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Buying a property with a short lease

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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.

 

 

Lender From beginning of term At end of term
Accord Mortgages Ltd 85
Aldermore Bank PLC 60 40
Atom Bank plc 80 50
Bank of Ireland (UK) plc 85 70
Barclays Bank UK PLC 50
Birmingham Midshires 70
Buckinghamshire Building Society 35
Clydesdale Bank plc 55
Coventry Building Society 70
Darlington Building Society 85
Dudley Building Society 85
Earl Shilton Building Society 75
Ecology Building Society 60
Family Building Soc (a trading name of National Counties BS) 75
Fleet Mortgages 75 65
Foundation Home Loans 50
Furness Building Society 85 80
Halifax 70
Handelsbanken 75
Hinckley and Rugby Building Society 85 75
HSBC UK Bank plc 55
Intelligent Finance 70
Investec Bank plc 105
Kensington Mortgage Company Ltd 85
Kent Reliance (a trading name of OneSavings Bank plc) 75
Keystone Property Finance 75
Landbay 80
Leeds Building Society 85
LendInvest 90
Lloyds Bank plc pre fixed 20/40 70 55
M&S Bank 55
Manchester Building Society 55
Market Harborough Building Society 75
Masthaven Bank 75 75
Metro Bank plc 75
Monmouthshire Building Society 105
National Counties Building Society 50
National Westminster Bank plc 55
Nationwide Building Society 55
New Street Mortgages 85
Paragon Buy to Let Mortgages 85
Pepper Money 85
Platform (a trading name of The Co-operative Bank p.l.c.) 70 55
Precise Mortgages (Charter Court Financial Services Ltd) 70
Principality Building Society 85
Saffron Building Society 75
Sainsbury’s Bank 85
Santander UK plc 55 55
Scottish Widows Bank 70
Skipton Building Society 85
Tesco Bank (a trading name of Tesco Personal Finance plc) 55 55
The Mortgage Lender Limited 65
The Mortgage Works 70 55
The Royal Bank of Scotland plc 55
The Tipton & Coseley Building Society 85 85
Together Personal Finance Limited 75
TSB Bank plc 70 55
Vida Homeloans 65
Virgin Money plc 85
Yorkshire Building Society 85
Author: Stuart Phillips

Author: Stuart Phillips

Fully CeMap qualified, Directly Authorised by the FCA and with over a decade of experience, Stuart has a wealth of experience in both specialist BTL and residential mortgages.

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