Converting Two Flats Into One Property

We have seen an increasing number of clients looking to purchase a flat located directly above or below a property they already own, with the intention of combining the two into one larger residence. Typically, the works involve installing a staircase between the properties and carrying out cosmetic improvements rather than extensive structural redevelopment.

While this may appear relatively straightforward, many high street lenders are unwilling to finance the transaction because, at the point of purchase or remortgage, they are technically still lending against two separate flats. This can make a conventional residential mortgage unsuitable.

However, where the proposed works are relatively limited, it may be possible to avoid the higher costs associated with development finance. Specialist private banks and building societies may be willing to cross-collateralise the two properties and allow the client to combine the flats into a single residence following completion, subject to their individual lending criteria.

In some cases, where the client has a relatively low mortgage on their existing flat, it may also be possible to raise sufficient additional borrowing against that property to cover both the deposit required for the second flat and the cost of the proposed works. This can potentially reduce the amount of additional cash the client needs to contribute, subject to affordability and lender criteria.

For transactions below £1M, building societies can sometimes be well suited to this type of structure, while private banks may offer more flexibility where the overall lending requirement exceeds £1M.

We recently dealt with two transactions that demonstrate how these structures can work in practice.

Building Society

Nature: Residential remortgage and purchase

Total property value: £950k across both flats

Maximum LTV: 75%

Product: Two-year discounted variable

Interest rate: 1.99%

Early repayment charge: 3% for two years, none thereafter

Mortgage term: Up to age 70

Repayment method: Part-and-part, with 50% of the property value on an interest-only basis and 25% on a capital-and-interest basis

Overpayments: Up to 10% of the outstanding balance each year without penalty

Lender application fee: None

Lender arrangement fee: £499

Private Bank

Nature: Residential purchase and remortgage

Property value: £3M

Maximum LTV: 65%

Mortgage term: Up to 25 years

Repayment method: Interest-only

Lender arrangement fee: 1% of the loan amount

The private bank offered a range of fixed-rate options, allowing the client to choose a structure that best suited their circumstances:

Two-year fixed

• Interest rate: 2.19% plus BoE base rate
• Monthly payment: £4,062
• Early repayment charge: 0.5% for two years, none thereafter

Two-year fixed

• Interest rate: 2.39%
• Monthly payment: £4,239
• Early repayment charge: 2% in year one and 1% in year two, none thereafter

Three-year fixed

• Interest rate: 2.59%
• Monthly payment: £4,594
• Early repayment charge: 3% in year one, reducing to 1% in year three, none thereafter

Four-year fixed

• Interest rate: 2.69%
• Monthly payment: £4,771
• Early repayment charge: 4% in year one, reducing to 1% in year four, none thereafter

Five-year fixed

• Interest rate: 2.79%
• Monthly payment: £4,949
• Early repayment charge: 5% in year one, reducing to 1% in year five, none thereafter

Overpayments: A capital reduction of 10% per annum could be made without an early repayment charge during the early repayment charge period.

These examples demonstrate why lender selection can be particularly important when a client is looking to purchase two adjoining or vertically connected flats and ultimately combine them into one residence. The transaction does not always fit neatly within conventional residential lending criteria, particularly where the legal status of the properties remains separate at the point of lending.

For clients considering this type of project, the proposed works, ownership structure, existing borrowing, property values, affordability and intended end position will all need to be considered. A lender must also be comfortable with the proposed security and the process for combining the properties.

Enness works with private banks, building societies and specialist lenders across the high-value mortgage market. Our role is to identify lenders whose criteria are appropriate for the specific structure rather than trying to force a complex transaction into a standard mortgage product.

Disclaimer:
This article is for illustrative purposes only and does not constitute financial, legal, tax or investment advice. Mortgage availability, rates, LTVs, fees, early repayment charges and lending criteria can change and will depend on individual circumstances. The rates and terms referenced above relate to historical examples and are not indicative of current or future pricing. Any proposed combination of properties should also be assessed by the relevant legal, planning and professional advisers.

Risk Warning:
Your property may be repossessed if you do not keep up repayments on your mortgage. Interest-only borrowing requires the outstanding capital to be repaid at the end of the agreed term or when otherwise due. Borrowers should ensure that they have a suitable repayment strategy and understand the costs and risks associated with purchasing, altering and combining separate properties.