Purchasing a leasehold property is very different from buying a property that’s freehold. As a result, a leasehold mortgage is completely different from a mortgage for a freehold property.
Leasehold properties typically have a lot more terms and conditions attached to them when compared to freehold homes. This is why the buying process can often take longer as solicitors have a lot more to go through. Lenders will also need to check the terms of the leasehold to make sure the property offers adequate security for the loan.
Nonetheless, leasehold properties can be a popular option for both residential and investment purposes. Most flats and apartments are only available on leasehold tenure. This is mainly because of the shared aspects of the building in which your property is located.
This guide will explain everything you need to know about getting a mortgage on a leasehold property. You can also make an enquiry with an advisor to get started.
Why is leasehold property different from a regular home?
Before we explain what leasehold mortgages are, we’ll explain what a leasehold property is.
Leasehold properties are owned by the leaseholder, but the land on which it’s built is owned by the freeholder. Leasehold properties are leased for a fixed period of time to the buyer. Once the lease expires, ownership is returned to the freeholder.
Leases are contracts which outline various terms and conditions. The main points to look out for in a leasehold contract are:
- Service charges
- Ground rent
- Lease term (number of years left on the lease)
- Conditions on renewing and extending the lease
Such conditions are important to pay attention to. Service charges can be very high and are payable in addition to other expenses such as mortgage payments and living costs. Ground rent can be an annual payment and isn’t usually a huge cost, but it’s still a cost nevertheless.
The term of the lease is very important and outlines how long the lease is. The conditions of renewing or extending the lease are also very important.
What is a leasehold mortgage?
A leasehold mortgage is a loan used to purchase a leasehold property. The main reason a leasehold mortgage is different to a freehold mortgage is that a leasehold property has a lease which outlines a fixed period of time until which the lease expires. A lease will also outline other terms and conditions, whereas a freehold property rarely does.
Most leases can be renewed or extended; however, this is the main concern for mortgage lenders. For instance, if you’re purchasing a property that only has ten years left on the lease, it will be near enough impossible to find a lender. On the other hand, it’s much easier to find lenders if you have over 100 years left on a lease.
When applying for a leasehold mortgage, lenders will pay close attention to the conditions of the lease to ensure it’s suitable to lend on. It’s not just the length of the lease, but also the costs such as service charges. Lenders need to make sure that any expenses that you’ll be taking on are affordable. This will be part of your mortgage affordability assessment.
Does the length of the lease matter?
The length of your lease is perhaps the biggest factor on whether or not your property is suitable for a mortgage. We’ve established that properties with shorter leases are difficult to get a mortgage on, but exactly how long does a lease need to be to make it suitable for a mortgage?
The majority of lenders will require between 60-80 years remaining on the lease at the time of your application. It’s important to remember that shorter leases also impact property values. Lenders want to be sure that if you default on your mortgage that they’re not left with a property that’s worth less than the original loan.
If you have two identical properties but one has a lease of 500 years and the other has a lease of 20 years, the market values will be completely different. The property with a lease of 500 years is likely to be worth a lot more. This is why the length of a lease is so important, especially if you’re applying for a mortgage.
If you wish to purchase a leasehold property that has a short lease, you can request that the seller extends the lease prior to selling it. This should make it easier to get a mortgage. On the other hand, extending a lease is likely to increase the value of the property.
How much does a leasehold mortgage cost?
A mortgage for a leasehold property is likely to cost more than a mortgage for a freehold property. This is largely due to the increased risk around leasehold properties in comparison to freehold homes. That being said, if you have a really long lease, you may be able to secure competitive rates.
In terms of leasehold mortgage rates and fees, there are other factors in addition to the details of the lease which can affect the rates you’re offered. For instance, your deposit amount will also have a big impact on the rates you’re offered. There are lenders that may consider you with a 10% deposit for a leasehold mortgage but many require more. Better rates are typically offered with larger deposits such as 25% and the best rates at 40%.
Your credit history and age are among other factors that can impact the amount you’re charged. As each lender is different, you can consult an advisor for a more tailored answer on the rates you’re likely to be offered.
It’s also important to mention that conveyancers will often charge more for cases that involve leasehold properties. This is simply because of the additional legal work involved. Conveyancers need to check your lease terms in addition to the regular legal work that’s involved and it can be a timely procedure. Legal enquiries can often go back and forth, especially if the lease is unclear.
Is it better to buy a freehold property?
There’s certainly nothing wrong with buying a leasehold property. Although mortgage costs may be slightly higher, there can be some advantages to owning a leasehold property.
Communal repairs and garden maintenance are typically covered by your service charge. If so, this can save you a lot of time while the upkeep of the building is maintained. Each lease is different, so do check this through.
Buildings insurance is usually covered by the freeholder, so this is one less expense to worry about. Furthermore, if you’re buying a property with a long lease, you should be able to renew the lease with little or no fuss.
There are also advantages to buying a freehold property. After all, you’ll own the building and the land that it’s sitting on. That being said, if the property you have your heart set on is leasehold, don’t let the tenure of it deter you away.
Mortgage advice on leasehold properties
Getting the right mortgage advice can be crucial when purchasing a leasehold property. With a lot of your money at stake, getting a professional opinion can save you a lot of time and money.
There are so many different variables with buying a leasehold property. For instance, if you’re buying a flat in an apartment block, you’ll be paying your service charge to the block managing agent. If there isn’t a block managing agent or they’ve disappeared, then it will be extremely difficult to get a mortgage.
Having the right expertise at the start of your homebuying journey can give you the confidence to make the right decisions. Our advisors can also give you an idea of the costs involved and whether a mortgage is likely.