Property purchase with a short lease

What is a leasehold property?

There are two main ways to own property in the UK - leasehold and freehold. Leaseholds represent a significant part of the investment market. 20% of UK housing stock is estimated to be leasehold, with 58% of those dwellings owner-occupied and 37% in the private sector. The remaining leaseholds are in the social housing sector. 

Whilst the freeholder of a property owns it outright, a leaseholder does not. Freeholds include the land the building is constructed on, giving them additional value over a leasehold. Most houses are freehold, but some might be leasehold - usually through shared-ownership schemes.

With a leasehold, you own the property for the length of your lease agreement with the freeholder, who owns the land the property is sited on. A lease defines the length of time you own property while it sits on land owned by the freeholder. This usually applies to flats, but it can also apply to houses and commercial units. At the end of the lease term, ownership returns 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 and how difficult extension may be. 

Historically, leaseholders had no guarantee a lease would be extended. Now, however, there is a statutory right in place that means anyone who lives in a property for 2 years can purchase a lease extension. However, if you don't live in the property or you want to secure an informal extension, you can't rely on these rights and will need to negotiate with the freeholder - often ahead of the purchase itself. 

How does a short lease impact property value?

When the lease on a property has 99 or more years left, it is usually worth 100% of its value, as if it were a freehold property. As the lease's length begins to drop, the value will fall over time.

When the length of the lease drops to about 80 years, the value can be expected to drop to about 75% when compared to its value as a freehold. After that, it continues to 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 the answer. Many vendors will sell off properties with short leases left on them without renewing the lease solely to expedite the sale. 

As an investor, buying a property for a lower percentage of it's value, organising a lease extension and then reselling would offer improved financial yields - provided you can secure the extension. While it may sound like a strong plan in theory, it's actually difficult for two reasons: lenders are less likely to fund short lease mortgages AND leaseholders may not be willing to extend. 

You can negotiate a lease extension ahead of the purchase - many property developers try to attain informal extensions before they proceed, though this will often incur a cost that can negate the savings associated with short lease property.

Short lease mortgage challenges

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 them. As the value of the property drops, the lender's risk is essentially increased. Compare this to a freehold, where the mortgage lender always has added security associated with land value - even if you can't repay the loan and your property falls apart, the land still holds value. In a leasehold, a lender doesn't have this and will often decline the mortgage.

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. They cannot wait for you to extend the lease or agree it in principal - it must be done before the lender is approached or they won't want to support your application. 

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 buy or sell a property if the lease is for less than 80 years. 

Whilst mortgages from banks may be off the menu, there are alternative lenders who will finance a short lease provided you can prepare a strong application and negotiate from a position of confidence. Work with the team here at Rangewell and we'll show you how. Mortgages, however, aren't the only way to acquire property...

Alternatives to mortgages for short leases

Property finance

There are lots of independent lenders that specialise in commercial property or other forms of property development outside of the standard residential mortgage arrangement. These lenders may be receptive to financing a short-lease property, provided you have other assets to offer as security. With Rangewell on your side, you may not even need security depending on your circumstances and initial capital. 

To maximise your investment's value, you can raise an initial cash loan, purchase a short lease property outright and then resell it once you renegotiate the lease. In some cases, you can even raise even more finance and attempt to purchase the freehold from the existing landlord.

Commercial property

Most commercial property in the UK is rented on a short-term basis, with leases of 3-5 years. If you want to purchase your commercial unit outright, you can either renegotiate with the freeholder to issue a long lease or attempt to buy the freehold from them.

In either case, you'll need specialist finance that is structured around your business. Unlike in a mortgage agreement, where the lender typically assesses the building's value and your personal circumstances, commercial property purchases will be financed only when you have a strong business plan and complete application that demonstrates the commercial value of the acquisition. 

Our team at Rangewell can help you understand the intricacies of a commercial property purchase with a short lease, walk you through the lender's market and help guide you to a positive outcome - all at no cost to you. 

Selling leaseholds

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 decreases relative to that lease. 

In the past, the cut-off point was usually in the region of 70 years. However, since changes in legislation, most 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.

Ultimately, the challenge around leasehold property is about balancing the value benefits of a cheaper property with a short lease against the added difficulty in financing it. In both the domestic and commercial sectors, short lease mortgages are rare due to lenders seeing them as depreciating assets. 

Getting a mortgage for a property with a short lease

As we've discussed, it's still possible to finance a short lease property through other products. However, even more typical mortgages are still an option - though it will be harder to secure one. To consider financing you, a prospective lender will only 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 into desirable locations and generate spectacular capital growth and rental yields 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. You should also consider the cost of purchasing the freehold and, where it is smart to do so, consider applying for the finance to do that with your lender. 

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. Most lenders won't offer short lease mortgages to the public and are only available through brokers. 

Our short lease mortgage service is based on our in-depth knowledge of mainstream and independent lenders, as well as our ability to build finance packages that are bespoke to our client's needs. We know that these mortgage applications often require a greater degree of negotiation with national lenders, the underwriters, their panel surveyors and property valuers, so we're ready to act on your behalf to get the right deal. 

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.

Bridging loans for short-lease properties

Bridging loans are a short-term loan product perfect for short-lease opportunities. They can be raised against assets that mortgages may not be offered on, meaning a bridging lender can help you fund a short-lease property acquisition and even the lease extension. 

They are often raised against auction property because they offer fast financing that allows someone to buy the property and then switch to a new loan once the acquisition is complete. In the same vein, you can use a bridging loan to purchase a short-lease property and then use the increased value post-lease extension to pay off the loan. 

Buying at Auction

Properties which cannot be mortgaged - including short-lease properties - are often purchased at auction. They must be paid for in full within 30 days. A Bridging Loan can help and may go from application to approval in 24 hours, with funds ready for drawdown shortly afterwards. The loan can cover both the purchase of the property and the cost of renewing the leasehold. The buyer can then complete the lease extension process and arrange a mainstream mortgage to repay the Bridging Loan.

What do Bridging Loans cost?

Short-term finance always costs more than long-term lending. Bridging Loans, therefore, have a relatively high cost and are intended to be repaid quickly, either by the sale of the property or by refinancing with a long-term finance product, such as a mortgage. They usually can cover around 70% of the total value of the property they are secured on.

However, in some circumstances, it is possible to arrange 100% Bridging Loans.

The interest rates that lenders charge will vary depending on both your circumstances and your business, and, of course,  the deal to be funded. Current rates can range from 0.7-1.5% per month, with even higher rates for more difficult propositions. On top of the monthly interest, most lenders will charge an arrangement fee of between 1-2%. In some cases, an exit fee will also be charged, and there may be surveyors’ and legal fees. It's also essential to remember that, if the loan runs over the agreed term, you will also have substantial penalty fees to pay.

Repayment arrangements can vary for Bridging Finance. In some cases, all fees and interest can be rolled up and settled with a single repayment.

How Rangewell can help with short lease property purchases

Short lease lending is a challenge and not all commercial property lenders will consider it. Those that do may not offer mortgages and instead you'll need to arrange alternative forms of finance such as bridging loans - which may be more expensive. 

To realise the potential of buying a short-lease property, you need to balance the finance you're offered against the value you could potentially achieve post lease extension. To do that, Rangewell can work with you and help you understand the lender's market, loan types and even advise on solicitors or other property experts to help with the lease extension process. 

Our team also has existing relationships with lenders who would otherwise not offer mortgages or finance to short lease borrowers, but will consider applications through our team. 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.