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Mortgages for Leasehold Properties

Leasehold properties come with a specific set of variables. This Revolution Finance Brokers guide explains how mortgages work on a leasehold residence and the ins and outs you need to know before applying.

Leasehold Property Mortgage Schemes

Leaseholds are common in flats and apartments, but many house buyers aren't sure about how a leasehold mortgage works, or what happens at the end of the term.

In this guide, the Revolution Brokers team runs through what leasehold mortgages are, and the critical considerations for a lender when assessing your application.

For tailored advice on your leasehold mortgage options, give us a call on 0330 304 3040, or email the Revolution team at [email protected].

How Do Leasehold Mortgages Work?

A leasehold means that you buy the rights to live in, and own, the property, for a fixed number of years. The land itself that your home is built on belongs to the freeholder, and you'll usually need to pay ground rent on top of the lease mortgage costs – it is possible to have a mortgage declined ground rent related if this cost is high.

A lease can be as short as 40 years, or as long as 999 years, with the average being around 100 years.

Mortgages for leaseholds are similar to those for a freehold property, and the lender's affordability assessment and eligibility checks are also not significantly different.

The key factor for a leasehold mortgage is how long the term is, given that a shorter lease is much higher risk.

Are There UK Mortgage Lenders Who Will Lend Against a Short Leasehold?

There are yes, although the lender is less likely to be a high street bank. If a leasehold is short, it may come with a very low price tag, as you may not be buying the ownership of the property for very long.

Most lenders will not mortgage any leasehold with under 60 or 70 years left on the lease. Others will lend, but require a higher deposit, or charge higher interest rates.

How Does the Length of the Leasehold Impact the Value of the Home?

The shorter the lease, the less value it holds. The below table indicates a rough idea about how the lease term will impact the cost incurred to extend it further:

Lease Term

Cost to Extend

Legal Costs

Total Charges

Added Value to the Property

99 years

£5,000

£2,500

£7,500

£5,000

85 years

£6,000

£2,500

£8,500

£10,000

79 years

£8,500

£2,500

£10,500

£16,000

70 years

£14,000

£2,500

£16,500

£26,000

60 years

£24,000

£2,500

£26,500

£38,000

This illustration shows that, if you have a 90+ leasehold term, and paid to extend that term, it would only add a small value to the lease's resale.

However, if you have a 79-year lease, and pay £10,500 to extend the term, you could increase the resale value by £16,000 and make a decent profit.

This happens because, when the lease falls below 80 years, you need to pay 50% of the property marriage value - as well as the usual price to extend the lease - that means the amount of value that the extension would add to the property resale value.

Is It Easy to Extend the End Date of a Leasehold Property?

Most freeholders are legally obligated to offer the option of adding a 90-year extension to a leasehold at market value - provided you have owned the property for two years or more.

What are the Pitfalls to a Leasehold Mortgage?

There are lots of factors to think about when deciding whether a leasehold property is right for you:

  • The costs to extend the lease term can be substantial.
  • The ground rent that you pay to the freeholder can be continually reassessed according to the property's market value, with the possibility of a mortgage declined ground rent reason.
  • Even when the land increases in value, you do not benefit, and it makes little difference to the value of your property.
  • There are fewer lenders to choose from who will consider a leasehold mortgage.
  • It can be trickier to sell a leasehold property, especially if the remaining term is short.

What are the Typical Lender Criteria for a Leasehold Mortgage?

Every lender has different policies, and therefore if you have been rejected for a leasehold mortgage by one lender, there is no reason you can't apply to somebody else whose eligibility criteria you meet more closely.

  • Loan to Value - most lenders will accept a deposit of between 5% and 15% on a freehold mortgage. You need a higher deposit of 15% to 20% on a leasehold to get an affordable interest rate.
  • Affordability - lenders will assess your income and outgoings to check whether you can afford the mortgage repayments, alongside other costs such as ground rent. As we’ve stated, mortgage declined ground rent reasons can be due to affordability.
  • Credit history, your age, and the type of property are all potential risk factors.

What are the Costs of Taking out a Leasehold Mortgage?

There are a few additional costs to budget for before applying for a leasehold mortgage:

  • Conveyancing fees are higher, as there is additional work required.
  • Ground rent remains payable to the freeholder for the duration of the lease.
  • Some properties also incur service charges for property maintenance of communal areas.
  • Additional costs can be influential with mortgage declined ground rent and service charge reasons possible.

How are Freehold and Leasehold Mortgages Different?

In essence, a freehold mortgage means you own the property, and the land it sits on, in its entirety.

Leasehold means that you own the home, but not the land until the lease expires, or you extend it.

Can I Change Over from Leasehold to a Freehold Property Loan?

You can, yes. Leaseholders have rights to purchase a freehold in some scenarios, and therefore you can switch your leasehold loan to a freehold mortgage.

There are all sorts of conditions around agreeing to purchase from a freeholder, so it is essential to seek professional advice before moving forward.

What are the Typical Interest Rates on a Leasehold Mortgage?

The interest rates you will be quoted depend on:

  • How long the lease has left to run.
  • What deposit value you have available.
  • Your income and affordability assessment.
  • Your age.
  • Credit scoring and credit history checks.

Are There Leasehold Mortgages for Buy to Let Investments?

There are, and a landlord can purchase a leasehold property and use rental income to cover the mortgage costs.

If the lease has a shorter term, the rates offered are likely to be less competitive, and you will need a larger deposit than for a residential leasehold mortgage.

Can I Mortgage Commercial Premises on a Leasehold Basis?

Many businesses lease their property and have a mortgage to cover the costs. This helps avoid a large initial investment and avoids putting a strain on company cash flow.

Which UK Lenders will Mortgage a Leasehold Property with a Short Lease?

There are many different lenders to choose from, such as specialist providers and mainstream banks.

A lender such as Halifax, HSBC, Nationwide and Santander will all consider a leasehold mortgage. However, the only way to find the most competitive rates is to consult an independent broker.

Professional Support with Leasehold Mortgages

For more advice about the right lender for your leasehold mortgage, or for help comparing the costs of extending your lease vs the return on investment, contact business finance broker.

As an independent, whole-of-market broker, our role is to find you the borrowing you need, negotiated at the best possible rates. Call the team on 0330 304 3040 or send an email to [email protected].

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