Buying a leasehold property
If you’re buying a leasehold property, you’re actually buying a lease from the freeholder (often referred to as a landlord) who owns the land. A lease can last up to 999 years, and you’ll usually have the option to extend it when it expires. Flats are usually leasehold properties, but some houses can be as well, usually those that are part of shared ownership.
Share of freehold
If you own a leasehold flat, it’s possible for you to group together with other flat owners in your building to purchase the freehold. However, this is subject to agreement with the current owner or owners, and involves setting up a new company in which leasehold owners have shares. If you take this route, you’ll be the leaseholder of your flat as well as a shareholder in the company that owns the freehold to the building.
What are a leaseholder’s main responsibilities?
These depend on the contract that you have with their landlord. It could include:
- having to pay ground rent, yearly service charges and maintenance fees, as well as a proportion of the building’s insurance charges
- having to gain permission if you want any major work done to your property
- being subject to your landlord’s rules, such as not subletting or having pets in the building
Unless you’ve received permission to manage common parts of a building – like the entryway, communal staircase or roof – that responsibility falls to the freeholder.
Does the length of the lease affect your mortgage?
When your lease expires, ownership of the property goes to the landlord. As a rule of thumb, it’s safer to be wary about purchasing a property with a lease of less than 80 years left on it. A short lease could affect the resale value of the home, should you choose to sell it. This is one of the reasons why mortgage lenders often calculate a lower loan-to-value (LTV) on leasehold properties – which means that it’ll be trickier getting a mortgage on your intended purchase.
Extending a lease
You’re legally allowed to extend the lease once you’ve owned the home for more than two years. This is usually 90 years for a flat or 50 years for a house. The HomeOwners Alliance has a handy calculator on its website to help you estimate how much it will cost you to extend the lease on a home.
It’s also possible to apply for an extension when you’re still in the process of purchasing the property, but this depends on whether the current owner will agree to start the process for you.
If you’re extending a lease that’s shorter than 80 years, you’ll have to pay the landlord an additional ‘marriage fee’. This is the difference between the value of the property on its older, ‘shorter’ lease and on the newer, ‘longer’ lease. The fee gives the landlord half of the increase in value.
Applying for a mortgage
If you’re applying for a mortgage on a leasehold property, there are other factors to consider in addition to the length of the lease. Your Equifax Credit Score & Report can help you to view your credit history to help improve your credit rating and get a sense of how a mortgage lender may view your creditworthiness. It’s free for the first 30 days, then £14.95 a month.
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