Multi-unit freehold block (MUFB) mortgage
Everything you need to know before applying for a multi-unit freehold block (MUFB) mortgage
In this Guide:
- What are multi-unit freehold block mortgages?
- Are there multi-unit mortgage regulations?
- What multi-unit mortgage rates are available?
- What is the valuation process for a multi unit freehold block mortgage
- Are there any tax implications for multi-unit property ownership?
- How can direct, specialist lenders help you secure financing?
One of the reasons for buy-to-let’s popularity is its flexibility. From single properties to HMOs, there are several ways to invest in bricks and mortar. One of those is multi-unit freehold blocks (MUFB), which means owning an entire block of residential properties. Here, we examine this type of buy-to-let with everything you need to know, including how to get a MUFB mortgage.
What are multi-unit freehold block mortgages?
Multi-unit freehold block mortgages have gained traction in recent years with savvy investors looking to capitalise on new opportunities in the property market. As the name suggests, a multi-unit freehold block mortgage (MUFB) is a product specifically designed for anyone who wishes to acquire multiple residential units within a single building.
The key advantage of a MUFB mortgage lies in its ability to consolidate the acquisition of multiple residential units under one mortgage . Not only does this simplify the management of debt obligations, but it may also result in cost savings as you can mortgage a set of properties under one deal rather than each one individually. Yet, you can still mitigate risk through diversification across several units.
Despite the many benefits of multi-unit freehold block mortgages, potential borrowers should be aware that these loans can require a higher deposit than traditional mortgages and larger interest rates, as lenders may perceive them as a riskier investment. However, the long-term rewards of investing in multi-unit freehold blocks can outweigh the initial costs and make this type of mortgage an attractive option for individuals looking to expand their property portfolio .
Are there multi-unit mortgage regulations?
Regulations are in place to ensure that both lenders and borrowers adhere to responsible lending practices while navigating the complexities of property investments.
Affordability criteria
Lenders are required to conduct thorough affordability assessments, taking into account the estimated rental income of the units. They may also have other requirements, such as the borrower’s income (usually around a minimum of £25,000 per year), credit history, any existing financial commitments and age (85 limit). However, the latter depends on the lender’s age-limit requirements.
The UK’s Prudential Regulation Authority (PRA)
The PRA has put stricter underwriting standards in place for buy-to-let mortgages, including multi-unit properties. These measures were introduced in 2017 and require lenders to examine the borrower’s portfolio and rental income to see if they can comfortably manage any additional financial obligations associated with a multi-unit mortgage. In some cases, the PRA’s regulations may result in higher stress test rates for interest cover ratios (ICR), particularly for borrowers with four or more mortgaged properties.
What multi-unit mortgage rates are available?
Multi-unit mortgage rates vary depending on factors like the loan-to-value (LTV) ratio, borrower’s credit history and the overall risk profile. Generally speaking, multi-unit mortgages carry higher interest rates compared to single-unit mortgages. This is to reflect the increased complexity and perceived risk associated with managing multiple properties.
It’s worth using a mortgage calculator and considering the type of product available for a MUFB mortgage, including fixed rate and variable options.
Fixed rates
Fixed-rate multi-unit mortgages offer predictable monthly payments, shielding you from interest rate fluctuations during the fixed term. This can be beneficial in managing multiple properties’ finances.
Tracker mortgages rates
Tracker mortgage rates for multi-unit properties are tied to a benchmark rate, typically the Bank of England Base Rate (BoE). They vary accordingly and may offer potential savings if the rate goes down. It’s also the same case if it goes up, only you end up paying more each month.
Variable rates
Variable-rate multi-unit mortgages have interest rates that can fluctuate over time, offering potential savings if rates decrease. However, they also pose a risk of increased payments if rates rise and require careful financial management.
What is the valuation process for a multi unit freehold block mortgage
Red book valuations
A red book valuation for multi-unit freehold block mortgages is a professional property appraisal, compliant with the Royal Institution of Chartered Surveyors (RICS) guidelines. It determines the market value of a multi-unit freehold block, often required by lenders to assess loan security and inform their mortgage lending decisions. Red book valuations can be three times the cost of a standard valuation.
Standard Valuations
Standard valuations are an assessment often conducted by a surveyor and provide an estimated market value of the property for mortgage lending purposes. They help lenders determine the viability of a loan, considering factors like property condition, location and comparables. They don’t delve into the detailed analysis found in more comprehensive reports but often provide enough information for a loan decision.
What is the minimum valuation for a MUFB mortgage?
There is no minimum valuations for MUFBs, as it varies among lenders, the property type and location. Lenders will have their own requirements and set thresholds for minimum valuations depending on the set criteria.
Are there any tax implications for multi-unit property ownership?
Income tax
Rental income generated from multi-unit properties is subject to income tax if it surprasses the tax-free freshold. Property owners must declare income on their annual Self-Assessment tax return, and the tax rate will be determined by their overall income and tax bracket. Allowable expenses, such as some mortgage interest, maintenance costs and property management fees, can be deducted from rental income, reducing the owner’s tax liability.
Stamp duty land tax (SDLT)
When purchasing a multi-unit block, owners are required to pay SDLT. The rates for SDLT on additional residential properties are typically higher than those for primary residences. However, purchasing multiple units in a single transaction may be liable for tax relief as it’ll likely be a freehold.
Capital gains tax (CGT)
When selling a multi-unit property, owners may be subject to CGT on any gains made from the sale. CGT is charged at different rates for basic rate taxpayers and higher or additional rate taxpayers. Certain reliefs and allowances, such as the Annual Exempt Amount, can help reduce the overall CGT liability.
Inheritance tax (IHT)
Multi-unit properties may also be subject to IHT if their value, combined with the owner’s other assets, exceeds the IHT threshold upon the owner’s death. Thorough estate planning can help mitigate the IHT liability.
You should consult a tax professional or financial advisor to navigate the complexities of your tax obligations and identify potential tax-saving strategies tailored to their individual circumstances.
How can direct, specialist lenders help you secure financing?
Direct lenders play a helpful role for borrowers hoping to secure financing for a multi-unit mortgage, offering a streamlined process and often more competitive rates compared to traditional banks. These lenders specialise in property financing and have a professional understanding of the intricacies associated with multi-unit mortgages.
One key advantage of working with the lender directly is their ability to provide personalised service – they can offer a catered experience to the borrower’s needs. Direct lenders often have a faster application process as well, especially if they’re an online lender and don’t require paperwork or appointments.
Moreover, direct lenders can offer access to exclusive products, specifically tailored to the needs of property investors. These products may provide competitive interest rates, flexible repayment options and other helpful features.
Using the services of a direct lender helps you tap into a wealth of specialised knowledge and resources, increasing the likelihood of receiving a better service and getting the amount needed as long as you meet the requirements.
All of the information in this guide is intended for educational purposes. For specific advice relating to financial, tax and compliance information, please refer to a professional in the required field who is qualified to advise on your specific circumstances.
Final thoughts: Multi-unit freehold block mortgages for your next investment
Owning and letting a MUFB requires more attention than other types of buy-to-let, but it can also lead to higher profits. Owning an entire block of rental units can help you maximise revenue while mitigating the risk of void periods and other aspects associated with having a single property.
If you need a mortgage for your MUFB project, Molo can help. We offer competitive rates for borrowers looking for a MUFB with up to six units. Our online application also means you can speed up the process with reviews and approvals in as little as 24 hours.
Find out more about MUFB mortgages with Molo and start your multi-property journey.
Author: Sim S. , 2022
Kris runs our Mortgage Operations and has an in-depth knowledge of Mortgage processes from application to completion at Molo. He shares his insights learned over the years in these articles.