Property purchase with a short lease
Short and complicated leases can present serious challenges for securing a mortgage. We present solutions.Speak to one of our experts020 4525 5312
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Property purchase with a short lease
Funding compex property cases is more straightforward with expert support
Many lenders will be reluctant to lend on flats with short leases, but being accepted for funding is still possible.
Table of Contents
There are two main ways to own property in the UK - leasehold and freehold.
The freeholder of a property owns it outright, including the land it’s built on. Most houses are freehold but some might be leasehold - usually through shared-ownership schemes.
With leasehold, you own the property for the length of your lease agreement with the freeholder. A lease defines the length of time that you own property while it sits on land owned by the freeholder. This normally applies to flats but can apply to some houses. At the end of the lease term, the property will go back to the freeholder unless the lease is extended - which is almost always possible, but frequently costly.
Most flats and maisonettes are owned leasehold so, while you own your property in the building, you have no stake in the building it is in. Some houses are sold as leaseholds. If this is the case, you own the property but not the land it sits on.
When you buy a leasehold property, you’ll take over the lease from the previous owner. But the lease will not start again - so before making an offer you’ll need to consider how many years are left on the lease.
When the lease on a property has 99 or more years left, it is usually worth 100% of its value if it were a freehold property. But the value will actually fall over time. When the length of the lease drops to about 80 years, the value can be expected to drop to about 75% of the value compared to its value as a freehold. After that, the value will fall with every year that passes. For this reason, a ‘short lease’ is usually considered anything under 70 years. If you were looking for a property at a very low price, then a short lease could be their answer. The goal would be to purchase the property and then extend the lease in order to bring the value up again. But this isn’t as simple as it might seem.
If the lease is for less than 70 years, you might struggle to get a mortgage. Properties with a short lease can be a problem as many high street lenders will not consider lending on properties with less than 70 years left on the lease. This is because the value of the property will begin to drop the closer the property gets to the end of the lease.
Some valuers now do not like recommending a property for a mortgage if there is not at least 80 years left on the lease. This is because lenders will normally want it to run for 25-30 years beyond the end of your mortgage.
So if you want to get a 25-year mortgage, the lease needs to have at least 50-55 years before it ends. As a result, it can also be difficult to sell a property if the lease is for less than 80 years.
But the complications don't end there.
If you eventually want to sell a leasehold property you’re buying, you need to think about how many years remain on the lease. Most residential leases used to be for a term of 99 years but, more recently, leases on modern purpose-built flats have been for 125 years or longer.
However, the value of a leasehold flat diminishes as the lease gets shorter. A flat with a 99-year lease - or more - will have a relative value of 98-100%. As the lease gets shorter the percentage relativity decreases.
In the past, the cut-off point was usually in the region of 70 years but since changes in legislation, a number of lenders now consider a short lease as being less than 80 years, as this is the point at which ‘marriage value’ kicks in when applying for a new lease under the terms of The Leasehold Reform, Housing and Urban Development Act 1993.
There is no problem in principle in buying a flat with a short lease, provided that its price reflects this fact. In practice, though, it can be more difficult, particularly if you need to raise a mortgage to buy the property.
The problem is that most properties can be considered appreciating assets. However, many lenders see leasehold property as depreciating assets, and so will not lend.
Getting a mortgage for a property with a short lease
However, it is still possible to buy a property with a short lease, but the prospective lender will normally grant a mortgage on the basis that the vendor will apply for a new lease. It's also worth noting that the lender may hold some money back until the lease is extended.
If you buy a leasehold flat with a short lease, you will have to wait two years before you can apply for a new lease in your own right - which can make some types of property deal, such as development and flipping, unrealistic. However, there are some reasons to consider short lease property for investment. Short lease properties can be a cost-effective way to buy in desirable locations and generate spectacular capital growth and rents as a result.
When purchasing a flat with a short lease, you will have to consider how much it will cost to obtain a new lease and factor this into your calculations when considering how much you should pay.
Short Lease Mortgages
Purchasing a property through a mortgage where the freehold is held by a separate party and requires a negotiation to extend the lease later has its own complications and, often, clients are a little unsure how to start their search. Short lease mortgages are a specialist area of mortgage finance and finding a lender may require the expertise of the Rangewell property team as many do not advertise their available products direct to customers.
Our short lease mortgage service is based, not only on our knowledge of lenders who are active in the sector, but on our ability to call on bespoke lending solutions. We generally find that these types of mortgage applications often require a greater degree of negotiation with national lenders, the underwriters, their panel surveyors and property valuers.
For leases of more than 35 years, there is a good chance that we may be able to secure high street interest rates. Some mainstream lenders will be able to lend as long as the length of the lease is at least 35 years at the end of the mortgage term. For example, you may be able to get a 5-year mortgage on a property with 40 years left on the lease or a 15-year mortgage on a property with 50 years left on the lease.
For a lease of fewer than 35 years, we can still ensure that competitive rates can be achieved from specialist lenders.
Even funding for lease lengths below 20 years could be possible if the lease is a “qualifying lease” - able to be extended beyond 21 years.
Presently there are some highly competitive products available whether the property is for use as a main residence or an investment property. Lending can also be obtained through a range of structures, including limited companies and offshore trusts.
How Rangewell can help
Short lease lending is a challenge and not all commercial property lenders will consider it.
At Rangewell, we know those that will - as well as those that specialise in particular sectors. Each has its own approach to interest rates and fee arrangements, and comparing them all may require expert knowledge to fully understand what is really being offered.
At Rangewell, we work with lenders across the market - and we can call on the expert knowledge you need to find the lender that is right for you. It means you have the financial solutions you require when you are considering a property purchase.
Our knowledge can not only help you secure the funding you need - but you could also save you a great deal of cash.
ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
REAL EXAMPLES OF WHAT WE CAN DO
Arrange funding for a 100 year old Edinburgh flat with just ten years left to run on the lease
Provide funding to secure a lease renewal on a mixed-use property in London
Provide funding solution to acquire leasehold flats cheaply because of issues with the length of the lease
Create a solution for a housing association that had acquired property with a defective lease title
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