Multi Unit Freehold Block (MUFB) Mortgages

There can be some confusion between a multi unit freehold block and an HMO (House in Multiple Occupation), particularly when it comes to property finance. These are, however, not interchangeable names for the same thing, and the practical consequences of this distinction are important.

An HMO is a property where three or more tenants from separate households share at least one facility (usually a kitchen, bathroom, or both). Crucially, an HMO is classified as a single dwelling in the lender’s view, even if the rental income is being generated from five or size separate individuals. By contrast, a MUFB contains a series of distinctly separate dwellings. Each unit must be self-contained, and have its own kitchen, its own bathroom and its own front door. Tenants in MUFBs do not have shared facilities such as kitchens or bathrooms, although they will have access to block common parts such as lobbies, corridors, lifts, and amenity spaces.  

Licensing. HMOs can be subject to licensing requirements, such as mandatory licensing where they meet defined criteria on unit numbers and occupancy levels. Larger HMOs also require additional licensing in most local authority areas. MUFBs on the other hand, are not subject to HMO licensing, although individual units within a MUFB (for example a 3-bedroom apartment) could themselves become licensable as HMOs if they are let on a shared tenant basis. Simply put, a block of six self-contained flats where each flat is let to a different tenant is a MUFB. A block of six flats where each flat is let to four sharers is likely to be treated as separate HMOs, regardless if the freehold is a single ownership.

Valuation. Approach to HMO and MUFB valuations can be different, because the likely buyer, alternative use and resale market may not be the same. Smaller HMOs where the property could easily be sold as, or reverted to, a single dwelling could be valued based on its residential market value (vacant possession value). In other cases, particularly where the HMO is larger or more complex, the valuer or lender may assess on an investment valuation basis using the rental income and an investment yield which is seen as more relevant for these types of assets.

Multi unit freehold blocks are usually assessed differently to HMOs because these assets are usually held and sold as a single investment, rather than individual flats on separate titles. Depending on the lender, valuer and property arrangement, a MUFB valuation may be based on the block as a single investment, the aggregate value of all the individual units, or an aggregate value with a discount applied to reflect investor bulk-sale marketability. This can materially influence the maximum loan available from lenders, even if the rental income is strong.

Lender appetite and criteria. HMO mortgage criteria covers yield, licensing, tenant mix, management strategy, and the physical condition of shared areas. MUFB lending criteria will include rental income across units, ICR stress testing, construction quality, and the freehold title. Although there is overlap between the two, they are distinct lending categories, and a lender active in one may not be active (or as active) in another. Investors should carefully study the product and criteria before submitting an application, to ensure that the asset in question fits the finance product.

The most straightforward route to MUFB ownership is probably via acquisition, where a landlord or investor purchases an existing multi unit freehold block from another owner. There are, however, other scenarios that brings investors into MUFB ownership, and the financing approach between them can vary.

Developers who build a residential scheme and look to retain completed development units is an increasingly common example. Developers may also sell some of the units on a scheme, by issuing individual head leases to buyers, whilst retaining any remaining units on the single freehold title creating a MUFB. Exits from a development facility onto a MUFB mortgage is a specific type of transaction with its own underwriting approach. The lenders who are active in this type of transaction may not necessarily be the same lenders who handle standard buy to let mortgages well. Development exit finance is frequently used in these scenarios following practical completion under a construction facility, to allow time for the MUFB refinance to complete

A house that is converted into self-contained flats takes a similar approach in that once self-contained units exist on a single freehold title, it becomes a MUFB – even if the building was originally a single dwelling. At this point the lender will also expect that any planning permissions or lawful development certificates, building regulations, fire safety requirements, and EPCs are in place.

Commercial to residential conversions can also become MUFBs once the conversion is complete and the units are self-contained. These might include former offices, care homes, doctors surgeries, or pubs. Lender appetite for converted commercial property can be narrower than for purpose-build residential, and this can be reflected in the terms, criteria, and valuation approach by lenders.

Inheritance may also bring an investor into MUFB ownership, where perhaps a building or property portfolio has been inherited from a parent’s estate.

A less common, but nonetheless possible, ownership route might be portfolio consolidation where an investor may seek to merge several single-let properties into a single block.

Typical high street banks and lenders don’t usually compete in the MUFB space. These lenders are typically set up to offer buy to let products within a relatively standard and narrow criteria, and they typically drop away once an asset reaches a certain size, value, or complexity.

The active market for MUFB mortgages is largely among specialist investment lenders, portfolio lenders, and some building societies with appetite for more complex residential investment.

Unit numbers is a key criteria for many MUFB lenders. Some are comfortable with two-unit blocks (essentially a building with two self-contained flats) while others focus specifically on larger blocks of twenty or more units where the income profile and management structure are more closely related to a commercial investment. Lenders in the MUFB market set out a range of different criteria based on their internal concentration limits and preferred underwriting models. A lender willing to finance a six-unit block may decline an application for a fifteen-unit building, even if the deal is stronger.

Although rates are important, lender choice for MUFBs depends more on how well the asset and borrower meet lender criteria. Unit numbers, background portfolio criteria, whether the lender will consider converted, non-standard construction or new build units, how they apply their ICR stress test, and numerous other considerations. A lender with a lower headline rate but stronger income coverage requirements may offer a borrower significantly less than a lender with a slightly higher rate but a more relaxed stress test criteria. Equally, a lender offering a higher interest rate but lower arrangement fee might be more cost effective over the initial term than a lender with a lower interest rate but higher arrangement fee.

Ensuring the right lender is selected before submitting a case prevents much wasted time and, occasionally, an application and valuation fee spent on a lender who was never going to approve the loan in the first place.

Investors are typically able to secure multi unit freehold block mortgages between 65% to 70% LTV, with the later being a fairly common ceiling for experienced landlords and portfolio investors. Lender’s may offer up to 75% for strong cases, but lender appetite will depend on the type of asset, rental income, borrower experience, property quality, construction type and unit mix.

In cases where the lender allows arrangement fees to be added to the cost of the loan, it’s not unusual to see LTV caps up to 80-85%.

Often the real constraint to loan sizes is the interest cover ratio and rental stress tests required from lender to lender. They test the rental income (or estimated rental income) against a stressed interest rate to make sure the income can cover the debt by a certain margin (for example 125%).

Ownership structure is also important, as some lenders assess limited company SPV’s differently to personal borrowers. For some lenders and products (for example those for limited companies or 5 year fixed rates) the product rate will be used as the stress rate. Our buy-to-let rental stress test calculator can help illustrate how rent, interest rate and ICR assumptions affect borrowing capacity.

Lender’s also have products designed for certain assets, therefore some products may have their own loan caps and unit count limits which could impact LTV. For example, a product may have a £2m loan cap for up to 6 units in the block.

The borrower’s portfolio can also influence the loan available. Too much exposure with one lender elsewhere in the portfolio could limit borrowing, as well as background portfolio debt overall. Even if a lender is comfortable with the asset itself, they may be unwilling to lend due to the composition of the wider portfolio with debt, property type, location or corporate and control structures.

Property quality will also influence the lending available. The type and complexity of the building itself could impact how a valuer assesses its value, but also the assessment of the rental values will directly feed into the valuation and affordability calculation. Weak or uncertain rental evidence can lead to a reduction in the maximum loan available, even if the headline LTV originally appeared achievable.

The majority of MUFB purchases are made through limited companies or SPVs, particularly where the borrower is an experienced or portfolio landlord. Specialist lenders are very comfortable with company-owned MUFBs, and SPV mortgages are now a well-established part of the wider buy to let mortgage market.

While the tax position should always be discussed with an accountant or tax adviser, the ownership structure does have direct finance implications.

As part of their underwriting process, lenders usually assess the company, the directors, the shareholders and beneficiaries, the wider portfolio connected to these parties, and the property itself. Some will consider borrowing across all connected companies, whereas some may assess each SPV separately. They may also assess their own exposure to a particular borrower group, sometimes capping the aggregate loan amount they will provide, or capping the LTV they will offer.

Personal guarantees by Directors of limited company borrowers are very common. Even where the loan is in the name of the SPV, most lenders expect the main individuals behind the company to sponsor the debt personally, especially where the loan size is significant.

MUFB refinancing is usually driven by one of three things: replacing an existing facility, raising capital against accumulated equity, or moving from bridging or development finance onto long-term investment lending.

The amount available depends on both valuation and rental income. A block may have increased in value, but the refinance still needs to pass the lender’s rental stress test. Cases are usually straightforward where the existing rent roll, tenancy documentation, and cashflow is well evidenced. For recently converted buildings or where units are vacant, under-rented or poorly evidenced, lender appetite and options can be reduced.

For larger portfolios, refinancing may also involve deciding whether the MUFB should sit with one lender, be separated from other assets, or form part of a wider capital-raising strategy. Planning the structure before approaching lenders can avoid delays, valuation issues and unnecessary declines.

Development finance is the perfect tool for the construction period of a new scheme, but its not designed for long-term ownership if developers wish to retain completed units. Once the scheme is complete, holding retained units on a development facility can become expensive, especially if the redemption has not been agreed before the loan approaches maturity.

Many developers move onto development exit finance, or directly onto a MUFB mortgage. In these circumstances, lenders would usually require the scheme to be practically complete and, if going to a MUFB mortgage, be in a fully lettable condition including any applicable paperwork for the units to be occupied. The retained units would need to be supported by rental evidence, such as actual lettings or comparable evidence of similar rentals in the area.

Where some units have been sold and others retained, the lender will need to understand the freehold, any leasehold titles, service charge arrangements and what security it can take over the remaining units.

The decision to sell or retain units should be modelled before practical completion. Our guide to retaining completed units after a development explains the main refinancing issues.