Remortgage a Freehold Flat

What Is a Freehold Flat?

A freehold flat is a flat or apartment where the owner holds the freehold title to their individual unit rather than a leasehold interest. This means they own their portion of the building outright, without a lease from a superior freeholder.

This arrangement is different from the much more common leasehold flat structure, where the building has a single freeholder (or a group of leaseholders who collectively own the freehold) and each flat owner holds a long lease granting them the right to occupy their unit for a fixed term.

Freehold flats are more commonly found in certain areas of the UK, particularly in parts of the North of England, the Midlands, and some areas of Wales. They are especially prevalent in older Victorian and Edwardian properties that have been converted into separate dwellings over the years.

There are several variations of freehold flat ownership:

• True freehold flat — The owner holds the freehold to their flat only, with no formal legal arrangement with the other flat owners in the building for maintenance of shared areas.
• Freehold flat with flying freehold — Part of the flat extends over or under another property, creating a flying freehold situation. This adds further complexity.
• Freehold flat with mutual covenants — The flat owners have entered into mutual covenants (legally binding agreements) to maintain shared areas and contribute to repair costs. This is more structured and more lender-friendly.

The key distinction from leasehold flats is that there is typically no overarching management structure, no service charge regime, and no clear mechanism for enforcing maintenance obligations between the different flat owners. This is what makes lenders cautious about freehold flats.

Why Lenders Are Cautious About Freehold Flats

Many mortgage lenders are reluctant to lend on freehold flats, and some will decline applications outright. Understanding why lenders take this view is important because it helps you identify what you can do to improve your position.

Lack of enforceable maintenance obligations

The primary concern for lenders is the absence of a clear, enforceable framework for maintaining shared parts of the building. In a leasehold structure, the lease obliges each leaseholder to contribute to the maintenance of the building through service charges. With a freehold flat, there may be no legal mechanism to compel a neighbour to contribute to essential repairs such as roof work, external decorating, or shared drainage.

This matters to lenders because their security (your property) could deteriorate in value if the building is not properly maintained, and there may be no way to force other owners to contribute to the cost of necessary repairs.

Flying freehold issues

A flying freehold occurs when part of one freehold property extends over or under another freehold property. Upper-floor freehold flats almost always involve a flying freehold because the flat sits above the ground-floor property. Many lenders have strict limits on the proportion of flying freehold they will accept, typically no more than 15-25% of the total floor area.

Insurance complications

With leasehold flats, buildings insurance is typically arranged by the freeholder or managing agent for the whole building. With freehold flats, each owner may be responsible for insuring their own section, which can lead to gaps in cover. Lenders need to be satisfied that the entire building is adequately insured.

Difficulty enforcing rights

Positive covenants (obligations to do something, such as contribute to repairs) generally cannot be enforced against subsequent owners of freehold land in English law, unlike negative covenants (obligations not to do something). This means that even if the original flat owners agreed to share maintenance costs, this agreement may not bind future purchasers.

Despite these concerns, there are lenders who will consider freehold flats, particularly where appropriate legal structures are in place. The key is understanding what arrangements lenders are looking for and taking steps to put them in place.

Legal Structures That Improve Lender Acceptance

The good news is that there are legal arrangements that can address many of the concerns lenders have about freehold flats. Putting these structures in place can significantly improve your chances of finding a willing lender and securing a competitive rate.

Deed of mutual covenant

A deed of mutual covenant is an agreement between the freehold flat owners setting out their respective obligations for maintaining shared parts of the building, contributing to repair costs, and insuring the property. While positive covenants in a deed are difficult to enforce against future owners of freehold land, many lenders will accept this arrangement, particularly if combined with other protections.

Management company structure

Setting up a management company owned by all the flat owners can provide a more robust framework. Each owner becomes a member of the company and is bound by its articles of association, which include obligations to maintain the building and contribute to costs. Because company membership is linked to ownership, obligations transfer to new owners more effectively than standalone covenants.

Conversion to leasehold

In some cases, the most effective solution is to convert the ownership structure from freehold to leasehold. This typically involves setting up a freehold company (owned by all the flat owners) that holds the freehold of the building, and granting long leases (typically 999 years) to each flat owner. This creates the standard leasehold structure that virtually all lenders are comfortable with.

While conversion involves legal costs and the agreement of all flat owners, it can dramatically improve mortgage options and property values. It is often the recommended approach where practically achievable.

Indemnity insurance

Some lenders may accept an indemnity insurance policy that covers certain risks associated with freehold flat ownership, such as the risk that other owners fail to contribute to maintenance costs. This is not a comprehensive solution but can help in some cases.

A specialist property solicitor can advise on which arrangement is most suitable for your situation and help you implement it.

Finding a Lender for Your Freehold Flat Remortgage

While the pool of lenders willing to mortgage freehold flats is smaller than for standard properties, there are options available. The key is working with a mortgage broker who has specific experience in this area and knows which lenders to approach.

Lenders who may consider freehold flats:

• Some building societies — Certain building societies, particularly smaller regional ones, take a more pragmatic approach to freehold flats and may consider applications on a case-by-case basis. Their manual underwriting processes allow them to assess each property on its individual merits.
• Specialist lenders — There are specialist mortgage lenders who focus on non-standard properties and are experienced in assessing the risks associated with freehold flats.
• Private banks — For higher-value properties, some private banks may be willing to consider freehold flat applications, particularly where strong legal arrangements are in place.

What lenders typically require:

• Evidence of a deed of mutual covenant or similar legal arrangement between the flat owners covering maintenance, repairs, and insurance.
• Confirmation that buildings insurance covers the entire structure, not just individual units.
• A satisfactory valuation from a surveyor who is aware of and has commented on the freehold flat arrangement.
• If there is a flying freehold element, confirmation that it falls within the lender's acceptable limits.
• Standard affordability and credit assessments.

Improving your chances:

Before approaching lenders, take steps to strengthen your application. Ensure that a deed of mutual covenant is in place, that buildings insurance covers the whole building, and that the property is well maintained. If you can demonstrate that there is a workable arrangement between all the flat owners for managing the building, lenders will be more inclined to consider your application favourably.

A whole-of-market mortgage broker with experience in non-standard properties will be your greatest asset. They can save you considerable time and frustration by directing your application to lenders who are most likely to say yes.

Converting a Freehold Flat to Leasehold

For many freehold flat owners, the most effective long-term solution is to convert the ownership structure from freehold to leasehold. While this involves some upfront cost and requires the cooperation of all the flat owners in the building, the benefits can be substantial.

How conversion works:

The typical conversion process involves the following steps. First, the flat owners jointly set up a freehold management company, with each owner becoming a shareholder. Next, the individual freeholds of each flat are transferred to the company, so that it holds the freehold of the entire building. The company then grants long leases (usually 999 years at a peppercorn ground rent) back to each flat owner.

The result is a conventional leasehold structure with a management company freeholder, which is recognised and accepted by virtually all mortgage lenders.

Benefits of conversion:

• Wider lender choice — Virtually all lenders will consider a standard leasehold flat with a management company freeholder, giving you access to the most competitive rates.
• Enforceable obligations — The lease provides a clear, enforceable framework for maintenance contributions, insurance, and building management.
• Increased property value — Properties with standard leasehold arrangements are typically worth more than equivalent freehold flats because they are easier to mortgage and sell.
• Simplified insurance — Buildings insurance can be arranged centrally by the management company, ensuring the whole building is covered under a single policy.

Costs and considerations:

The cost of conversion will include solicitor fees for each flat owner, Land Registry fees for transferring the freeholds and registering the new leases, and the cost of setting up the management company. These costs are shared between the flat owners and can vary depending on the complexity of the situation and the number of flats involved.

The main challenge is often practical rather than legal. All the flat owners need to agree to the conversion and cooperate in the process. If one or more owners are unwilling, the conversion cannot proceed. Early, open communication with your neighbours about the benefits of conversion is essential.

A specialist property solicitor can guide you through the entire conversion process and help ensure that all the necessary legal formalities are properly handled.

Practical Tips for Remortgaging a Freehold Flat

If you are planning to remortgage your freehold flat, here are some practical steps you can take to improve your chances of success and secure the best possible deal.

Get your legal arrangements in order

If there is no deed of mutual covenant or management structure in place, consider putting one in place before applying to remortgage. This can significantly widen your choice of lenders. Speak to your solicitor about the most appropriate arrangement for your building.

Ensure adequate buildings insurance

Check that buildings insurance covers the entire structure of the building, including shared areas, the roof, and external walls. If each flat owner currently has separate insurance, consider arranging a single, comprehensive policy for the whole building. Lenders need to be confident that their security is fully insured.

Maintain the building

A well-maintained building will receive a better valuation and give lenders more confidence. Work with your fellow flat owners to address any outstanding maintenance issues before the lender's surveyor visits.

Use a specialist broker

A mortgage broker with experience in freehold flat mortgages is invaluable. They will know which lenders are most receptive, what information to provide, and how to present your application in the best light. Do not waste time approaching mainstream lenders who are unlikely to consider your application.

Be prepared for higher costs

Be aware that the remortgage process may take longer and cost more than for a standard property. Legal fees may be higher, and some lenders may charge arrangement fees that reflect the additional complexity. Factor these costs into your calculations when assessing whether remortgaging will save you money overall.

Consider the long-term picture

If you are finding it consistently difficult to mortgage or remortgage your freehold flat, it may be worth investing in converting to a leasehold structure. While this involves upfront costs, it can save you money and hassle in the long run by giving you access to mainstream mortgage products and potentially increasing your property's value.