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Mortgage on a leasehold property

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Mortgage on a leasehold property

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Last reviewed on 6th September 2023 by Martin Alexander (Mortgage Advisor)

Buying a leasehold property is very different from buying a freehold. As a result, a leasehold mortgage is completely different from a mortgage for a freehold property.

Leaseholds 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 lease to make sure the property offers adequate security for a mortgage.

Leasehold ownership is a popular option for both residential and investment purposes. Most flats and apartments are only available on this tenure and are rarely available freehold. This is mainly because of the shared aspects of where your property is located.

What is a leasehold mortgage?

A property can either be purchased on a freehold or a leasehold basis. A freehold property, which is common for stand-alone properties, such as traditional houses is often freehold. This means the land and the property are owned by the freeholder. A leasehold on the other hand would indicate ownership of the property, but not of the land.

A leasehold mortgage would therefore include a lease from the freeholder, which will be limited to a set number of years. Leases can range up to 999 years and can be renewed with consent from the freeholder. You’ll also pay ground rent to the freeholder each month, to pay for the land the property sits on.

Can I get a mortgage on a leasehold property?

Yes, getting a mortgage on a leasehold property is possible. In fact, the tenure of a property won’t affect whether it’s suitable for a mortgage or not.

Rather than the tenure of a property, lenders will assess factors such as:

  • The condition of the property – Lenders will want to ensure that the property is suitable for a mortgage. As a result, your property must be habitable. Properties that are very run down will be harder to get a mortgage on.
  • Details of the lease – Each lease will vary and as a result, lenders will check its terms and conditions. This is to ensure the lease meets their criteria.
  • Suitability of the applicant – Lenders will assess applicants based on their income, spending habits and affordability. Furthermore, your employment and credit history can also have an effect on whether you’re approved.

How does a mortgage on a leasehold property work?

Mortgage approval will largely depend on the length of your property’s lease. Most leases can be renewed or extended, but this is the main concern for mortgage lenders. For instance, if you’re buying 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 at least 100 years on your lease.

To get a 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 involved. 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.

Why do mortgage lenders check the length of a lease?

The length of your lease is perhaps the biggest factor in 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 terms also impact property values. Lenders want to be sure that if you default on your mortgage they’re not left with a property that’s worth less than the original loan.

Can I get a mortgage on a short-leasehold property?

If you have two identical properties but one has a term of 500 years and the other has a term of 20 years, the market values will be completely different. The property with a term 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 want to buy a leasehold property that has a short lease, you can request that the seller extend the term prior to selling it. This should make it easier to get a mortgage. On the other hand, extending a lease term is likely to increase the value of the property.

How much does a mortgage for a leasehold cost?

A mortgage for a leasehold 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, there are other factors in addition to the details of the lease that can impact 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 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 properties with leases. 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.

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What makes a leasehold different from a freehold?

The difference between freehold and leasehold mortgages is that a leasehold has a fixed period of ownership until it expires. A lease will also outline other terms and conditions, whereas a freehold property rarely does.

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 that outline various terms and conditions.

The main points to look out for are:

  • Service charges
  • Ground rent
  • Lease term (number of years remaining)
  • Conditions on renewing and extending

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 for renewing or extending are also very important. With a freehold, you’d own the land as well as the property and wouldn’t need to pay any ground rent or service charges.

Are freehold mortgages better?

There’s certainly nothing wrong with buying a leasehold property. Although mortgage costs may be slightly higher, there can be some advantages.

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 it 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 its tenure deter you.

Finding the best mortgage rates

Getting the right mortgage advice is often crucial when purchasing a 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 in buying a leasehold. 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.


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About the author

Martin Alexander
Senior Mortgage Advisor | More Articles

Martin is a senior mortgage advisor and has held a CeMAP qualification for over 15 years while also completing an MBA in Global Banking & Finance.