Whether you’re renting or buying, it’s important to get an apartment mortgage that works for your situation. The right loan can help you save money on interest, minimize closing costs and maximize your cash flow.
There are several different types of apartment loans, including HUD multifamily and agency loans. In addition, CMBS, or commercial mortgage backed securities, are another source of debt for apartment investors.
Freehold or leasehold?
When buying an apartment, you’ll need to decide whether the property is freehold or leasehold. These terms are important because they can impact your home loan.
Freehold means that you own the property from the moment you buy it. This means you can do anything with it, as long as planning permission isn’t required.
This can include changing internal layouts or putting up external walls, although these are all subject to local regulations. You can also have pets or rent out a room.
You should read the terms of your apartment mortgage to ensure that you don’t have any restrictions, and to find out if it can be remortgaged if you ever wish to move.
In leasehold arrangements, you sign a lease from the freeholder (the landlord) of the property for a specified period. These can vary between 40 and 999 years, but usually 90 or 120 years.
Your lease is a contract between you and the freeholder that sets out the rights and responsibilities of both sides. It includes enforcement covenants, rights of way and access, repairing and maintaining covenants, details of ground rent etc.
Leaseholds can be a great option for many people as they’re cheaper than freehold properties and there are usually a few extra perks. For example, some blocks have a concierge who will sign and collect your parcels and there are often discounts on building insurance.
Alternatively, you can club together with other flat owners and buy the freehold of the building as a whole. This then gives you a 999-year lease, which gives you all the benefits of freehold but with a few added perks, including being able to take advantage of communal facilities like swimming pools or gyms.
A leasehold may not be as expensive as a freehold but it’s still more than you’d pay for a freehold property. It’s important to check how long the lease is before you commit to purchase a property as this will affect how valuable it is in the future. A lease with fewer years left is less likely to attract buyers as it could be difficult to sell.
Number of storeys?
One of the most challenging parts of an apartment mortgage is the selection process. Lenders may be reluctant to hand out a bespoke apartment loan because of the complex nature of the business, and will have to take a close look at your application before they make a recomendation. The criteria varies a lot depending on the lender, but some of the more popular requirements include a strong property appraisal, a good credit score and a keen eye for detail. For the best results, speak to a specialist. The right mortgage could be the key to unlocking your multifamily dreams.
Leasehold or freehold?
There are many different factors to consider when you’re buying an apartment, but one of the most important decisions is whether to buy a leasehold or freehold property. This is especially true if you plan on living in the property for a long time and want to be able to make home improvements.
The main difference between a freehold and a leasehold is that with a freehold, you own the house and land it sits on. With a leasehold, you’ll pay a monthly service charge and ground rent. You can also extend the lease if you meet the criteria, but this can cost money.
In a leasehold agreement, you are granted the right to live in a property for a set period of time (called the lease). The lease can last between 125 and 999 years. When the term of the lease has expired, the property reverts to the owner of the land that it is built on.
Some people prefer leaseholds because they can benefit from rental income if they use their condo for a business. This can be beneficial because the rental income will cover the cost of maintenance, repairs and insurance for the property.
However, there are some disadvantages to owning a leasehold apartment. These include restrictions on what kind of businesses you can run from the property, and the value of the apartment may be lower if the lease has only a few years left before it expires.
Getting a mortgage on a leasehold property isn’t as easy as getting a freehold mortgage, but it can be done if you have a good deposit and enough equity in the property to pay off the mortgage in full. Depending on the lease terms, you might be able to secure a competitive mortgage rate.
But if you’re interested in owning a leasehold property, it’s important to shop around and find the best rates. You can use our tool to compare the market and get a good idea of what you can expect from your mortgage, but it’s always best to speak to a financial adviser about your specific situation before signing on the dotted line.
Commercial mortgages?
Generally, people use mortgages to purchase residential property (single family homes, condos and duplexes) or commercial properties that generate income like apartment complexes. But commercial real estate mortgages are used to purchase more than just property; they are often used to fund expansions, buy new equipment or employ more staff.
There are many different types of commercial mortgages that are suited to specific business needs, and your personal credit history will be a key factor in the lender’s decision-making process. A good lender will also conduct extreme due diligence before approving a loan, which may include a site tour and financial review as well as commissioned third-party reports.
As with residential mortgages, the terms of a commercial mortgage vary by lender. Some lenders will make fully amortized loans with terms of 20 years or more and loan-to-value ratios typically up to 80%, while others may offer interest-only loans with terms of 10 years or less and lower LTVs.
Some lenders will also offer conduit loans, which are commercial mortgages pooled together by a commercial lender and sold to investors on the secondary market. These may be a better option for borrowers with poor credit because they tend to have more flexible requirements than traditional commercial real estate loans.
One common commercial mortgage is the Section 207/223(f) loan, which facilitates the financing of multifamily rental housing. These can be particularly beneficial to borrowers who need more flexibility than conventional mortgages provide, such as paying off the loan early or avoiding prepayment penalties.
When it comes to the mortgage terms on these commercial mortgages, they are similar to residential ones, except that the debt-service coverage ratio (DSCR) is based on annual net operating income rather than gross income. The debt-service coverage ratio should be 1.2 times or greater, and the borrower should be able to show that they have sufficient income from the property to cover their monthly payments.
The commercial mortgage lending process can be long and drawn out, as the lender will want to get to know you and your business before approving your mortgage. They will be looking for a strong financial track record, a high debt-service coverage ratio and a positive cash flow from the property.