“I’m in a bit of financing conundrum,” wrote a buyer named Keir on online property portal property118 in December. His problem: an un-modernised two-bed split level flat in a council estate in London’s trendy Brixton, one minute from the tube. He had bought it at an auction for £275,000 in cash; and following a full refurb a surveyor had called it ‘impressive’ and recommended it as suitable security valued at £430,000, so Keir wrote. Yet, why would no lender finance it?
The post caused an avalanche of responses on the forum, many bemoaning similar experiences, many unimpressed by lenders’ excuses for turning down funding: too many floors, not the right build, outside balcony access, not the right neighbours…
“In our experience, it isn’t ex-local authority per se that can cause funding issues but particular types of properties that often happen to have been under local authority ownership in the past,” said LendInvest business development manager Tom Madden.
He said the lender was among a small group of specialists which consider the properties, but it has restrictions on construction type and the local environment.
“For instance, some ex-LA properties are regarded as ‘non traditional’ or even ‘defective’ construction because they’re made of concrete or steel frames, as opposed to the standard brick and tiled roof build. Most mainstream lenders don’t like properties that fall outside the conventional standards,” he said. “And, if the ex-LA flat is in an area where there is a high concentration of social housing, lenders will be concerned about the impact of this on the future demand and saleability of the unit,” he added.
Specialist lender Fleet Mortgages also lends on council flats but only after a valuer has confirmed the property is a suitable security, particularly with regards to the surrounding property.
What’s more, “the fact properties are sold at auction and not by private tender suggests there could be potential problems and it’s important to carry out full due diligence before going ahead,” said Fleet chief executive Bob Young.
Houses are in, flats are out
“Council houses tend to be okay, flats are the ones that cause problems,” said Mortgage Concepts Associates director Mike Richards. “It’s a shame. These properties have a place in the market,” he added.
For him it was just another way to curb the buy-to-let market following the government’s changes to underwriting rules and buy-to-let tax. “If they want less lending to buy to let, they will restrict the property types first,” he said.
Richards agreed with suggestions the lending criteria with mainstream lenders were outdated and should be adapted. He said he understood lenders’ concerns about the saleability of properties but added “as an investment [these properties] are pretty good.”
Functioning niche market
Despite this, SimplyBiz Mortgages chief executive Martin Reynolds believed the market was functioning. “There are still a number of lenders that do it, about the same number that serve the self-employed,” he said. “It’s a specialist area, a niche, we can always do more but the market is functioning.”
He also suggested buyers should consider the current low interest environment when looking at prices of specialist mortgages for their properties. “They may be more expensive than plain vanilla mortgages but they still cost less than what we were paying for vanilla two to three years ago,” he said.
Similarly, Young said: “This is definitely lending for specialists like Fleet Mortgages because the fact is, if we’re not willing to lend it’s probably a good idea for the borrower not to proceed.”