Leasehold Mortgages

Any property you buy will either be freehold or leasehold property. If it's a freehold, you own the entire property and the ground it sits on. Meanwhile, a leasehold means that, while you own the property, you don't own the land it's built on. A leasehold will be for a specific time, up to 999 years, although in most cases it will be 90 to 120 years. Still, some leases can be considerably shorter, around 40 years. As you'll be effectively renting the land from the freeholder, you'll likely be required to pay them a monthly ground rent.

Once the lease expires, the ownership of the land your property is on returns to the freeholder. Essentially, leases are contracts that contain certain terms and conditions, including:

• Conditions on renewing and extending
• Ground rent
• Lease term
• Service charges

Mortgage lenders are concerned with the length of the lease because it directly affects the value and marketability of the property. A shorter lease term means that the property's value decreases over time, as the lease approaches its expiration date. Additionally, properties with shorter leases may be less desirable to potential buyers, making them more challenging to sell in the future. From the lender's perspective, a property with a short lease presents a higher risk, as it may be more difficult to recover their investment if the borrower defaults on the mortgage. Therefore, mortgage lenders typically prefer properties with longer lease terms, as they provide greater security and stability for both the borrower and the lender.

When it comes to leasehold properties, the length of the lease is likely to be the biggest factor in whether you can get a mortgage. Most lenders will want 60 to 80 years remaining on the property lease from when the mortgage term has finished. The lender will want to ensure that if you default on your mortgage, they aren't left with a property worth less than the original mortgage loan. After all, a property with a long leasehold (for example, 500 years) is likely to be worth considerably more than a property with a term of just 20 years.

If the leasehold property you want to buy has a short lease, you may be able to ask the seller to extend the lease term before they sell the property. This should make it much easier for you to get a mortgage and increase its value.

You should be able to extend your lease, but the shorter the original lease, the more expensive it’ll be to increase. It could cost you anything from £2,000 to £15,000. If the lease is less than 80 years, you can expect to pay around 50% of the extra value, which will be added to the property after extending the lease, also known as marriage value.

If you’re looking to purchase a leasehold property, it's a good idea to consider extending the lease as soon as possible, which you can do from when you own the property. You can only extend the lease once you have owned the property for two years under the statutory route. However, you could informally request a lease extension, but remember, the freeholder is not obliged to extend the lease before this time.

A mortgage for a leasehold property is likely to cost more than a freehold property mortgage. This is mainly due to leasehold properties posing a greater risk for lenders than freehold homes. However, if a property has a very long lease, it may be possible to secure fairly competitive rates. Other factors that can impact the cost of a leasehold mortgage include the size of the deposit you put down and your credit history. It's also common for conveyancers to charge more for leasehold properties as there is often more legal work involved.

Freehold mortgages are generally considered advantageous for homeowners because they provide full ownership of both the property and the land it sits on indefinitely. With a freehold mortgage, homeowners have greater autonomy and control over their property, without having to pay ground rent or leasehold fees to a landlord. Additionally, freehold properties may be more attractive to potential buyers and typically retain their value better than leasehold properties. Overall, freehold mortgages offer greater security, stability, and flexibility for homeowners compared to leasehold mortgages.Top of Form

While you might find mortgage costs slightly higher, there are some advantages to a leasehold property. For instance, building insurance is often covered by the owner of the freehold, which means you have one less expense. Also, if the property has a long lease, you should have little to no problems renewing it. Things like garden maintenance and communal repairs are also covered by your service charge, saving you considerable time and possibly even money ensuring the building and its grounds are maintained. However, with a freehold property, you own the entire building and the land it's built on.

Leasehold mortgages are very common for flats and maisonettes in the UK. The leasehold ownership of a flat relates to its interiors, such as the floorboards, walls and ceiling. It doesn't tend to relate to the exterior or structure of the flat or anything outside it. The freeholder will own and be responsible for any communal areas and the land on which the flat stands.

As the leaseholder, you’ll likely be required to pay a communal service charge for the upkeep of the grounds and communal areas. You’ll also have some rights to the property as the leaseholder, but not if you’re only renting the property. If you decide to convert a house into separate flats to sell, you'll need to divide the flats into separate leasehold properties. Your solicitor will sort out the freehold ownership, which you may choose to retain (as long as you aren't also a leaseholder of one of the flats).

Some properties will require an estate rent charge to be paid to the freeholder to cover the general maintenance and upkeep of communal areas. The mortgage lender may consider this when assessing your mortgage application. While most lenders don't view it as a deal-breaker, a few lenders will automatically refuse to lend on residential properties with estate rent charges or put certain caveats. For instance, some lenders insist that:

• The charge cannot double every 25 years
• The initial estate rent charge cannot be above £500
• The agreement prohibits the recipient or collector of the rent charge from creating a lease over the property
• They will only lend if the owner of the estate rent charge is a management company made up of other residents

Many mortgage lenders offer leasehold mortgages, but each has its criteria. However, the most common factor lenders look at is the length of the lease. For instance, the Bank of Scotland and Barclays require a minimum of 70 years, while HSBC ask for leases to be at least 85 years long from the mortgage completion date. Lenders such as Nationwide (requires at least 30 years remaining on the mortgage terms), Bradford & Bingley (requires mortgage term plus 25 years) and Habito (50 years at the end of the mortgage term) are a little more generous.

It’s possible to buy the freehold of a property, but it's not always easy. A developer or estate management often holds the freehold or sells it to a third party, such as an investment company, who may put up the freehold cost to make a fast profit. You can find out who owns your property's freehold by searching the title register at the Land Registry.

Just like with every mortgage, a leasehold mortgage has certain criteria you'll be required to meet, which can vary depending on the lender. While the length of the lease is a big factor for most lenders, other factors can impact your eligibility.

Loan-to-Value

LTV is the ratio of how much money is borrowed against the cost of a property. Some lenders will accept an LTV of 95% (with a 5% deposit), others will accept 90%, while most others will accept 85% and under.

Affordability

As with any mortgage, lenders will consider your affordability before approving your application to ensure you can keep up with your mortgage repayments.

Other Factors

Several factors will impact your overall mortgage eligibility, including age, credit history, and the construction type of the property.

If you've found your dream home, you shouldn't let the fact that it is a leasehold property put you off. However, make sure you go into the purchase with your eyes wide open. Find out much it’ll cost you to extend the lease and the cost of the service charges. But what's most important is to find out how long the lease is before you commit to buying the property, as this will impact what mortgage you can get. If you’re looking for a leasehold mortgage, speak to our team of independent advisers at John Charcol.

At John Charcol, we have access to an extensive range of mainstream and specialist mortgage products, including those for leasehold properties, and our experienced advisers will be able to help you find the right financing option for you. Get in touch with us on 0330 433 2927 or submit an online enquiry.