lease will become more expensive as the expiry date gets nearer.’

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

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

A flat might have a long lease, which can be up to 125 years. This is a long time, but when you consider a mortgage might be 35 or even 50 years in duration, this could leave 85 years left on the lease. 

‘Many lenders will want to see a minimum lease of 85 years on the application, with 60 years remaining at the end of the mortgage term,’ says Mendes.

However, there are some mainstream lenders who will consider a mortgage if there are at least 40 years left at the end of the mortgage term. 

Ground rents and service charges

As well as the lease length, lenders will also want to know about any ground rents or service charges, as these will be factored into their calculations when they are deciding whether you can afford to pay the mortgage on the property. 

‘Not only is this an expense you need to prepare for, but lenders will see it as affecting your ability to repay any lending,’ says Stewart. 

Some banks even have fixed caps on the level of ground rents they will accept on 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 have fixed caps on ground rents, whereas other will have a percentage amount. There may be conditions around what is deemed acceptable ground rent inflation.’

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

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

The above rules are not all hard and fast, and decisions will often come down to the lender or valuer’s judgment of an individual property, rather than a blanket policy.

Smaller building societies and challenger banks might be more amenable as they underwrite each of their mortgages manually, whereas larger lenders rely on automated systems for some parts of the process. There is an argument that the former method is more nuanced.

However, even if they find they are able to get a mortgage, buyers should think carefully about any factors that could make their flat less saleable in the future. 

If they don’t get back what they paid for the flat, they would be left in negative equity. 

And even if the value does rise, choosing a property without a broad appeal means they could find themselves stuck in a home that is tricky to sell. 

‘I often advise buyers to tread with caution when considering a flat that poses a particular challenge for a mortgage lender,’ says Anderson. 

‘When they go to sell, the chances are the purchaser will encounter similar issues, hence they should always consider the resale value.

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