Buying a property is exciting but it can also be challenging, especially if you discover that the one you want to make an offer on has a short lease. Mainstream lenders are often reluctant to offer mortgages for short lease properties as they’re considered to be high risk.
So, where does that leave you if you’re not a cash buyer and need a mortgage to buy the property? How feasible is it to get mortgages on short lease properties?
What is a short lease?
Most flats are sold as leasehold properties, as well as some houses, although these are usually freehold. When you buy a leasehold property, you own it for a fixed term, according to the length of the lease. Leases typically run anywhere between 90 and 999 years. You don’t own the land that the property sits on, however, which is different from a freehold property.
A short lease is usually considered to be one that falls below 80 years. The shorter it is, the more of a risk it poses to lenders and, therefore, the more challenging it is to secure a mortgage to buy a short lease property.
Why does the length of the lease matter?
As the length of a lease decreases, so does the market value of the property. In turn, the risk for the lender increases, as detailed below.
Expensive to extend the lease
When the remaining time on a lease is less than 80 years, the cost to extend the lease becomes significantly more expensive. This is because of something known as the ‘marriage value’. This relates to the increase in the property’s value after a lease has been extended.
Currently, 50% of the marriage value has to be paid to extend a lease or buy the freehold. There is a provision in the Leasehold and Freehold Reform Act 2024 to abolish the marriage value but, as yet, this section of the Act hasn’t come into effect.
Getting a lease extension also takes time so this needs to be considered, too.
Marketability issues
A short lease reduces a property’s value and can be complex to deal with, causing future marketability issues. A property with a short lease is, therefore, harder to sell and the shorter the lease gets, the fewer buyers there are to sell to. As the property is used as security for the mortgage, this doesn’t bode well for the lender if it has to be repossessed and sold to recoup their funds.
A risk of the lease expiring
If a lease expires, ownership of the property automatically reverts to the freeholder. This means that you lose all legal rights to the property. The freeholder (the landlord) may offer you a rental contract but they’re not obligated to do so and they have the right to legally evict you. From a lender’s point of view, an expired lease makes the property worthless and unable to be used as security for a mortgage loan.
How to get mortgages on short lease properties
Due to these risks, mainstream lenders generally set minimum lease terms. Typically, they require a minimum lease of 70 to 80 years before the mortgage commences and expect the lease to continue running for at least 30 to 40 years after the end of the mortgage term.
Those who do accept short leases tend to set loan-to-value (LTV) restrictions. The LTV is the amount you can borrow compared with the price of the property. For a short lease property, this can be restricted, such as a maximum LTV of 60%, meaning you have to pay a much larger deposit.
Don’t be disheartened, though. Discovering that the property you want to buy has a short lease doesn’t mean that you can’t get a mortgage. Specialist lenders can help and you can also negotiate a lease extension with the current property owner.
Use a specialist lender
Specialist lenders offer more flexibility than mainstream ones. They are more willing to accept short leases, even those below 50 years in some cases. They’ll require confirmation from the valuer that the property is mortgageable and will require the lease extension to be implemented.
Negotiate a lease extension
Before you proceed with the purchase, negotiate a lease extension with the current owner. They can then begin the process and either ensure that it is finalised before your purchase of their property completes or they can assign the benefit of the statutory lease extension to you upon completion. The latter option then allows you to continue the extension process that they have started.
Secure a bridging loan
An alternative to arranging a mortgage for a short lease property is to use bridging finance. This short-term loan can be used to buy the property and fund the lease extension. Once the lease has been extended, you can then refinance to a standard residential mortgage.
A bridging loan is ideal for buying a short lease property at auction. Auctions have quick turnarounds and bridging loans are fast to arrange. This ensures that you have access to the funds you need to meet the short completion timescale.
Get specialist help arranging your short lease mortgage
Our mortgage brokers are well-versed in dealing with short lease mortgages. They have access to niche lenders specialising in financing for properties with short leases, allowing you to benefit from the flexibility that they offer.
Before approaching a lender, your broker will factor the marriage value into the affordability calculations. That way, you’ll be fully aware of the increased cost and how it will affect your borrowing power. With a full understanding of the LTV restrictions applied by different lenders, your broker will be in a good position to match your application with the most suitable lender for your circumstances.
It’s essential to get specialist advice before buying a short lease property. Without it, you risk being unable to secure a mortgage, suffering significant financial issues and being stuck with an unsellable property. Give us a call on 01322 907 000 for expert advice before you make an offer on the property you’re considering buying.