Mortgages for leasehold properties with short leases
Buying a home might involve your purchase of a freehold property or a leasehold property.
As the Council of Mortgage Lenders (CML) advises, most houses – whether detached, semi-detached or terraced – are freehold; most flats are leasehold. When you buy the freehold, you buy the building and the land on which it sits; when you buy a lease, you buy the right to occupy the property for the remaining term of the lease.
At the beginning of a lease that has 999 years to run, the distinction in tenure makes little practical difference. As the years run out on the length of the remaining lease, however, the limitations and restrictions of leasehold property become more apparent.
As that remaining period shortens, the value of a leasehold property also falls, and any subsequent buyer is likely to be looking for specialist short lease mortgage providers to secure any advance for the purchase of such a property.
What is a “short” lease?
The length of a typical lease has been 99 years. Some have had an initial term of 125 years and more recent leases, in particular, may have a term as long as 999 years.
A short lease may be defined as one nearing the end of its term – although it should also be noted that, since 1993, any leaseholder has the statutory right to extend a lease and the freeholder may not legally refuse that request to extend. Before 1993, once a lease expired, the property returned to the freeholder and the former leasehold had nothing at all.
Mortgage lenders have developed their own definition of a short lease – and this currently stands at one that has less than between 70 and 80 years still to run until its full term. That is an interval which ensures that a reasonably long mortgage – one for as long as 30 years, for example – can reach its full term when there are still 40 to 50 years’ of the existing lease still to run, and the leasehold property, therefore, retains some value.
If the property you want to buy has a lease of less than 70 to 80 years still to run, therefore, you will be looking to short lease mortgage providers.
Can I get a mortgage on a short leasehold property?
If you want to buy the lease on a property with a short lease of only 70 to 80 years, you have two options:
- negotiate an extension of the current lease – which may be a significant cost (since one of the appeals in buying a short lease property is the considerable drop in price the shorter the lease becomes); or
- seek a short lease mortgage provider.
If you are persisting in the purchase of a property with a short lease, your pool of potential mortgage lenders is more restricted – not all lenders will be interested in entertaining your application.
Getting specialist help from a broker such as ourselves at Needing Advice can help you access what we consider are the most cost-effective and appropriate solution for you.
How much can I borrow for mortgages for leasehold properties with short leases?
As mentioned above, as the length of any lease shortens, the cheaper a property is likely to cost. This declining value in the leasehold property is also reflected in the amount that any lender is prepared to advance.
The relative insecurity of leasehold tenure compared to freehold means that lenders typically offer lower loan to value (LTV) ratios – while you might be offered a 90% mortgage on a freehold property, for example, the very maximum offered on a leasehold property might by just 80%.
If the property you want to buy has a lease less than 80 years still to run, it becomes increasingly difficult to find a willing lender – since the lease becomes more and more expensive to extend – and the restrictions on the maximum loan and LTV are likely to be still more severe.
What else do I need to consider with short lease properties?
If you go ahead with your purchase of a short lease property, bear in mind the practical inevitability of the following:
- the need to extend the lease – which may prove expensive and involve costly legal fees;
- possible increases in ground rent – which might appear affordable at the outset, but are subject to increase as and when the freeholder decides;
- the benefits of any increases in land values accrue to the freeholder only – you are likely to be faced with the ensuing increase in ground rent;
- when it comes to selling your property, there are likely to be fewer interested buyers finding it increasingly difficult to find short lease mortgage providers.
Buying a leasehold property may be more complicated than purchasing freehold, especially if you are looking for short lease mortgage providers. But the latter do exist!
If you are likely to be looking for such a lender, please contact us here at Needing Advice to discover how we can help. We have relationships with mortgage lenders who are willing to lend on short lease properties, so we can find you a suitable deal that you may not be able to access on the high street.