Leasehold properties are coming under increasing scrutiny and a recent report from NAEA Propertymark found that 94% of leasehold homeowners regret buying a leasehold property. There remain, however, many areas where leasehold properties account for a significant proportion of the housing stock and this is unlikely to change any time soon. So, what do you need to know about leasehold properties?
The important dynamic to be aware of is that there can be a disparity between the appetite that lenders express for leasehold properties with short leases in their lending criteria and the guidance notes they provider for surveyors.
Many lenders, within their criteria, state they are able to lend on properties where the remaining period on the lease stretching to 30 or even 25 years beyond the end of the mortgage term. So, for example, on a mortgage with a 25-year term, a lender’s criteria might only require a leasehold property to have 50 years remaining on the lease.
However, within their guidance notes, lenders will also stipulate to surveyors valuing a property that the property should be readily resaleable and this effectively increases the minimum period remaining on a lease to at least 80 years, because of something known as marriage value.
A flat with a long lease is worth more than a flat with a short lease and the marriage value is the increase in the total value of the property after a lease extension. Under the Leasehold Reform, Housing and Urban Development Act 1993 a leaseholder has to effectively pay compensation to a freeholder if the lease drops below 80 years and so when the lease is extended, the leaseholder has to share 50% of the increase in value with the freeholder, which could run into many thousands of pounds.
This means that a surveyor who is valuing a property with a short lease approaching 80 years remaining, needs to factor in the potential impact on the value of the property should it fall below 80 years. In fact, a leaseholder has to own the property for at least two years before they are able to extend the lease, which effectively shifts this deadline to 82 years and so many lenders will start to ask more questions if a lease drops below 85 years.
This means that it can be harder to get a mortgage on a property with a lease of less than 85 years and so developing a specialist knowledge in lease extensions can help surveyors to help their clients by creating an asset that will meet the criteria required to make a property readily resaleable.