Lenders have always been reluctant to lend money on property that might be difficult to sell in the future.
This has become particularly true for leasehold properties, where lenders have been increasingly cautious in recent years due to consistent reporting of unfair lease terms being imposed on leaseholders.
Generally, our clients say that they struggle to secure finance on leasehold properties for one of two key reasons.
Reason 1 – Lease length
Commonly flats have been leased on 99-year or 125-year leases, and this seems like a very long time.
However, the day a lease drops below 80 years the cost of extending suddenly increases significantly. Consequently an 80-year lease is no longer considered long. Most buyers want to avoid the cost and hassle of having to extend the lease or being forced to sell the flat at a discount.
Most lenders will refuse to lend when there are fewer than 70 years remaining on a lease at the point a new mortgage application is made. Some have even more stringent criteria – at time of writing, Virgin Money usually won’t lend unless a lease has 85 years or more unexpired.
Reason 2 – Ground Rent
Older leases, especially those from the 1980s or earlier, typically have minimal ground rent. For instance, many ex-council flats sold under the Right to Buy scheme have ground rents as low as £10 annually.
However, newer leases often have much higher ground rents, sometimes with clauses that allow for large increases over the lease term.
Ground rent on new leases was banned by the Leasehold Reform (Ground Rent) Act 2022, and this has only made things worse for owners of existing leases which have a ground rent.
Mortgage criteria around ground rent is more nuanced than lease length. Below are some of the key reasons, connected to ground rent, which are problematic for lenders.
Ground rent is more than 0.1% of property value
Lenders tend to be hesitant to provide mortgages on properties where the ground rent exceeds 0.1% of the property’s value. For a £200,000 flat, this threshold would be £200 per year.
Ground rent exceeds £250 (or £1,000 within Greater London)
If your ground rent is above the threshold, under current law it may classify your lease as an Assured Shorthold Tenancy, which could make it easier for your freeholder to repossess your flat if you didn’t make your ground rent payment.
Whether or not this cap applies would require a detailed review of your specific situation. Even if it didn’t apply, often mortgage lenders don’t want to lend because they are concerned it could cause an issue in the future.
Ground rent rises too frequently
As long as the initial ground rent is reasonable, even if the lease includes a clause doubling the rent every 25 years, it should remain manageable over time, especially when factoring in inflation. For example, a 99-year lease starting with a £100 annual ground rent would reach a maximum of £800.
However, consider a similar 99-year lease starting at £100, but with a clause doubling the ground rent every 10 years. In this case, the ground rent would escalate to a staggering £51,200 by the end of the term.
Many lenders, such as Nationwide, find ground rent increases problematic if they occur more frequently than every 20 years.
Even if the ground rent doesn’t double, but increases by a different calculation, it can still be an issue if reviewed too often. Lenders typically object to increases at intervals of 10 years or less.
Ground rent rises in an unusual way
Ground rent reviews commonly rise by the Retail Price Index, the value of the property or by predefined amounts at predefined points during the lease term.
Mortgages companies are familiar with these mechanisms, and often happy to lend as a result.
However, if your ground rent rises are based on something other than one of these common reasons, it is more likely your mortgage lender will question it. For example, we’ve seen ground rent clauses where ground is to be based on a percentage of whatever the flat could be rented out for in the future. Mortgage lenders might not like this because it is hard to judge how ground rent will rise in the future, or how a fair price will be agreed between freeholder and leaseholders.
What’s the solution for buyers?
Frustratingly, mortgage lenders are often not very transparent about what lease terms are acceptable to them.
Their lender criteria is often sparse on detail, and they always have discretion to decide not to lend even if lease terms are technically within policy.
Fortunately, there is a solution to the problem.
If you want to reduce your ground rent then you can approach your freeholder and ask them for a “Deed of Variation” to reduce, remove or cap your ground rent.
Some freeholders refuse to do this or will charge you a large sum of money to reduce your ground rent.
A better solution is to do a statutory lease extension, which will both increase the number of years remaining on your lease (by an additional 90) and reduce your ground rent to £0.
Unlike a Deed of Variation, which will be offered at a ‘take it or leave it’ price by your freeholder, a statutory lease extension gives you the power to make sure that you get a fair price.
Once you’ve done your lease extension, you can assume that your lease length and ground rent won’t cause you or future purchasers any issues getting a mortgage in the future.
Linz Darlington is managing director of Homehold, which offers an end-to-end lease extension service
Tel: 0203 997 8950
Address: 483 Green Lanes, London, N13 4BS
Web: homehold.org
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