What is the standard requirement mortgage lenders have about the length of a lease term?

If you are buying a leasehold property and you intend to take out a mortgage, you need to be aware of the mortgage lenders’ lease term requirements.

When you own a leasehold property, the lease will have a set term, often 99 years or 125 years from the date on which the lease was granted. Over time, the remaining term will reduce. Once it falls below a certain level, you need to be aware that your property will be harder to sell and it could lose value. You will usually have the right to extend the lease in return for a payment to the freeholder or landlord.

At Lockings Solicitors, we deal with leasehold sales and purchases. We can advise you of the implications of your lease in light of the number of years remaining and let you know whether you should consider extending it.

We have been dealing with leasehold conveyancing for clients in East Yorkshire and beyond for many years and have a reputation for excellence. We hold the Law Society’s Conveyancing Quality Scheme accreditation in recognition of the good legal advice we provide, as well as our high levels of client service.

We offer a FREE initial chat so that you can ask us any questions you may have about leasehold purchases or sales. Call us on 01482 300 200, email us at welcome@lockings.co.uk or fill in our Free Online Enquiry and we will call you back promptly. We have offices in Beverley, Hull and York and represent clients across the East Yorkshire area.

Why do lenders stipulate a minimum lease term when offering a mortgage?

Over time, a lease will become less desirable as the number of years remaining falls. Eventually, the lease will run out if it is not renewed and the property will then belong to the landlord.

There is a cost involved in extending a lease and a legal process to go through with the landlord in order to agree and implement an extension.

These factors mean that lenders prefer properties with a good number of years remaining on the lease. Should they have to repossess a leasehold property, they would struggle to sell it if the lease term was low.

What is the standard requirement mortgage lenders have about length of lease?

Each lender has their own requirement in respect of the number of years they need to be remaining on the lease term.

Once the lease term falls below 80 years, the cost of extending it will generally increase. This is because, at this point, the landlord is entitled to receive an additional payment known as ‘marriage value’.

Marriage value is the increase in the value of the leasehold interest once the lease is extended. The landlord is entitled to payment for half of this sum.

Taking this into account, some lenders require a minimum remaining term of 85 years. Some are happy with less. Often, the length they insist on will take into account the length of the mortgage. For example, they may be happy to lend if there will be 30 years or more remaining at the end of the mortgage term.

Even if your lender is happy to lend against a shorter remaining lease term, you need to be cautious. If you want to sell the property at this point, buyers may be unable to obtain a mortgage and you would then be severely limited as to whom you could sell to.

What should I do if there is only a short number of years remaining on my lease?

As a leaseholder, you have the right to extend your lease if the following apply:

• You have owned the property for at least two years
• The lease is a long lease, ie. it was originally granted for more than 21 years

The lease should not be a business or commercial lease and the landlord cannot be a charitable housing trust.

Your landlord may be prepared to negotiate a lease extension on an informal basis. The potential pitfall is that they could pull out of the transaction if they decide not to go ahead.

There is a formal right to a lease extension for qualifying leaseholders, as above, and provided you qualify, the landlord cannot refuse your request if you follow the formal process correctly, including serving notice on the landlord.

Can I buy leasehold property with a mortgage if the remaining lease term is short?

If you are thinking of buying a property with relatively few years remaining on the lease, you need to have a good understanding of the situation and how the value will be affected, both now and in the future.

You should speak to an expert lease extension valuer. They will be able to provide an estimate of the potential cost of the premium to extend the lease.

In addition to the premium payable to the landlord, you will need to pay the related expenses, including:

• The specialist leasehold surveyor’s fee for providing a valuation
• Your solicitor’s fees
• The landlord’s reasonable legal and valuation costs
• The Land Registry’s fees for providing copies of the titles and registering the lease extension

Your mortgage lender may also have administration fees for approving the lease extension.

Can I sell leasehold property if lease term is short?

Once the term remaining on the lease falls towards 80 years, you may find it harder to sell your property. The buyer would usually need to deal with a lease extension, and they may expect a reduction in price to take this into account.

Because they will not be able to start the lease extension process until they have owned the property for two years, they may want you to commence matters before the sale is completed. If you have started the lease extension process, they are able to take this over from you and will not then have to wait for two years.

If you are thinking of selling a flat or leasehold house in the future, you could consider dealing with the lease extension yourself. If you are eligible to extend the lease, you will have an extra 90 years if the property is a flat and 50 years if the property is a house. The ground rent will also be effectively eliminated.

When can I extend a lease?

If you have owned your property for two years or more and you are otherwise eligible, you might want to consider extending your lease once it approaches the 80 years remaining mark.

This will mean that if you decide to sell, you should have enough years remaining on your lease to satisfy any buyer and their lender.

However, new legislation, the Leasehold and Freehold Reform Act, is pending, which will make changes to the lease extension process as well as the process of buying the freehold.

It is proposed that the new extension term will be 990 years for both houses and flats and that the process of obtaining an extension will be easier. Those with leases that have less than 80 years remaining or with ground rent of more than 0.1% of the value of the property may also find that it will be cheaper to obtain an extension once the new act comes into force.

In addition, it will no longer be necessary to own the property for two years to start the lease extension process. Instead, you will be able to do this from day one of ownership, provided you otherwise qualify.

The act will also introduce the right to purchase the ground rent without extending the lease. Again, if your ground rent is more than 0.1% of the value of the property, it could be cheaper to purchase the ground rent once the new legislation is in force.

There is not yet a timetable for implementing the new laws, meaning they could be some way off.

Contact our East Yorkshire leasehold property solicitors

If you are considering buying or selling a leasehold property, we will be happy to help.

You can ring us for a FREE initial chat on 01482 300 200, email us at welcome@lockings.co.uk or fill in our Free Online Enquiry and we will call you back promptly. We have offices in Beverley, Hull and York and represent clients across the East Yorkshire area.