As a Central London Estate Agent; at MyLondonHome we encounter many interesting and complex property deals on a regular basis. With this in mind, we thought it might be helpful to run through a quick guide on how to purchase a flat with a short lease.
What are residential leases?
The majority of residential leases are for a term of 99 years, this can of course vary; more recently leases have been known to extend up to 125 years and it is also not unusual, certainly within central London to see a lease term of up to 999 years. The value of a leasehold flat reduces as the lease gets shorter. The basic concept is that a flat with a 99-year lease or more is valued at the same price as the freehold value of a flat, as the lease gets shorter the value of the property decreases.
Now, in principle, there is not a problem in buying a flat with a short lease if that this is reflected in its price. However, in practice, it is more difficult, particularly if you need to raise a mortgage to buy the property. Many mortgage lenders will be reluctant to lend on flats with short leases. Some lenders have a more open policy than others, so whilst some may be happy to lend on a 50-year lease, others require 50 years to be remaining at the expiry of their mortgage, so may restrict you to a 65 or 75-year term.
A term you need to know is ‘Marriage Value’. Marriage value is essentially the point in the lease where the freeholder can earn a premium from you to extend the lease. This is set at 80 years. If your lease is over 80 years it will still cost you to extend, but the amount is greatly reduced.
Purchase a flat with short lease!
Many people opt to extend the lease during the purchase process, thus avoiding an issue with their lender. Whilst this is possible it is important to consider that this may considerably delay the process of purchasing. Of course, if you buy a property with cash, the issue of a short lease becomes less complex. You don’t have to worry about convincing lenders but you will have to wait two years before you can apply for a new lease in your own right.
You can now see it is important when looking to purchase a flat with a short lease that you consider just how much it will cost to obtain a new lease. Therefore it is sensible that you factor this into your calculations.
Steven Herd, MyLondonHome