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multi unit freehold block

Multi-Units – What are They and How to Finance Them?

Average yields remain high for multi-unit freehold blocks (MUFBs), but what exactly are they and how easy is it to finance them?

What is a Multi-Unit Freehold Block (MUFB)?

A multi-unit freehold block (MUFB) is defined as multiple, separate, independent residential units held under a single title. This means that no one unit is subject to a lease. Examples might include:

  • Purpose-built blocks of flats
  • Houses converted into flats
  • A number of houses all held under one freehold title

Properties which fall under this category may have the following characteristics:

  • Multiple houses, each with their own AST agreement.
  • Private areas for each resident/household, into which no one else has right of access
  • Separate entrances for each resident/household
  • Some also have common areas that all residents/households have the right to use, such as a hallway or garden area

Yields for multi-unit properties tend to be higher than yields for vanilla buy to let property, as the following extract from our Buy to Let Mortgage Index demonstrates:

Average Gross Yield:

 

Q2 2021

Q3 2021

Q4 2021

Q1 2022

Multi-unit

7.4%

6.55%

6.13%

6.79%

Vanilla BTL

5.62%

5.88%

5.42%

5.35%

Multi-Unit Rates and Terms

Buy to let mortgage rates available on multi-units are generally higher than those available to their vanilla buy to let counterparts, but this isn’t to say rates are highly-priced. We have access to five-year fixed rates from 3.73% at 75% LTV with an EPC rating of A to C required, or from 3.83% at 75% LTV for EPC ratings of D or below, so do get in touch if you would like a free-of-charge quote. It is also worth noting that some multi-units are deemed as too complex to be financed via a buy to let mortgage, and in these cases, a commercial mortgage is more appropriate.

As the mortgage type can vary case by case with these properties, it’s worth noting that we can help with the following scenarios:

Borrowers

  • Portfolio landlords
  • First-time landlords
  • Ex-pats and foreign nationals
  • Individuals, SPVs & trading limited companies
  • No upper age limits
  • No minimum income

Properties

  • Multi-units comprising 2 – 100 separate units
  • Multi-units above commercial premises
  • A number of houses under one freehold title
  • Multi-units of non-standard construction
  • Part ownership of the multi-unit
    For example: There are 20 flats within a block, five have been sold off separately, yet you are looking for multi-unit finance to cover the remaining 15, all still held under one freehold.

Finance

  • Up to 85% LTV
  • Interest-only 
  • Buy to let and commercial terms available

Multi-Unit Freeholder/Leaseholder Relationship

The law stipulates that the Freeholder and Leaseholder of a property must be separate legal entities. What this means is that the Freeholder could be an SPV Limited Company with you as the director, which would allow you to be the Leaseholder of the property in your personal name. These restrictions and regulations are listed in the Commonhold and Leasehold Reform Act of 2002.

Put into layman’s terms, the Reform Act states that if a leaseholder fails to pay certain fees such as ground rent and service charges, they may forfeit their lease. However, the Act also provides them some protection, with legal opportunities for them to correct the situation and remain in their contract. As such, due to the balance the Act provides to serve both parties, lenders are typically unconcerned if a freeholder and leaseholder are unrelated.

On the other hand, lenders become uneasy if you have interest in the freehold and leasehold of a multi-unit. If you own the leasehold and the freehold in separate legal entities (i.e., an SPV Limited Company and your personal name), and manipulate the system to forfeit the lease, you will be passing ownership to the entity that already owns the freehold. While this is extremely rare, lenders’ risk assessment is always ‘worst-case scenario’, and therefore some lenders will be very cautious about borrowers with freehold and leasehold interest. An experience whole of market mortgage broker will be able to help you find the right lender for your requirements.

What to do next if you need finance for a multi-unit:

Call us on 0345 345 6788 to discuss any multi-unit property enquiries you may have. Alternatively, you can email us at enquiry@mortgagesforbusiness.co.uk, and one of our expert brokers will get back to you.

Multi-Unit Property Case Study

We were approached by the directors of a development company who were looking to refinance eight houses they had recently built in Nottingham, with a total value of £2.3 million. They needed to raise capital on the houses, which they own on one freehold title, to repay the development loan they had taken out to fund the build.

Although the directors have some experience as property developers, they are classed as first-time landlords because this is their first project with a let rather than sell strategy.

Reluctant to split the properties out onto separate leases or freeholds, we needed to find a lender that accepts multi-units. This is not normally difficult as many specialist lenders operate in this area, however, the funding options were limited because of the overall complexity of the scenario:

  • The units are houses. Most lenders willing to accept multi-units will only accept flats
  • The directors are both first-time landlords. Most lenders like to see experience, especially when it comes to renting out multi-unit property.
  • The company structure is complex. It is a trading business (not SPV) consisting of two directors and four shareholders. To confuse matters – one of the directors holds no shareholding in the company and the majority shareholder is based in the US.
  • Only 25% of the units had tenancy agreements in place. Most lenders prefer at least 25% of a new development to be tenanted on application for finance.

We took the case to one of the specialist lenders, which we knew would underwrite the deal on a commercial basis as it was far too complex for buy to let terms. We started negotiating using the following points as leverage to secure a deal:

  • Strong outside income – both directors work as accountants for multi-national firms
  • Low loan to value – the directors were only looking to borrow 53% LTV
  • Strong rental location – the houses are well built and in a strong rental location

After a relatively small amount of to-ing and fro-ing, the lender issued terms that were acceptable to our clients and we were able to get the funds released just one month after the formal mortgage offer was made. This resulted in a total loan amount of £1.25 million.

NB: ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE