One of the first most important things you must have thought about when deciding what kind of property you want to buy as your next home is whether you wish to purchase leasehold or a freehold.
If you want to buy a leasehold property and need a mortgage to cover your new home's expense, you should be aware of how mortgages work when you want to buy a leasehold property.
What are leasehold properties?
The difference between freehold and leasehold is that they are the two fundamental forms of legal ownership.
With leasehold properties, you have a lease to use the property for a certain amount of time. Some leases can be as long as 900 years. You will be living in the property under a contract which sets out your legal rights and obligations.
Can you get a mortgage on a leasehold property?
Getting a mortgage on a leasehold property will primarily depend on how long or short the lease is. You will have a difficult time getting a mortgage on a short lease. Whereas, most lenders, in all probability, will not lend if the lease is lease than 70 years.
In such a case, they will want the lease to be extended approximately by 40 years until after the end of your mortgage term. This is because they will want the property's value to be secure during the term of the mortgage.
The types of mortgages available and the lending criteria is similar whether you want to buy a freehold or a leasehold.
How can you find mortgage lenders for leasehold properties?
You can find the list of mortgage lenders and their requirements, which has been compiled by the Council of Mortgage Lenders.
For instance, Accord Mortgages requires that the lease be 85 years longer than the mortgage term. Bank of Scotland requires that the lease be 70 years longer and Fleet Mortgages requires 75 years.
Mortgage Lenders willing to lend on shorter leases include Royal Bank of Scotland, which requires 30 years surplus on the lease term. Whereas, Barclays requires only 25 years surplus.
Are the interest rates for mortgages higher when the property is leasehold?
Interest rates on mortgages for leasehold properties may be generally higher depending on the lease's length. Mortgage lenders also offer lower LTVs if the property is leasehold.
LTC is the ratio of the amount you can borrow against the value of the property.
Are leaseholds more expensive than freeholds?
The conveyancing cost for leasehold properties is generally a few hundred pounds higher as compared to freehold properties. This is since the conveyancing process for leasehold properties involved more legal paperwork.
Further, you will incur a lesser initial cost than a purchasing a freehold, but you will be responsible for maintaining the common parts of the property, paying annual maintenance fees and service charges, and paying annual ground rent.
Can you extend your lease?
Extension of lease for flats
This new law differs between houses and flats. You may be able to extend the lease of a flat by 90 years, in which case you might be able to negotiate your way out of having to pay ground rent. However, this is only a possibility where you have held the lease for 2 years, and it was originally a long lease. You will also have to pay a premium when extending the lease. If you qualify for an extension of your lease, but your landlord rejects your offer, you can challenge their rejection in court.
Extension of lease for houses
In the case of houses, you may be able to extend your lease by 50 years. Similar to the law on flats, you can only take up this opportunity if you have held the lease for 2 years and the lease was originally a long lease. If your landlord fails to extend your lease, you may challenge this in court.
Can you cut out the two-year requirement?
It is possible is you start the extension process at the point of sale. The seller will have to issue the statutory notice for extension of the lease, and the benefit of this notice will be transferred to you once the sale is complete. However, you should get advice from you conveyancer regarding this.
How much will it cost to extend the lease?
The cost of the lease extension will depend on how long there is left in the lease. The shorter the lease, the more expensive it will be to expend.
You will have to pay 50% of the marriage value if you want to extend a lease under 80 years. Marriage value is the amount of value that will be added to the property by extending the lease.
Most leaseholders only choose to extend their lease when it comes close to the 80th year mark. This is because the cost of extending the lease by 90 years, which is the most commonly sought extension, does not outweigh the profit you will make if you decide to sell the property in the future.
Can you buy the freehold?
Yes. However, it can be difficult. You will first have to find who owns the freehold by searching the title register at the land registry. Then you can approach the freeholder. In some cases, the freeholder is the developer or an estate management company. Often it gets sold on to third parties such as an investment company.
Click here to find out about affordable home ownership government schemes to help you buy a home.