Splitting the lease - or not

BTL lenders have a very 'vanilla' approach to what they want to lend on, based on their view of the worst case scenario i.e. how easily could the property be disposed of if it was repossessed?  They look for properties with broad market appeal.  If it’s not a regular freehold house let on a single AST, they start to put up the barriers.

Unmarketable properties include:

• Non-standard construction
• Flats above commercial units
• Flats in high rise blocks
• Properties let by the room and many other quirky features
• Houses divided into flats

If you’re requesting a mortgage for any of these they prefer to play safe and decline to lend.  So when you are planning to buy a building that has been converted into flats you have to jump through some hoops. 

The first – and critical step – is to establish whether the property is a legal conversion. In other words, does planning permission exist with the local council for it to be separate flats rather than one house?

Don’t assume this is case as there are hundreds, if not thousands, of property owners who have decided that their property will be much more lucrative as multiple flats rather than a single house. So, without seeking permission, they just convert it – making it unmortgageable as an illegal conversion.

No mortgage lender will touch an illegal conversion with a bargepole. It’s not as rare as you might think, I frequently get investors trying to buy illegally converted houses.

Don't be fooled by thinking if each flat pays separate council tax it must be a legal conversion. Council tax and planning departments don’t cross reference each other.

Assuming the conversion is legal, but the property is still under a single lease, your next step is to find lenders.

1: Split the titles

You could split the titles to create separate flats on long 100 year plus leases.

You will face a number of barriers in both trying to do this and to get BTL lenders to lend on it.  You may decide that the result outweighs the cost of the legal fees involved, but you need clarity on this before proceeding.

When creating the leases, the same entity cannot be both freeholder and leaseholder. Typically a limited company is used to own the freehold, and they can then charge both ground rent and a service charge to the leaseholder.

BTL lenders work on an over-exposure rule.  This means they will not lend on typically more than 25% to 35% of flats in a single block.  If you’re buying a building that has been converted into, say three, flats, this means that you will need a different lender for each of the flats

At least one of those three lenders will decline to lend when they discover that the leaseholder of all three flats is the same person.  So the leases must be held in different people’s names

At the point the new leases are created, that is considered to be the start of that period of ownership.  The implication is that the majority of BTL lender will not accept an application for a remortgage until the property has been owned for six months.  That will mean six months from the day the new lease started, so you will have difficulty refinancing until six months have elapsed from creating the leases.

2: Retain the single title

Commercial or specialist lenders will lend on a property split into separate flats, but still on one title.

You will have saved the cost of the legal work to create leases and split the title. These lenders do not have a six month ownership restriction, but their rates and set-up fees are usually higher than BTL lenders.  They are also geared to lending to landlords with at least 12 months experience.

There are always solutions, it’s just knowing how to resource them.

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