Understanding Short Lease Mortgages - The Complete Guide

02-October-2023

02-October-2023 17:06

in Mortgage

by Sam Hodgson

Understanding Short Lease Mortgages - The Complete Guide

If you're looking to buy or remortgage a property with a short lease remaining, you likely have questions about eligibility and process. You’ll want to know exactly how short lease mortgages work, what lease extensions are, and what the potential risks and concerns a short lease mortgage may bring.

Here, in this comprehensive guide, we’re answering buyers' common queries about short lease mortgages.

With our expertise within the property finance market – we can help you make informed financing decisions.

With that said, let's take a thorough look at short lease mortgages and all they entail.

Understanding Short-lease Mortgages - The Complete Guide

What is a Short Lease Mortgage?

A short lease mortgage is for properties with less than 80 years remaining on the lease term. As the lease length reduces over time, it can negatively impact property value and mortgage eligibility.

In the UK, most residential property leases start at 99 or 125 years. As the years pass, the lease term shortens. Once it drops below 80 years, it is considered a short-term lease and can limit financing options.

What is a Leasehold Mortgage?

When you have a leasehold interest in a property, you don't own the land itself. Instead, you have a lease or rental agreement with the landowner that allows you to use the land and any buildings on it for a specific period, typically long-term, such as 99 years. Leasehold ownership is common in situations like apartment blocks or properties on land owned by governments or organizations.

Leasehold mortgages are often used in situations where freehold ownership is not possible or practical, such as in commercial leases or residential properties on leased land. Lenders assess the value of the lease, the terms of the lease agreement, and the lessee's creditworthiness when determining the terms and conditions of a leasehold mortgage.

Can I Get a Mortgage on a Short Lease?

While many lenders do offer such mortgages, they impose stricter criteria compared to those for standard leases. Typically, lenders require a minimum remaining lease term of around 40 to 50 years.

The remaining lease's length is crucial because lenders want to avoid properties that may depreciate significantly as the lease term shortens.

Additionally, the property's value must align with the lender's loan-to-value requirements adjusted for the shortened lease term.

Short lease mortgages generally necessitate a larger deposit, often around 45%, compared to the 25% commonly required for properties with longer leases.

Of course, your credit profile also plays a pivotal role, with lenders conducting thorough assessments to evaluate affordability risks.

Having a strong credit score can be advantageous when seeking approval for a short lease mortgage. To enhance your chances, it's essential to meet the lender's affordability calculations.

How Do Short Lease Mortgages Work?

There are two main approaches to securing a short lease mortgage:

Self-Initiated Lease Extension

In most cases, you can proactively extend the lease after owning the property for 2+ years. This can increase the property's value and improve your mortgage options by turning it back to a standard full-term lease.

However, arranging a lease extension can be an expensive, complex, and lengthy process.

Here are the key steps if you want to independently extend the lease before applying for a mortgage:

Check legal requirements

In the UK, you typically must wait two years from purchase before applying.

Value the premium

Work out what one-off premium you'll need to pay the freeholder to extend the lease. This will be based on factors like the remaining lease term, and you'll likely need a specialist surveyor's help.

Serve notice

Your solicitor formally serves notice to the freeholder of your intent to extend.

Negotiate terms

You will need to negotiate and agree on the premium amount with the freeholder. This can take many months.

Complete extension

Once terms are accepted, the lease extension can be legally completed. The property now has an extended lease term, improving mortgage eligibility.

Lender-Initiated Extension

As an alternative, the lender can initiate extending the lease as part of the mortgage process. Here's how it works:

Dual valuation

The lender will value the property twice based on both the short lease and an assumed extended long lease.

Conditional offer

They will offer a mortgage amount based on the higher long lease valuation. This offer will be conditional on formally extending the lease upon mortgage completion.

Extension costs

The lender will arrange and cover lease extension costs from the mortgage amount so you don't pay upfront.

Completion

On mortgage completion, the lender extends the lease before registering their charge on the property.

While simpler for the borrower, lender-initiated extension can limit how much you can borrow compared to doing it yourself upfront.

Book Consultation »

Key Factors Lenders Consider

When assessing a short lease mortgage application, key factors lenders evaluate include:

Valuation Difference - Lenders will check the potential value uplift from extending the short lease to a long lease. A sizable difference indicates extension could be worthwhile.

Interest Rates - Long leases (over 80 years) typically qualify for the best mortgage rates. Short leases usually have higher interest rates and arrangement fees.

Loan-to-Value Ratio - Short leases need a larger deposit, with many lenders requiring at least 45% LTV. Some may accept higher LTV for short leases if you have an excellent credit profile.

Lease Duration - The remaining lease duration impacts the maximum mortgage term a lender will offer. For example, they may limit lending to 25 years if the lease has 50 years remaining.

Risks - Lenders view short leases as higher risk in case they must repossess and sell the property. So, they apply tighter criteria to mitigate this.

Is it Worth Buying a Property with a Short Lease?

Buying a short lease property does come with its considerations. As the lease decreases, the value is likely to fall, which could put you in negative equity. Extending the lease can also be costly, especially if left late.

However, short leases may allow you to purchase a property you couldn't otherwise afford. And extension costs are typically less than the discount received on the purchase price.

Carefully weigh up these pros and cons relative to your goals. Seek guidance from a specialist broker to assess all factors before proceeding.

Understanding Short-lease Mortgages - The Complete Guide

Should You Consider a Short Lease Mortgage? - Weighing the Pros and Cons

Short lease mortgages allow buyers to purchase properties otherwise unattainable. But they also come with potential drawbacks.

Evaluating the pros and cons can help you make an informed choice on whether this route fits your situation.

At Clifton Private Finance, our specialist brokers often advise clients on navigating the nuances of short lease lending.

Possible Benefits of Short Lease Mortgages

Access more properties in your budget - short leases can make expensive homes more affordable.
Negotiate discounts off market value, which can compensate for the shortened lease term.
Improving the home and extending the lease can increase value, offering the potential for capital growth.
There may be a lower initial outlay, and the discount can result in a smaller deposit and other upfront costs.

Potential Risks of Short Lease Mortgages

Stricter lending criteria leave fewer lender options and a need for substantial deposit funds.
The eventual extension can reduce initial savings, leading to higher lifetime costs
Uncertainty of future gains: no guarantee value will rise sufficiently after improvement.
If extension costs outweigh the discount received, there may be a negative equity risk

At Clifton Private Finance, we advise weighing up these pros and cons relative to your goals and risk tolerance.

Our brokers can provide objective guidance on whether a short lease mortgage is your best path forward.

What is the Shortest Lease You Can Get a Mortgage On?

Most mainstream lenders will not advance mortgages for properties with less than 40-50 years remaining on the lease. Their criteria are based on the lease term covering the full mortgage term plus a buffer.

If your remaining lease term is very low, you will likely struggle to secure financing from high-street banks and building societies. Specialist lenders may consider shorter leases under 30 years but will still require an extension.

It’s recommended to act quickly to extend the lease if it's winding down below 50 years. An experienced mortgage broker can connect you with specialist lenders who have the resources to offer short lease mortgages.

Get Specialist Short Lease Mortgage Advice

We hope this guide has helped demystify short lease mortgages and empowered you to make informed financing decisions.

Our expert brokers at Clifton Private Finance have helped countless borrowers secure competitive short lease mortgages and navigate the lease extension process.