Fairly frequently we come across purchases for leasehold properties where there is a short lease, and this creates quite a challenge when sourcing mortgages. This tends to be more common in the BTL market, partly i suspect because for most residential home buyers, the prospect of paying hundreds of thousands of pounds for something that you might only own for a period of time just seems beyond the pale. The criteria are relatively straightforward however and the table below might give you an idea of where the threshold for “too short” actually lies. In general it’s about 75 years, but as you can see there are a few exceptions. Buying a short lease property can actually be a clever way to grab a bargain and we plan to show you how to spot these!

One of the reasons there is opportunity to benefit from property with short leases is that often, the vendors don’t have the funds to extend the lease themselves. If you are able to do some research you should be able to determine what a similar property would value at with a longer lease. You should also be able to calculate or negotiate the cost of the extension and compare the two. If the uplift in value is in excess of the cost of extending the lease then this seems like a worthwhile investment. This becomes particularly useful when you consider that some lenders will allow you to use the value of the property with its long lease provided that you complete the extension and the purchase at the same time. What this means is that you would approach the freeholder and start the process of purchasing an extension to the lease at the same time as you start the purchase of the property. The lender would put a condition in the offer that completion can only take place if the lease extension is fully submitted, and you pay for both at the same time. This seems contrary to the fact that most lenders are only interested in the situation on application, but because a lease extension is a fairly simple thing to quantify when it comes to value, and they can control the extension by conditioning the offer, it seems many are comfortable with this approach.

So working through an example:

A client buys a property for £150k however it only has a short lease of 70 years. As you can see below some lenders will do it, but not many. If the client pays £10k to extend the lease to 150 years they estimate that the value increases by around £25k and so we approach a lender on this basis. We put the property through at £175k, the client puts down a 25% deposit on this, £43,750 and sets aside the £10,000 for the lease. Whilst this seems like a huge amount to put down.