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Lenders may not be as open to short leases as it seems – Arnold

by: Joe Arnold, managing director of Arnold & Baldwin
  • 11/10/2018
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Lenders may not be as open to short leases as it seems – Arnold
Leasehold properties are coming under increasing scrutiny and a recent report from NAEA Propertymark found that 94% of leasehold homeowners regret buying a leasehold property.



There remain, however, many areas where leasehold properties account for a significant proportion of the housing stock and this is unlikely to change any time soon.

So, what do you need to know about leasehold properties and how can they provide opportunity for you to add value to your clients?

The important dynamic to be aware of is that there can be a disparity between the appetite that lenders express for leasehold properties, with short leases in their lending criteria, and the guidance notes they provide for surveyors.


Lender criteria vs  surveyor guidance

Many lenders, within their criteria, state they are able to lend on properties where the remaining period on the lease is just 30 or even 25 years beyond the end of the mortgage term.

So, for example, on a mortgage with a 25-year term, a lender’s criteria might only require a leasehold property to have 50 years remaining on the lease.

However, within their guidance notes, lenders will also stipulate to surveyors valuing a property that the property should be readily resaleable for owner occupation.

This could effectively increase the minimum period remaining on a lease to at least 80 years, because of something known as marriage value.

A flat with a long lease is worth more than a flat with a short lease and the marriage value is the increase in the total value of the property after a lease extension.


Share profits with freeholder

Under the Leasehold Reform, Housing and Urban Development Act 1993 a leaseholder has to effectively pay compensation to a freeholder if the lease drops below 80 years.

So when the lease is extended, the leaseholder has to share 50% of the increase in value with the freeholder, which could run into many thousands of pounds.

This means a surveyor valuing a property with a lease approaching 80 years remaining, needs to factor in the potential impact on the property value should it fall below 80 years.

In fact, a leaseholder has to own the property for at least two years before they are able to extend the lease – effectively extending the deadline to 82 years.

As a result many lenders will start to ask more questions if a lease drops below 85 years.


Guide clients through complexity

In these cases a surveyor familiar with lease extensions can help keep the deal alive by creating an asset that will meet the criteria required to make a property readily resaleable.

Indeed, there is also opportunity to review your client book and revisit those clients whose lease may be approaching 80 years to discuss extending the lease ahead of a remortgage.

This will make the process more straightforward, your client may need to raise funds through a remortgage to pay for the lease extension, and you could even benefit from referral fees.

A short lease can be a hurdle to securing a mortgage, but it can also provide an opportunity to guide your clients through a potentially complex process.



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