Simon Davis, aged 55, pleaded guilty to arson, being reckless whether life was endangered, when he appeared at Exeter Crown Court on video link from Langdon Hospital.
He admitted starting a fire at around 1.45am on the morning of January 7 this year which caused serious damage to Loweswater House in Windermere Close, Exeter.
He was heard shouting ’burn, baby burn’ as the fire spread, trapping 37-year-old neighbour Julie Curtis, her one-year-old daughter and 14-year-old son inside.
Davis is thought to have lit the fire using petrol which he poured onto his front door and door mat.
Julie and her children could not get out of the front door because of dense smoke in the communal area outside. Her own front door was damaged but was fireproof and prevented the blaze spreading into her flat.
A firefighter led them to safety after the fire had been brought under control but Julie was treated at the scene for smoke inhalation.
Davis is due to be sentenced next week and is likely to receive a hospital order which will result in him remaining at Langdon indefinitely.
Miss Caroline Bolt, prosecuting, said a more serious charge of intending to endanger life is not being pursued in the light of the probable outcome.