When you buy a property with a leasehold rather than a freehold it means you only own your home for a fixed period of time. When your lease ends, your property reverts back to belonging to your landlord.
Leases can last between 99 and 999 years, but its very important to know how long your lease has before it expires. If you don’t, you could be in a lot of trouble.
A Short Leasehold Reduces Value
The length of your lease affects the value of your property. Any leasehold that has less than 80 years left to run could cause the value of your home to plummet and mean that it no longer qualifies for a mortgage. The situation will only get worse with every passing year.
One of the first effects of a short leasehold is that you will not be able to remortgage your home. It will be difficult to move home as well, unless you can find a cash buyer, because it will be hard for anyone to get a mortgage on the property.
A High Risk of Negative Equity
Because the value of your home has dropped by thousands of pounds, it is likely that you could be stuck in negative equity, as your home may not be worth what you paid for it.
This is bad news for your mortgage lender as well, because they cannot sell the property to make up for their loss, as they might in another situation.
10% of Homes in England and Wales Affected
According to research carried out by E.Surv in 2013, up to 1.43 million homes in England and Wales are at risk from shortening leasehold terms. This is approximately 10% of all residential housing stock, including house and flats, worth about £2.2bn.
The areas with the highest number of leasehold properties are London and the North East. This is an issue that affects owners of flats in particular, because most UK flats are leasehold rather than freehold.
If you own a flat, it is very important to check that you know how long your lease has to run and take action if the remaining time is approaching 80 years. The good news is that you can apply to buy a lease extension of up to 90 years, and this will reduce your land rent to a peppercorn.
Interest-Only Mortgages Put at Risk
Another group of homeowners who could be badly caught out are those who have bought their property with an interest-only mortgage. In this case, the borrower only pays interest on the mortgage while they live in the property, and aims to repay the value of the mortgage to the lender when it is sold.
If a property’s leasehold is less than 80 years, its value will be greatly reduced. It is possible the borrower could find themselves in negative equity, unable to remortgage or repay the mortgage lender.
How Do I Extend My Leasehold?
You can to ask to extend your lease by up to 90 years on a flat and up to 50 years on a house.
In order to extend your leasehold you will have to arrange for a surveyor to visit your property and carry out a Lease Extension Valuation. This means the surveyor will gather all the information they need to assess how much it should cost to extend your leasehold.
You will have to pay the freeholder, or landlord, for the loss they will incur by not taking back ownership of your home at the end of the current lease.
A RICS-accredited surveyor should tell you what compensation the landlord is entitled to and give you two valuations – the most you should be expected to pay, and a lower figure which takes into account your current situation.
You should then take the lower figure to your solicitor, and they will negotiate the lease extension with the freeholder. It’s important to calculate the costs of a lease extension correctly, otherwise a court could throw out your application and you won’t be able to apply again for another 12 months.
Unfortunately, the less time available on the current lease, the more expensive it is to arrange for a lease extension, so make sure you take action in good time. Once you have sorted out the issue, you will enjoy greater peace of mind.
What If I Want to Buy the Freehold?
Another alternative to extending your lease is to offer to buy the freehold from the landlord. In this case you would ask a surveyor to prepare a Freehold Valuation.
The surveyor will gather the relevant information in the same way as they would for a Lease Extension Valuation, and will provide two valuation figures.
RICS recommend that your solicitor should use the lower of the two figures to negotiate the purchase of the freehold. Be aware that you will have to pay any reasonable costs incurred by the freeholder.
If you live in a block of flats, it is also possible to collectively buy the freehold of your building, as long as at least 50% of the owners of the development agree. The freehold would then be held in the name of a company comprised of all the owners, and you would effectively become your own landlord.
At the same time you would also become the landlord of any of the flats who were not part of the process, and would have to arrange for repairs and insurance, as the previous landlord had done.
When you own the freehold of your home its value increases and you no longer have to worry about your leasehold running out. However, it can be an expensive process, especially in London, where recent increase in property values may have made costs prohibitive.
What If I Can’t Agree With The Freeholder?
If you would like to extend your leasehold or buy the freehold on your home and the freeholder doesn’t agree, you can use a mediation service or even take your case to an independent tribunal. Free advice is available from the Leasehold Advisory Service (LAS) if you are unsure how to proceed.