Why mortgage problems may prevent you buying a studio flat Money The Observer

Why mortgage problems may prevent you buying a studio flat

Illustration by Leillo

Outside London, it would merely be the stuff of estate agents’ dreams: 162,000 for a studio flat so cramped that the only place to sleep is inside a makeshift, coffin-like box. Then there’s 148,000 for an even smaller studio, measuring 20 sq m, that doesn’t have a window. But inside London, where buyers are lining up to purchase such properties, estate agents have long since stopped pinching themselves – both these flats, for example, went under offer just weeks after being listed.

Yet if you’re desperate enough to consider purchasing such a property – perhaps because your only other option is renting an equally tiny flat and paying your landlord’s mortgage instead of your own – then beware, you’re about to enter a process that is fraught with potentially expensive problems. Those who seek mortgages on such “dream homes” will often discover, after making an offer, paying for a survey and racking up solicitors’ fees, their mortgage is refused.

Indeed, on the above properties, the estate agents’ initial euphoria was, it seems, short-lived. Both properties have been on and off the market and have undergone significant asking price cuts. At least one potential buyer had to drop out because of mortgage problems (see below),which might be why would-be buyers of the other flat will only be considered if they can pay cash.

Even if your mortgage is approved, you may find – after you buy a tiny studio flat – that it has been illegally converted or contravenes its lease. And that’s not the worst of it .

Here’s what you need to know before you sign on the dotted line …

What the law says

The Housing Act states that a room with less than 10.2 sq m of floor space is unsuitable for two people to sleep in, so be wary of buying anything that doesn’t meet this minimum standard.

You should also ask your solicitor to check that all planning permission consents and building regulation certificates have been complied with, particularly if the property is a conversion. “Anything that’s been used as an office block or a garage must also have a change-of-use certificate from the local authority,” says solicitor Steve Reading from Access Legal.

As most studios are leasehold, the firm also recommends looking for written consent from the freeholder for any internal works that have been carried out, such as a change to internal walls or the inclusion of a mezzanine floor.

Mortgages: size matters

Around 50% of lenders in the market, including Accord, Skipton and Virgin Money, will not lend on studios. “Of those lenders that do consider them, nearly all specify a minimum of 30 sq m,” says Ray Boulger from mortgage brokers John Charcol. He adds: “Properties also need separate food preparation, toilet and washing facilities.”

The lenders that do not impose size restrictions are Santander, Nationwide, Woolwich and the Lloyds Banking Group brands (Halifax, BM Solutions, Lloyds Bank and Bank of Scotland). If the studio is more than 30 sq m, NatWest and Leeds building society may also lend on it, and brokers Anderson Harris says to consider applying to Clydesdale, Kent Reliance and Metro Bank, too.

That may sound like you have a lot of choice, but many of these lenders will impose further restrictions which cause problems for studio buyers at the bottom of the market.

For example, Leeds building society won’t lend on basement studio flats and requires the property to have natural light.

Compact does not always mean bijou …

Others won’t lend on ex-local authority properties or those in large blocks of flats, especially if the building doesn’t have a lift, or is constructed from non-standard materials such as concrete and steel. “Most lenders prefer flats in buildings of five floors or under,” says Pete Mugleston from OnlineMortgageAdvisor.co.uk. Similarly, he says, studio flats (or indeed any flats) near or above commercial premises can be very tricky to find finance for.

“Lenders tend not to like properties near any business with unsociable hours, like a pub or kebab shop, or anything smelly like a dry cleaner or hairdresser,” says Ying Tan of the Buy to Let Business.

What’s more, you should be prepared to put down a larger deposit on a studio than you would on a bigger property in the same location. “Typically, borrowers struggle to find anything above 80% to 85% loan-to-value,” says Brian Murphy of the Mortgage Advice Bureau.

The saleability of a studio

Have you ticked every box so far? Don’t start celebrating just yet, though. When it comes to studios, the lender will rely particularly heavily on its surveyor’s comments about “saleability” when deciding whether it’s suitable to lend on.

“Buyers can find themselves out of pocket for the survey fee simply because one person’s opinion of the property is not favourable,” says Tony Harris of financial advisers ContractorFinancials.com.

In this situation, using a mortgage broker can really come into its own as he or she may be able to convince a lender’s surveyor that the property is a viable purchase. Similarly, a good broker will know the ins and outs of a lender’s criteria – for example, Tang says NatWest is a good lender to try if you want a mortgage on a studio that is above commercial premises, while Mugleston has found that Nationwide will only lend on ex-council studios in large residential blocks (over five storeys) if the property is located in a Greater London borough.

“The location and quality, coupled with the level of local demand, are key factors for lenders,” says Boulger.

As a result, brokers say, the more salubrious the location and the more luxurious the building, the less size matters to a lender.

And it’s wise not to forget that the market you buy into can also make a big difference when it comes to selling the property.

“When the property market is strong, there’s an increasing number of people who can afford only to buy a studio – and, because they are desperate to buy, they’ll buy a property they don’t really want, rather than ‘miss the market’,” says Boulger.

“When the market turns, this type of buyer is not around because, as prices fall, they can afford a bigger flat. And so the lack of demand for studios means their value falls more than other properties.”

THE LOSER

Camberwell studio flat, south London Photograph: Zoopla

A charming studio flat ”with numerous clever space-saving storage solutions” is how estate agent, Your Move, describes the 162,000 29-sq-m property in Camberwell, south London. Indeed, the 5m by 4m living area looks quite airy – until you realise the owner has sacrificed the bedroom and seemingly stuck a bed into a cupboard-like space in the wall (see above).

“Desperate” is how the successful bidder, 32-year-old Pete Flowers (not his real name), describes himself. He has been renting for more than 10 years on a 21,500-a-year salary. “I started in Hackney. Four years ago, my rent doubled overnight and I’ve had to move further and further out. I’ve been trying to buy for over a year, so I can escape the London rental market – prices are out of control.”

Despite being able to put down a 50% deposit thanks to his parents, Flowers’ purchase has stalled. His lender, Woolwich, has refused a mortgage, because the main entrance is from a balcony walkway.

It is the second time it has turned him down – despite agreeing in principle to lend to him if he found a suitable property. In April, after incurring hundreds of pounds of legal fees, he also lost a studio in New Cross because it was above a barber shop. “I’m assuming a cash buyer snapped it up instead and is now letting it out to a tenant like me.”


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