Should I buy an apartment with 20 years remaining on the lease?

I recently separated from my partner and we are in the process of selling our house. I’m looking forward to moving closer to my workplace in London.

Everything is very expensive and I don’t want to pay a huge amount towards my mortgage every month.

I’m thinking of looking for an apartment downtown with a very short lease. Probably about 20 years.

I know an apartment with a short lease like this might be difficult to sell in the future, but it will allow me to buy with cash instead of using a mortgage.

Short Lease: This reader is considering a property that has only 20 years left

Short Lease: This reader is considering a property that has only 20 years left

In the future, I may also be able to extend the lease or buy a share of the freehold – especially if… Rent reform bill It was passed.

I’ve looked at a few apartments, and they seem to have very different reviews.

How can I find out what a short-term rental property is worth, and how can I find out how much it will cost to extend the lease in the near future?

Once I become a landlord, is it possible to extend the lease and use the mortgage to do so? Any help would be greatly appreciated.

Ed Magnus of This Is Money replies: Buying a short-term rental apartment comes with some obvious downsides.

But with lease reform on the horizon, it could be an opportunity too – at least for those who are comfortable taking the risk.

In England and Wales, many apartments are sold with a lease that gives the owner the right to live in the property for a specified number of years.

After this period, the right to use the apartment ends, and it returns to the freeholder who owns the land on which the apartment is built.

The idea that you may only buy something for 20 years before handing it back to the freeholder can make it more like signing a long lease agreement – ​​rather than truly owning something that is yours.

You may also need to pay a Land rent.

But it can still make sense for some people. As I mentioned, it can provide a cheaper route to an expensive area that may not be affordable to you.

At the same time, realize that you are buying into a niche part of the real estate market.

The fact that mortgage lenders won’t lend on short-term rental homes means you’ll also be relying on cash buyers when you sell, unless you extend the lease.

You may be purchasing a depreciating asset, especially if the real estate market has remained relatively flat or even declined during the years you have owned it.

the Price of rented house It should theoretically decrease as the number of years in the lease decreases. But this is not guaranteed, and the opposite could also theoretically happen if there was a sudden boom in housing prices.

As you rightly mentioned, it looks like tenants in England and Wales will be given greater rights and powers over their homes as part of the new reforms.

an opportunity?  Buying an apartment on a short lease will allow our reader to buy into an expensive area that would otherwise be unaffordable – but it's a potentially risky strategy.

an opportunity? Buying an apartment on a short lease will allow our reader to buy into an expensive area that would otherwise be unaffordable – but it’s a potentially risky strategy.

the Draft law reforming the lease and freehold system It is currently passing through Parliament. However, it will take some time to become law, and it is also possible that it will be rejected or amended.

The draft law aims to make extending a lease or purchasing a freehold cheaper and easier for people. This would include removing the so-called “marriage value”, making it more expensive to extend leases when they are about to expire.

In search of expert advice, we spoke to David Philsenior analyst at the Hamptons, Shabnam Ali-Khana partner in the law firm Russell-Cooke and a member of the Association of Suffrage Practitioners, and Linz Darlingtonfounder of a company specializing in home rental extensions.

What is the cost of extending a short lease?

Lenz Darlington answers: To determine how much you should buy an apartment for, the best place to start is to understand how much it will cost to extend a lease when you qualify.

No online calculator will be able to give you this answer, instead you need to invest in a specialist assessment.

No online calculator will be able to correctly determine the value of a short-term rental apartment, says Lenz Darlington

No online calculator will be able to correctly determine the value of a short-term rental apartment, says Lenz Darlington

Suitable valuers can be found on Association of Tenancy Voting Rights Practitioners website. Before you choose one, quiz them on how experienced they are at evaluating and negotiating insurance premiums on apartments with very short leases.

Your offer price to purchase should also reflect the fact that you will need to pay legal fees and valuation fees for both sides when you extend the lease.

You will need to discount it further to take into account the fact that you are taking on significant risks and accepting the hassle involved in what can be a very controversial deal.

David Fell answers: Under current rules, extending a very short lease for between 10 and 30 years is likely to cost between 30 per cent and 70 per cent of the value of the apartment with an additional 90 years on the lease.

This figure drops to 8-10 percent when the lease is extended for 70 years.

Current proposals for leasehold reform are likely to reduce these costs, primarily by limiting the rate at which freeholders are compensated and eliminating the value of marriage, thus reducing the cost of extending a lease that is too short.

Shabnam Ali-Khan adds: A surveyor can advise you on the value of the flat on a short lease. Ideally, someone with knowledge of local property and familiar with proposed rent reforms and how they could affect the value of rental apartments.

Will rent reforms happen?

Shabnam Ali Khan responds: When the lease has fewer than 80 years remaining at the start of the formal lease extension process, the premium is higher due to an element known as the marriage value.

This represents the difference in the value of the apartment before and after extending the lease.

A surveyor can advise you on the value of the flat on a short lease, says Shabnam Ali Khan

A surveyor can advise you on the value of the flat on a short lease, says Shabnam Ali Khan

The difference is the value of the marriage, and the freeholder gets half. The draft law seeks to abolish the value of marriage, which ostensibly means reducing insurance premiums.

So far, so good, but the bill also looks to change some other elements that could lead to higher premiums.

Although the general concept is that it will be cheaper under the new repairs as there are less than 80 years left on the lease.

The bill is likely to be enacted this year, but parts of it may be scrapped if freeholders challenge the proposals.

David Fell adds: Since the proposals would reduce the value of many freeholds, they are likely to be challenged in court, especially if they are applied retrospectively to existing leases purchased at a value that reflects their terms at the time.

So, given that the proposals have not yet become law, and potentially long timelines, any purchase would likely be based on today’s rules, but with the hope that costs will come down in the future.

Lenz Darlington adds: If the Leasehold and Freehold Rights Reform Bill is successful, you may find it much cheaper to extend your lease.

Obviously this would be a windfall if that happened, but don’t count on it.

Can you finance a lease extension with a mortgage?

David Fell answers: Major banks usually do not lend to apartments with a lease term of less than 50-70 years.

However, by law, all tenants are entitled to a lease extension – a cost that rises as the lease expires.

David Fell says extending a lease for between 10 and 30 years would likely cost between 30% and 70% of the apartment's value with an additional 90 years on the lease

David Fell says extending a lease for between 10 and 30 years would likely cost between 30% and 70% of the apartment’s value with an additional 90 years on the lease

This payment is essentially compensation to the freeholder for the potential loss of ground rent, as well as not receiving the apartment when the original lease expires.

Upon completion of a lease extension, the apartment becomes mortgageable, meaning the mortgage can usually finance the lease extension.

Lenz Darlington answers: Borrowing money to finance a lease extension is not impossible, but it will limit your choice of lenders and make things more difficult.

Since your equity in the short lease will be limited, your lender will likely want to complete the lease extension simultaneously with the release of mortgage funds.

Coordinating a lease extension and remortgage at the same time is not easy – so at a minimum you should hire the same firm of lawyers to handle both.

What should they be aware of?

Shabnam Ali Khan responds: The apartment tenant must currently be the owner of the apartment for at least two years before he or she can exercise the right to extend the lease for 90 years at a (essentially zero) ground rent.

What are leasehold and freehold properties?

In the UK, homes are purchased either freehold or leasehold. When you buy a freehold property, it means you own the property and the land it is built on indefinitely. This is the most common way to buy a house in the UK.

However, by purchasing a lease, you only own the property for a specific period, but not the land on which it is built. The landowner remains the freeholder. This arrangement is most common with apartments, but you can get houses on a rental basis.

The lease you purchase is often long – usually between 99 and 999 years. Banks will typically lend mortgages as long as the lease term has 75 years remaining, but once the lease is less than approximately 70 years, it may be difficult to sell or remortgage the property.

Freeholders may also impose restrictions on what leasehold owners can do with the property.

Leaseholders pay ground rent for the land, plus a service charge to help cover the freeholder’s liability for common areas such as walkways or garden.

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