If you’re looking to buy a flat, or even an apartment building, you can take out a mortgage. However, it’s more complicated than a residential mortgage and may require a specialist lender or broker.
Lenders look at a number of factors when considering an apartment mortgage. These include net operating income and debt service coverage ratios. They also consider ground rent and services charges.
What is an apartment?
An apartment (American English), flat (British English), or unit (Australian English) is a self-contained housing unit that occupies part of a building. The buildings may be residential, commercial or mixed-use. They vary in size, ranging from studio apartments to mansion blocks or luxury residential buildings.
They may be rented out or owned by the occupants of the individual units. In the United States, apartment-dwellers also own their units in some cases; a number of apartment buildings are legally condominiums (strata title or commonhold).
In Japan, the terms flat and apartment have a parallel; both are used to describe a cluster of rooms or suites in a multi-residence building containing several other residences. The term mansion block is also used to describe a mansion-style apartment building, usually from the Victorian or Edwardian period, with ornate architecture and large, high-ceilinged flats.
Depending on the location, there are many variations of apartment living, ranging from studios to two-bedroom apartments. The type of accommodation a person chooses will depend on their budget, lifestyle and needs.
Some people prefer more privacy and peace of mind, while others prefer the convenience and social connections that come with living in an apartment. Regardless of what you prefer, it’s important to know the pros and cons before making a decision.
The pros of renting an apartment are fewer upfront costs, a lower risk to you and the ability to build equity over time. But if you want to build long-term wealth, the best option is to purchase a home.
Another advantage of owning your own home is the ability to increase the value of your home through renovations and expansion. However, it can be difficult to do this if you live in an apartment because you share walls with your neighbors.
If you’re looking to buy an apartment, it’s important to work with a professional real estate broker. They can help you find properties that meet your criteria and can provide insights into the local real estate market. They also know how to structure loans to fit your specific investment goals.
Leasehold or freehold?
There are two main types of property ownership: freehold and leasehold. They are often used interchangeably, but it’s important to understand their differences so you can make an informed decision about your property.
A freehold means you own the building and the land it stands on, whereas a leasehold means that the land is owned by someone else (known as a freeholder) who leases it to you for a set period of time. This can range from just a few years to over 120 years, depending on the terms of the lease.
Buying a property with a freehold can be expensive, but it can also give you more control over your home and help to reduce your mortgage repayments. However, it is a legal process and you should seek expert legal advice.
You should always check that your apartment is a leasehold or freehold property before you buy it, as it can have an effect on the way you live in it. In particular, if you’re a tenant with a leasehold property, you may find it difficult to make changes to your living space or to the shared areas that are part of your block.
If your flat is a leasehold, you’ll need to pay annual ground rent and a service charge to cover the cost of maintenance of the communal areas such as gardens and hallways. You can ask the leaseholder for a copy of the lease, or look online at the Land Registry or the Land and Property Index to find out how long you’ll own it for.
A leasehold isn’t as good as a freehold, but it can be a useful option for some properties. It offers a lower purchasing price, but you have to pay for a longer lease.
In some cases, apartments can be purchased with a 999-year lease, which is as good as a freehold and can have a few extra benefits. These include the right to use communal areas, such as paths and bin stores.
Leaseholds are a popular choice for many homebuyers because they can be less expensive than freehold properties. However, they can have disadvantages that make them harder to sell or remortgage. It’s best to ask your solicitor or estate agent for advice on whether a leasehold or freehold property would be better for you.
Loan-to-value ratios
The loan-to-value ratio (LTV) is one of the most important figures that lenders use to determine if you’re a good candidate for mortgage financing. It’s also a key factor in determining whether you qualify for private mortgage insurance, or PMI, and if you can get approved for a refinance or home equity line of credit.
LTV ratios are a valuable tool for mortgage lenders because they help them assess the amount of risk that they’re taking on when they lend you money. The higher the LTV ratio, the more likely it is that you will default on the loan and lose the property to foreclosure.
Most lenders set a minimum loan-to-value ratio of 80% for conventional loans. This number can be higher for FHA loans, which are designed to encourage homeownership among people with poor credit or no down payment.
High-LTV mortgages typically come with higher interest rates and fees than low-LTV ones. The main reason is that borrowers with higher LTV ratios have to pay mortgage insurance, which protects lenders from losses if a borrower defaults on the loan.
A combined loan-to-value (CLTV) ratio is another way that lenders calculate the amount of debt against a property’s value. This number combines your first and second mortgages with any HELOCs or home equity loans that you have on the property.
Often, the best loan-to-value ratios are those that are lower than 80%. This is because a lower LTV ratio means that you’ll have more cash to put down on the property and will save you money in the long run.
Most lenders consider a higher loan-to-value ratio to be risky, and they may charge you more for the mortgage or deny your application altogether. In addition, they may also require you to buy private mortgage insurance or pay fees for the PMI.
Lenders’ criteria
Apartments can be financed by many types of lenders, including banks, agencies, HUD and conduit lending firms. Like one-to-four loans, they come in standardized types that are sold to Fannie Mae and Freddie Mac and customized types, known as portfolio loans, that lenders keep on their own books.
A lender may require a physical needs assessment or property condition report to determine the property’s current health and future repair needs. This report is also used to determine required replacement reserves, which are funds set aside each year for future repairs and maintenance costs.
The lender also might consider the candidate’s rental-property experience and management expertise, as well as their credit history. These factors help to verify that the borrower can be responsible for all aspects of the apartment complex’s financial health and profitability, says Dan Borland, office manager for commercial real estate at Wells Fargo in Orange County, California.
Whether an apartment is freehold or leasehold is another important consideration for a mortgage lender. Most lenders prefer freehold flats, but there are a few who will approve mortgages on leasehold flats.
Lenders will want to be sure that a freehold apartment has been in private ownership for at least 100 years. This gives the lender more time to resell the property in case of a sale by auction or if it becomes worth less than its original purchase price.
In addition, some apartments are located above or within commercial buildings. These can pose security concerns, and some lenders will insist that there’s one clear floor between the apartment and the commercial area to ensure your safety.
Some apartment properties are ex-council flats, and these can come with their own rules and regulations. These can include minimum property value, minimum floor area and maximum number of storeys.
A specialist mortgage advisor with experience of securing an apartment loan is likely to have better success, as they will understand the criteria and requirements of each type of building, along with their eligibility brackets. They will also be able to direct you towards the best possible mortgage for your circumstances.