When purchasing a short-lease property it is imperative to work with an experience mortgage broker, lender and valuer who understands the benefits of such a property.
Sadly too many brokers and lenders are not equipped to deal with such a process.
We have spent years honing their skills and experience in this market and fully understand the process. As such, we have relationships with lenders who offer bespoke products for those looking to purchase a short-lease property, and funding is available on lease lengths as low as 9 years and even beyond, as long as it is a qualifying lease (i.e. 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.
The short lease loan is a favourite of financially astute borrowers and can be a cost-effective way to buy properties in some of London’s most desirable locations and generate spectacular capital growth and rents as a result.
This is, even more, the case given changes in the law a few years ago, which mean that individuals or companies — if they have owned a property for at least two years — can now apply for a lease extension.
The result is an exciting window of opportunity for more speculative property investors, particularly given Coreco’s level of expertise in this area.
Traditional lending criteria
Most high street lenders need the lease to run at least 30–40 years after the date your loan reaches maturity. For example, a minimum 30-year lease at maturity with a minimum mortgage term of five years means that a minimum of 35 years is required on the lease before a loan can be considered at outset. Other lenders may not even look at any property with a lease shorter than 70 years at all. However, after a growth in popularity of short-lease purchases, especially in key areas of London, some Private Banks have stepped into this market and have worked hard with brokers, agents and valuers to work out an innovative approach to lending on what is, initially at least, a depreciating asset.
Lending on a lease of less than 30 years
This is probably best illustrated by using an example of a 20-year lease:
- Maximum loan-to-value 60%
- Loan term 5 years
- Valuation of 20-year leasehold interest £350,000 x 60% = £210, 000
- Valuation of 15-year leasehold interest £300,000 x 60% = £180, 000
Given an initial purchase price of £350,000, the lender will consider an initial advance of 60% over a 5-year mortgage term. The lender will ask the valuer to value the property based on its current 20-year lease and based on a 15-year lease. The lender will want its original 60% advance to remain at 60% of the estimated future value, i.e., the original loan is 60% of £350,000 and in 5 years’ time the loan must be 60% of £300,000. This is achieved by structuring the loan on a part interest-only, part-capital and interest basis, so that sufficient capital is repaid over the 5-year loan period. A word of caution: some lenders insist that you pay the mortgage in full over a 5-year period on a capital and interest basis.
The actual identity of the Freeholder is very important to the lender. Lenders are less likely to consider a property where the freeholder is unknown. In fact, the first questions a lender will ask are who the freeholder is and where is the property located? Many lenders will only consider lending on a short lease granted by one of the large central London estates, e.g. Grosvenor Estate, Cadogan Estate or Wellcome Trust.
Financing a lease extension before your existing mortgage expires
If you have the option to extend the term of the mortgage against the new longer lease, e.g. a 5-year loan on a 35-year lease could be extended to a 25-year mortgage on a 99-year lease, then there are two options you could take to achieve this:
- Firstly, you can approach the existing lender who will consider giving you a further advance.
- Alternatively, you can approach a new lender who would regard this as a straight remortgage.
The lender will instruct an approved ‘panel valuer’ to value the property based on its current short lease and based on a new long lease. A mortgage offer will be based upon the future long lease valuation, on condition that once the funds are released, the solicitor simultaneously puts into place the new long lease. With the long lease in place, the lender can offer a mortgage with a longer term, e.g. 25 years.
For example, an existing mortgage of £300,000 is secured against a property on a short lease valued at £500,000. A premium of £300,000 is payable to the freeholder to acquire a new long lease. The value of the property with a long lease is £1,000,000. A mortgage offer for £600,000 is offered against a valuation of £1,000,000, which gives the lender a final exposure of 60% (£300,000 repays the existing lender and £300,000 provides the additional funds, or premium, to buy the new lease).
For leases in excess of 35 years, there is a good chance you will be offered high street interest rates. If the lease is less than 20 years, you will generally be offered a loan with a variable rate, set with a fixed margin over Libor (the London Interbank Offered Rate). With these products, especially on the shorter lease lengths, there is a percentage arrangement fee, based on the amount you borrow. This fee ranges from 1% to 2% of the loan amount and is often deducted from the loan.