One of the most crucial distinctions you’ll come across when buying a property
When purchasing property in the UK, one of the most crucial distinctions you’ll come across is whether the property is leasehold or freehold. A freehold property means you own both the home and the land it is built on outright.
On the other hand, a leasehold property grants you ownership of the property for a specified time period, as outlined in the lease agreement. Lease lengths can vary significantly, from as few as 40 years to over 900 years, though most typically fall between 90 and 120 years. However, the length of the lease can significantly impact the terms of purchase, especially if you are relying on a mortgage.
IMPACT OF LEASE LENGTH ON MORTGAGES
The duration of the lease plays a pivotal role for individuals buying a leasehold property. Mortgage lenders are generally cautious about short leases, and most will not lend on properties with fewer than 70 years remaining. Even if a lender is willing to consider it, they typically require the lease to last at least 40 years beyond the mortgage term to protect the property’s resale value.
Short leases not only make mortgages more difficult to secure but also lead to a sharp decline in the property’s value over time. Lenders scrutinise details such as ground rent clauses, unchecked estate charges, and cladding issues requiring an EWS1 form. These factors can lead to applications being declined or demand higher deposits.
ADDRESSING ABSENT FREEHOLDERS AND SPECIAL POLICIES
Obtaining a mortgage can become even trickier if a leasehold property has an absent freeholder. Many lenders require an Absent Landlord Indemnity Policy to protect their investment, but this does not guarantee approval. Each lender sets its own criteria, and some may reject such applications outright, even if the policy is provided.
Another consideration is how leasehold properties often impose different mortgage terms. Mortgage rates for these properties may be less competitive, particularly where the lease length is limited. Additionally, the loan-to-value (LTV) ratio, which shows how much you borrow compared to the property’s value, is often less favourable for leasehold properties.
HIGHER COSTS AND ONGOING EXPENSES
Purchasing a leasehold property often involves higher conveyancing costs due to the added legal complexities. This is because solicitors need to examine and address the lease details, which naturally increases the workload and fees.
Leasehold properties usually come with ongoing expenses like ground rent and service charges. These costs vary depending on the property but can be substantial, particularly on flats with shared amenities or extensive communal areas. Additionally, lease extension expenses can climb sharply if the lease has fewer than 80 years left.
EXTENDING YOUR LEASE – WHY TIMING MATTERS
Extending a lease is always an option, but it may not be simple or inexpensive, especially for shorter leases. When the lease falls below 80 years, the cost of extending includes paying 50% of the property’s marriage value, defined as the added value created by the lease extension. If you choose to purchase a leasehold property, it might make sense to explore extension options early.
Once you’ve owned the property for two years, you’re entitled to extend the lease under statutory provisions. Alternatively, you can pursue an informal agreement with the freeholder to avoid the wait. Buyers can even start the lease extension process during the sale via a statutory notice issued by the seller. This notice can be transferred to the buyer upon completion.
BUYING THE FREEHOLD – IS IT POSSIBLE?
Another route leasehold property owners sometimes take is buying the freehold. While this can simplify property ownership, it’s not always straightforward. Developers, estate management companies, or third party investment companies typically hold freeholds. These third parties may inflate prices for quick profits, making freehold purchases costly.
To discover who owns the freehold of a property, you can search the title register through the Land Registry. However, even if the freehold purchase is viable, it’s essential to factor in all costs, ongoing responsibilities, and potential negotiation delays.
THE PERFECT HOME IN THE IDEAL LOCATION
Leasehold properties can appeal to many buyers, especially when it’s the perfect home in the ideal location. That said, it’s critical to approach the process with full awareness. Take time to estimate the cost of lease extensions, research service charge obligations, and examine any planned maintenance in communal areas.
Most importantly, ask the estate agent and vendor upfront about the length of the lease. This will influence not only your mortgage options but also your future costs and responsibilities. Sometimes, opting for a comparable freehold property might result in a more straightforward transaction and lower long-term expenses.
>> ARE YOU LOOKING FOR GUIDANCE ON NAVIGATING LEASEHOLD PROPERTIES? <<
For further advice and guidance on navigating leasehold properties or for help with understanding property ownership options, contact our expert mortgage team.
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