Leasehold Mortgages

Despite there being millions of leasehold properties in the UK, leasehold mortgages can be more difficult to obtain, depending on the length and circumstances of the lease.

If the home you’re looking to buy is leasehold, finding a suitable finance option is perfectly achievable, however, seeking the right advice beforehand is highly recommended.

In this article we’ll look at how the length of lease can impact mortgage availability, what the potential downfalls of a leasehold property can be, and how the right advice can ensure you don’t make any costly mistakes.

What is a leasehold property?

Whereas with a freehold property, you own the property and ground that it’s built on, with a leasehold property, you only own the actual property. Although some single family homes are leasehold, it’s more commonly seen in purpose-built flats, or homes that have been divided into separate apartments.

When you purchase the property, your name will appear on the deeds, however, you will only own the home for the length of time remaining on the lease, at which point ownership will revert to the leaseholder.

A lease can be hundreds of years long, up to 999 in fact, however, for shorter leases, it’s important to consider how this will impact you in the long term.

Can you get a mortgage on a leasehold property?

Yes. Most mortgage lenders will happily consider offering mortgages for a leasehold property, especially if it’s a flat or an apartment as the vast majority of them fall into this category.

For leasehold houses, there are still a wide variety of lenders available, although some might be deterred if there is only a limited time remaining on the lease or it has a doubling ground rent clause attached.

They will also want to make sure that you’re clear on the legal ramifications of buying this type of property.

Many people who are considering getting a mortgage on a leasehold property choose to speak to a broker first as they can offer independent advice and help buyers avoid the pitfalls.

Property types

If you’re looking to purchase a flat or apartment, there is a strong likelihood that this will be on a leasehold basis. It is also common on shared ownership properties, regardless of whether they are flats or houses.

It’s becoming increasingly popular for property developers to retain a leasehold on new build properties. Although it’s rare for this to apply to the entire home, elements of new build homes may be freehold, for example, the garages or gardens/communal areas.

How can the length of a lease impact your mortgage?

As shorter leases are less attractive to both potential buyers, and mortgage lenders, it’s possible to extend your lease, however this can be very expensive. That said, it can also add considerable value to your property.

For example, extending the lease on a £200,000 property by ninety years can increase the value of your home by an estimated amount between £5,000 and £38,000, depending on the current length of the lease.

The shorter the lease, the more of a positive impact the lease increase will have on the value of your home, however, this should always be balanced against the cost and fees involved. An experienced broker will be well placed to advise you on this.

It’s also important to note that if you allow your remaining lease to fall below eighty years, you will need to pay 50% ‘marriage value’ on top of the cost of extending the lease. Marriage value refers to the amount of value added by a lease extension.

What if it’s a short leasehold property?

You can still get a mortgage, although the availability of lenders will reduce, the shorter the length of the remaining lease. Lenders will usually want to see at least 35 years remaining on the lease after the mortgage has been paid off.

A lender is also likely to consider how the ongoing costs of ownership, such as ground rent, impact your affordability, when they calculate how much you can borrow.

The mortgage itself will work in the same way, regardless of whether the property is freehold or leasehold. The interest rates can vary based on the length of the lease, however, as lenders will consider short lease properties as more of a risky investment.

You will require more substantial legal assistance from a conveyancer, which means that solicitor costs are likely to be higher than for freehold properties. The remaining eligibility requirements are similar to that of a standard mortgage.

When can I extend my lease?

Once you have owned your property for two years, you are ordinarily entitled to increase the lease on your home by ninety years, under the 1993 Leasehold Reform Act.

If you are considering the purchase of a home with around eighty-three years left on the lease, it’s important to bear in mind that you should consider extending the lease as soon as you fulfil the two year ownership requirement, as this can save you from the cost implications of marriage value, as explained above.

Eligibility requirements

The eligibility criteria for a leasehold mortgage is as follows…

• Deposit – as lower loan to value (LTV) ratios are generally offered on leasehold properties, a deposit of 15-20% will be required in most cases
• Income and affordability – Your affordability will always be a major factor, this is determined by calculating your income minus your outgoings. A multiple of your income will be used to calculate the loan, and this multiple can vary based on your job type, level of income, credit status, and property type
• Credit rating – There are options available for people with bad credit, however, the most competitive mortgage rates are offered to those with a strong credit score
• Age – there can be limitations on borrowing depending on your age, especially those nearing retirement age, however, this is considered alongside your income availability, and is less of a problem for those with strong pension or investment income

Which lenders offer mortgages for leasehold properties?

Some lenders will only lend on leases longer than seventy years, and it will get more difficult to find a lender if the lease has sixty years or less remaining. If the lease is below forty years, you are unlikely to find a lender.

The loan to value (percentage of the cost of your home that you can borrow)  that lenders offer is also often impacted by the length of the lease, with shorter leases likely to result in lower borrowing.

There are both high street banks, and more specialist lenders that will consider leasehold mortgages, here are some examples.

*Please note that criteria can change regularly, and it’s important to check this information with a specialist broker.*

It’s important to note that many of these lenders will not deal directly with buyers for this type of mortgage, and it’s therefore strongly advised that you use the services of an experienced broker in order to access the type of deal you need.

How an expert broker can help

It can be difficult to know which lenders will consider your chosen leasehold property, as each lender has their own criteria in terms of what length of lease they will consider. Other restrictions can also impact a lender’s decision, particularly if ground rent and other associated fees are high enough to impact your affordability.

This is where the expert brokers that we work with can help.

They maintain strong working relationships with both leasehold and freehold lenders, and stay on top of any changes in criteria. They can therefore find you the most suitable mortgage product for your needs, with willing lenders, saving you the cost, time and frustration of the search.

As lenders often limit the loan to value on leasehold properties, particularly if the home is also a new build.

Specialist mortgage advisers will be able to ensure that you achieve the maximum loan to value possible for your circumstances, as well as helping to ensure that you properly fulfill the criteria, and to complete the application correctly.

Make an enquiry and we will ensure that you are connected with one of the most experienced leasehold mortgage experts that we work with.

Share of freehold

If you own a leasehold flat or apartment, another option is to purchase the freehold as a collective.

This would require you and your fellow residents setting up a company and dividing up ownership into shares. This is again, however, subject to the agreement of the freehold owner(s).

Restrictions you should know about

The lease is a legal document which you should understand and agree to prior to agreeing upon the purchase of the property. This important document lays out your responsibilities as a tenant, and the responsibilities of the freeholder.

It can also set out restrictions on how you live in the home, which can range from needing authorisation to structurally alter your home, through to banning pet ownership.

In the case of flats or apartments, the freeholder usually has responsibility for maintaining common areas, such as stairwells, hallways and communal gardens. Your responsibility as the leaseholder usually includes paying certain fees to the freeholder, some of which will be used towards the upkeep of common areas.

For example:

• Ground rent – the lease should also set out whether this is a set amount, or liable to increase
• Service charges – which is used towards communal costs
• Sinking fund – towards unexpected major repairs, such as roof repairs
• A percentage of the freeholder’s insurance costs

Potential issues you should also be aware of include…

• Regular ground rent and service charge increases, which can mean that it becomes unaffordable, even if it was affordable at the time of purchase
• You won’t directly benefit from an increase in land value, infact, this could instead increase your ground rent
• Lower lender availability, particularly for leases below sixty years

Can you buy the freehold?

Yes. It is possible to buy the freehold in order to acquire full ownership of the home, and the land on which it’s built, but this can be difficult to achieve. If you’re unsure who owns the freehold, this information can be found by searching the title register at the Land Registry.

There are legal powers under the Leasehold Reform Act 1967, should the freeholder(s) refuse to sell you the freehold, that allow you to enforce an agreement through a tribunal. It’s important that you seek independent legal advice from a solicitor, as this can be a complex process.

Some lenders will let you pay for a lease extension or purchase the freehold with capital you’ve released through a further advance on your mortgage or a remortgage.

Share of freehold

If you own a leasehold flat or apartment, another option is to purchase the freehold as a collective. This would require you and your fellow residents setting up a company and dividing up ownership into shares. This is again, however, subject to the agreement of the freehold owner(s).

Let us introduce you to the experts

Buying a leasehold property is perfectly achievable, but can be more complex in terms of finding a suitable lender. We work with expert advisors who specialise in leasehold mortgages, and can help you to find the most competitive deal, from a lender most likely to approve your application.

Contact us on 0808 189 0463 or through our enquiry form, and let us put you in touch with someone who can make the home buying journey easier for you.