Some lenders will consider a 70 year lease too short to lend, however, we have access to lenders who will look at leases below 20 years.
Short lease properties can be a cost-effective way to buy in desirable locations and generate spectacular capital growth and rents as a result.
For leases of more than 35 years, there is a good chance you will be offered high street interest rates. Below this competitive rates can still be achieved from Specialist short lease mortgage lenders.
A lease defines the length of time that you own a property for when it sits on land owned by someone else (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.
Properties with a short lease can be troublesome for buyers as many high street lenders will not consider lending on properties with less than 70 years left on the lease because the value of the property will begin to drop the closer the property gets to the end of the lease, dramatically in the latter stages. What is more, some valuers now do not like recommending a property for a mortgage if there is not at least 80 years left on the lease, so it is important to approach the correct lender first time.
There are however some mainstream lenders who will be able to 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 can 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.
The most important thing to clarify on lease lengths below 20 years is that the lease is a “qualifying lease”, i.e. able to be extended beyond 21 years. If it is, we should be able to help.
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 mortgage brokers, agents and valuers to work out an innovative approach to lending on what is, initially at least, a depreciating asset.
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 during your mortgage application 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.
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 potential for spectacular capital growth for financially astute borrowers is all the more possible thanks to changes in the law in 1993. This stated that if an individual or business has owned a property for at least two years, they can apply for a lease extension and the freeholder must grant this request at a fair market cost.
Therefore, you can apply for a lease extension as soon as you have owned the property for two years, or alternatively when purchasing the property the vendors can exercise their right to extend and pass this on to you. The earlier you apply to extend the lease the better as the cost will increase the shorter you let the lease fall.
Extending a lease can be expensive, especially if there isn’t long left on the current one. You will definitely need to talk to a professional when calculating the costs – there are too many variables to get a close estimate.
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 or perhaps raise a Second Charge on the property, (you will need the consent of the existing borrower to do this).
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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).
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.
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 the lender’s particular cost of funding. 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.
The loan to value ratio (LTV) on leasehold properties could be less than you would find on freehold properties from certain lenders. This is especially true if the property is a new build house or new build flat so be prepared to have a 15-20% deposit. For shorter leases you may need a 40% deposit. The reason for this is that there are more risks for lenders compared to freehold properties. The biggest risk is if they need to repossess the property, the short lease will make it difficult to sell and recoup the mortgage value.
Your home may be repossessed if you do not keep up repayments on a mortgage or any debt secured upon it.
A fee of up to 1% of the mortgage amount may be charged depending on individual circumstances.
A typical fee is £495.
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