How Will Converting My House into Flats Affect My Mortgage?

You need to gain your lender’s consent before commencing any work to convert a house into flats. 

When you first took out your current mortgage, the lender would have granted it on the basis of your property being a single dwelling, therefore they must be notified of any proposed changes to their security. 

Converting a house into flats without the lender’s permission will put you in breach of the terms of your mortgage which would potentially give the lender the right to take possession of the property.  

In most cases, the incumbent lender won’t consent. Find out below what you can do next. 

Do I Need a Different Mortgage to Split My House into Flats? 

It’s likely you’ll ultimately need to remortgage onto a new product - or products -  if you want to convert a house into 2 or more flats. It’s important to note that you’ll need to have the property split legally with separate leases for each flat, otherwise you won’t be able to get multiple mortgages. 

The type of loan/loans you’ll need depends on the extent of the work you want to carry out, whether you already have the money for the conversion and what you plan on doing with the property once it’s finished. 

You’d normally take out development or bridging finance to pay off your current mortgage and release you from its conditions, as well as to possibly fund the house to flat conversion. If you’re still in the introductory period of your current mortgage you could face an ERC (early repayment charge). 

You’d need to remortgage again once the work was complete, unless you intended on selling the flats straight away. We explain how this all works below. 

To Carry Out the Conversion 

Development Finance 

If turning the house into flats means you’ll have to carry out extensive work on the property, you may need development finance.  

A lender will let you borrow up to 75% of the current property value or GDV (gross development value) with development finance. You can use this to pay off your current mortgage. 

They’ll then lend you money to fund the work you want to carry out, usually 100% of what the work will cost - providing it doesn’t exceed 75% of the GDV. You typically receive this money in instalments, subject to regular valuations on the property. 

Development finance options come with high interest rates and fees – including product fees, valuation fees and solicitors’ fees. They’re short term solutions, up to 36 months. You repay the whole debt in one go at the end of the period. You can pay the interest monthly, or you can opt for a roll-up interest option. 

With roll-up interest, you don’t pay the interest every month; it’s added to the outstanding debt. The interest then compounds which means the next round of interest is charged on the new amount – i.e. the debt plus the previous interest. 

One main benefit of roll-up interest is that you don’t have to worry about paying off any interest until the work is completed and you remortgage or sell the property. 

One main drawback of roll-up interest is that the amount you owe – and will have to pay back – increases by a bit more each time the interest is added. However, it’s worth remembering that development finance is short term, so the interest doesn’t have a particularly long period over which to roll-up. 

You’ll need to remortgage or sell the property after the work is completed so you can repay the loan. 

Bridging Loans 

Bridging loans are quick solutions you can use to pay off the current mortgage on the property. You don’t receive any money to fund the work itself. They’re suitable if you have the money to carry out the conversion, but your current lender won’t allow it. 

They come with high interest rates as they’re very short term – up to 24 months. They’re for slightly less extensive projects – ones where you wouldn’t need a development loan - which is why you have less time to pay them back. 

Some lenders will let you borrow up to 75% of the property’s current value, while others will let you borrow up to 75% of its GDV. 

You can also opt for roll-up interest when you take out a bridging loan, which means you repay the whole loan including interest in one go when you remortgage or sell the flats. 

Like with development finance, bridging loans are short term solutions so you have to remortgage onto a new product or sell the flats as soon as the work’s completed. 

Buy-to-Let Remortgage 

If the work you want to carry out is straightforward - e.g. you’re only converting a house into 2 flats and would only need to build a single wall to do this - you may be able take out a specialist buy-to-let remortgage and save yourself the inconvenience of remortgaging again once the work’s completed. This may also save you from having to create separate leases.  A buy-to-let remortgage would likely be cheaper than development finance or a bridging loan. 

You’ll only be eligible for a specialist buy-to-let remortgage on the whole property if you want to rent out all the flats after the house is converted; you wouldn’t be able to live in one of the flats yourself. 

After the Work is Completed 

It’s important to instruct your solicitor to arrange a title deeds and leases for each flat as soon as the work’s completed if you plan on dividing up the flats into separate leasehold properties. 

You would almost always split a house into leasehold flats when converting a property. The only time it wouldn’t be necessary would be if you planned on remaining the freeholder of the entire property and letting out each flat rather than selling some as leasehold properties. 

To Sell the Properties 

You may not need to remortgage if you intend on selling the flats after the work is finished, as long as you discuss your exit strategy with the development/bridging loan lender before you take out the loan. Your lender will normally be happy for you to sell each leasehold flat one by one, as long as you repay part of your debt each time you sell and the overall LTV (loan-to-value) doesn’t increase beyond any agreed limits. 

To Rent Out Each of the Flats 

If you intend on splitting a house into leasehold flats to let out, you’ll need to remortgage each flat separately on a leasehold basis after the conversion is completed. 

You would have no intention on living in any of the flats, therefore you would need to take out a buy-to-let mortgage on each one. You could then continue to own all flats and rent them out. 

Alternatively, you may be able to continue owning the freehold of the entire property in your name by taking out a single specialist buy-to-let remortgage. You would then rent out each flat individually while remaining the freeholder. You wouldn’t necessarily have to assign leases to the individual flats if you didn’t want to. 

To Live in One of the Flats 

You’ll need to arrange a residential mortgage on the leasehold flat you intend to live in. You could either arrange separate buy-to-let mortgages on the remaining leasehold flats you wish to let out or sell them and have other people buy the leaseholds. 

What Happens to the Freehold? 

When you divide a single freehold property, like a house, into multiple leasehold flats, you don’t split the freehold. The freehold title remains unaffected, it’s just that you create a series of long term leases on the property. 

You’ll need your solicitor to sort out the ownership of the freehold when you divide the property into separate leasehold flats - as the freehold and leaseholds cannot be held in the same name - along with a maintenance agreement, etc. However, you can indirectly own the freehold through a limited company, and own the lease on your flat directly. 

Don’t Forget About Planning Permission 

In order to gain any finance for the conversion, a lender will want to see that you have planning permission. You can apply for planning permission online. 

You’ll typically receive a decision on your planning application within 8 weeks. There’s normally an application fee, but the amount you’ll have to pay will depend on what you need permission for. Use Planning Portal’s fee calculator for an application fee estimate.  

How Will Converting My House into Flats Affect the Value of the Property? 

How converting your house into flats affects the value of the property depends on what you plan to do with it. 

If you plan on taking out leasehold mortgages on each of the flats – regardless of whether you live in one or not – the properties will usually be worth more collectively than one big freehold property. 

If you plan on retaining the freehold in your name and renting out all the flats, rather than offering them as leaseholds for sale, then the value of your property will likely increase overall but might not be worth as much as the collective value of multiple leaseholds. This is because a potential buyer of the freehold will likely want a separate lease on each flat, as it would give them some flexibility if they were to sell any in the future. 

It’s worth noting that you won’t be able to sell any of the flats without putting individual leases on them first. 

Important factors to consider when converting your house into flats:

1. Change in property use - converting your house into flats represents a change in the use of the property. Most residential mortgages are designed for single-family dwellings. You will need to inform your mortgage lender about the change in property use  
2. Planning permission and regulations - before converting your house, you will need to obtain planning permission and adhere to building regulations. Lenders may want assurance that the conversion is legal and compliant with local regulations  
3. Valuation and Loan-to-Value (LTV) ratio - the value of the property may change after the conversion, affecting the loan-to-value ratio. Lenders typically have maximum LTV ratios, and the change in property type could impact the amount you can borrow or the terms of your mortgage  
4. Commercial mortgage - converting a property into multiple flats could mean that it is considered more of a commercial venture. In such cases, you might need a commercial mortgage rather than a residential one. Commercial mortgages often have different terms, interest rates, and eligibility criteria  
5. Rental income considerations - if you plan to rent out the individual flats, lenders may consider the potential rental income in their assessment. This could affect your borrowing capacity and the terms of the mortgage  
6. Insurance changes - you may need to update your insurance coverage to reflect the change in property use. Landlord insurance might be necessary to cover the individual flats and associated risks 
7. Tax implications - converting your property into flats can have tax implications. You may be subject to capital gains tax or other taxes depending on the nature of the conversion and whether you plan to sell or rent out the flats  
8. Affordability assessment - lenders will assess the affordability of the mortgage based on the new property configuration. They may consider potential rental income and your ability to manage the increased costs associated with multiple units  

Before proceeding with the conversion, best to speak with an experienced mortgage broker such as John Charcol. Who can provide guidance on how the changes may impact your mortgage and help you navigate through the necessary steps.