Short Lease Mortgages

Short Lease Mortgages: What You Need to Know Before Buying

Purchasing a property with a short lease can be an appealing option due to the typically lower purchase price, but it comes with its own set of challenges, particularly when it comes to securing a mortgage.

At Kerr & Watson, we specialise in guiding our clients through the intricacies of short lease mortgages, ensuring they have the support and knowledge needed to make informed decisions.

What is a Short Lease?

A lease is a legal agreement that defines the period during which you own a property situated on land owned by someone else, known as the freeholder. Most often associated with flats, leasehold properties can also include some houses. When the lease expires, the property reverts to the freeholder unless the lease is extended. Here you can find out more information on the difference between a freehold and leasehold.

A “short lease” typically refers to a lease with 70 years or fewer remaining, though some lenders may consider anything under 80 years as short.

As the lease term diminishes, so too does the property’s value, making it less appealing to buyers and potentially more challenging to secure a mortgage.

Many high street lenders are reluctant to finance properties with very short leases due to the increased risk associated with their declining value, and the large potential cost for the owner to extend the lease again.

Challenges of Short Lease Mortgages

Securing a mortgage for a property with a short lease can be challenging for several reasons:

Decreased Property Value: The closer a property gets to the end of its lease, the more its value decreases, particularly when the lease has fewer than 70 years remaining. This depreciation makes it riskier for lenders, who may be concerned about recouping the loan if the property needs to be repossessed and sold.

Limited Lender Options: Many lenders set minimum lease requirements, often refusing to lend on properties with fewer than 70 years remaining on the lease. Some may require at least 35 years remaining at the end of the mortgage term, which limits the options for prospective buyers.

Valuation Issues: Some valuers are hesitant to recommend properties with short leases for mortgages, particularly if the lease term is under 80 years. This further narrows the pool of lenders willing to provide financing.

Despite these challenges, there are lenders and financial products available that cater to buyers of short lease properties. The key is knowing where to look and how to present your application in the most favourable light.

When Should You Extend the Lease?

Extending a lease is often a necessary step when dealing with short lease properties, both to protect your investment and to increase the property’s marketability.

The best time to extend a lease is as early as possible. Under the Leasehold Reform, Housing, and Urban Development Act 1993, leaseholders have the right to extend their lease by 90 years, provided they have owned the property for at least two years. The earlier you extend the lease, the lower the cost will generally be.

If you are purchasing a property with a short lease, consider negotiating with the seller to extend the lease before completing the purchase. This can save you time and potentially a significant amount of money in the long run. You should talk with a solicitor for full legal advice on this subject.

How Does Short Lease Lending Work?

Lending on short lease properties may involve a more complex process compared to standard mortgages. Typically, the lender will instruct a valuer to assess the property based on its current short lease and a prospective new long lease (if applicable).

Here’s how the process generally works:

Valuation: A panel valuer assesses the property’s value based on its existing short lease and what it would be worth with an extended lease.

Mortgage Offer: The lender may offer a mortgage based on the future value of the property with the extended lease, on the condition that the lease extension is completed simultaneously with the mortgage funds being released. In this instance, the mortgage would not go through if this has not been done.

Simultaneous Extension: Once the mortgage is approved, the solicitor arranges for the lease extension to be executed at the same time as the mortgage completion. This ensures that the lender’s risk is mitigated by securing the property with a longer lease.

For example, if you’re purchasing a property with a current value of £700,000 on a short lease, and it would be worth £1,000,000 with a new long lease, the lender might offer a mortgage based on the £900,000 valuation, provided that the funds are used to extend the lease.

Bridging Loans for Short Leases

In some cases, a bridging loan might be an alternative solution if securing a traditional mortgage proves difficult due to the short lease. A bridging loan is a short-term financing option that can be used to purchase the property and then extend the lease. Once the lease is extended, you can either sell the property for a profit or refinance with a standard mortgage.

Bridging loans are particularly useful in situations where:

Speed is Required: You need to secure the property quickly, perhaps at an auction.

Value Addition: You plan to increase the property’s value through lease extension or renovation before selling or refinancing.

However, bridging loans come with higher interest rates and fees, so they should be considered carefully as part of your overall strategy with professional advice always being taken.

Is Buying a Property with a Short Lease Worth It?

The decision to buy a property with a short lease depends on several factors, including your financial situation, investment goals, and risk tolerance. There are both pros and cons to consider:

Pros:

Lower Purchase Price: Properties with short leases are typically less expensive, which can make them an attractive option for buyers with a limited budget, perhaps making a profit on the subsequent sale.

Negotiation Opportunities: The reduced marketability of short lease properties often means there’s room to negotiate a lower purchase price.

Potential for Lease Extension: By extending the lease, you can significantly increase the property’s value and secure long-term stability once the lease has been extended.

Cons:

Financing Challenges: As discussed, securing a mortgage for a short lease property can be difficult, with fewer lenders willing to provide financing.

Reduced Resale Value: Properties with short leases are less attractive to buyers, which can make it harder to sell in the future if you do not extend it.

Uncertainty: There’s always a risk that the lease may not be extendable or that the cost of extending it will be prohibitively expensive.

Conclusion

Short lease mortgages require careful consideration and expert guidance.

At Kerr & Watson, we specialise in helping clients understand their options and make informed decisions about purchasing and financing properties with short leases.

Whether you’re considering buying a short lease property or need advice on extending an existing lease, our team is here to assist you every step of the way.

If you’re facing challenges with a short lease mortgage, don’t hesitate to contact us today. Our experienced advisors are ready to help you find the best solution for your needs.