This guide was last updated 8 November 2022
If you live in a property based on a leasehold, then you always have to be aware of the length of time left on that lease.
If you let the lease drop too low, the resale value of your property plummets. But, assuming you have owned the property for at least two years, you should have the opportunity to extend the lease, or perhaps even buy the freehold. This means you have the right to stay in the property for a longer period and the resale value won’t decline drastically. But is it always such a good idea?
Getting a lease extension can be an expensive and time-consuming process. You should pause for thought and consider your situation compared to the urgency of renewing your lease. For instance, if you are low on cash with many difficult debts to repay and your lease still has around 90 years left on it, then it isn’t in your best interest to extend a lease at this time. The extension could cost many thousands of pounds. In fact, you should consider if you can afford an extension as early as the point of purchase because if you find yourself on a short lease and unable to afford an extension, then you could end up trapped.
You also might not need to extend if you don’t intend to live in the property very long. This could be the case if you’re planning on moving out, or – rather somberly – if you don’t expect to outlive the lease (remember, a lease is considered ‘short’ with anything below 70 years!).
There are a few circumstances where getting a lease extension isn’t a good idea, but if you can afford it and there’s time running out on your lease, then you will likely want to extend. If you have a lot of time left on your lease, then you might be thinking you would be better off to put extending the lease on hold for a while, but rethink that presumption!
The cost of extending a lease increases exponentially the closer to the end of the lease you are. When there are less than 60 years left on the lease, the cost of extending increases by about 1% of the value of the property every year. For a £300,000 property, that’s £3,000 every year.
So if you’re certain you want to extend the lease, do it quickly! Even if you move in with 90 years on your lease and are intending to move out after 25 years, you might want to extend the lease in order to attract more buyers when it comes to selling. If you wait until there are 65 years left on the lease, extending the lease becomes expensive and buyers become less interested.
Another reason you might not want to extend the lease is that you’d rather stop having to worry about it and own the building and the land indefinitely. You won’t have to pay ground rent or service charges, although you will be responsible for building maintenance (we covered this in our blog about freeholders and leaseholders).
As luck would have it, the owners of the property are usually legally entitled to buy the freehold from the current freeholder, and many surveyors will add 1% to the property value if you own the freehold. The bad news is that buying the freehold is much more expensive than extending the leasehold, and if the property is a flat in a building (which is more likely when your are leasing), you will only have a share of the freehold, split between you and the building management.
We’ve been working in the property market for a long time, so we’ve become pretty savvy at knowing where the financial opportunities are. Short lease properties are extremely difficult to sell, but as a buyer, you may be able to turn it into an opportunity. If a property has 60 years left on its lease, the typical cost of extending it by 90 years is £26,000-£27,000 (including fees). But the added potential value of the property after extending the lease is around £38,000. That’s about £10,000 profit without even having to develop the property!
We can help you if you’re looking for a short-lease mortgage and would be happy to advise you on your opportunities. Call us now on 0207 220 5110 now or arrange a call using the form below.
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