Lease Extension – How to Secure a Mortgage for a Short Lease Property and Extend It
If you want to buy a property and need a Lease extension mortgage, this article is for you!
Properties with short leases can be bargains and allow you to purchase in highly sought-after areas that you may have thought would have been beyond your reach. However, extending the lease can be costly, so most people need financial support. In this article, we explain the two distinct ways you can go about this. If you want help financing your lease extension, I hope you give Niche Advice a try.
Before we start, it’s important to separate out the stakeholders involved. The person you are buying the property from is the Vendor, and the person you are obtaining the Lease extension from is the Freeholder. They can be the same person but are often different.
Option 1: Lease extension mortgage
A traditional mortgage is likely to be the cheapest form of finance to fund a property with a short lease.
Research is required as some Mortgage Lenders have a minimum term remaining on the lease at the start and/or a minimum time left after the mortgage term expires. For example, 70 years and no less than 50 years left when the mortgage finishes. Some Mortgage Lenders will factor in the expected increase in lease length provided you make them aware of the plan to extend the lease before they send their Surveyors around to value the property.
The Mortgage Lenders will lend against the price you are paying the Vendor. So if the property is on the market and being sold for, say, £600,000, the mortgage will be based on this figure (subject to the Lender’s own valuation). So, the cost of extending the lease would need to come from your own resources. However, the Mortgage Lender may be willing to lend with just a 10% deposit (£540,000), allowing you to keep your savings back to go towards funding the lease extension.
Option 2: Borrow more with a Bridging Loan Lease extension strategy
Bridging finance is short-term finance designed to offer flexibility to solve problems where traditional mortgages fall short in their design. This flexibility comes at a premium price with generally higher interest rates, set-up fees, and legal costs.
The beauty of this method is that the Bridging Lenders are far more likely to factor in the end value of the property with the lease extension, which could be much higher. For example, with the lease extension, the property is worth £1,200,000, and the Bridging Lender may well lend 75% of the value, which typically nets down to 70% in your pocket (£840,000) after costs. This money can be used for the purchase and lease extension combined, i.e., to go towards payments to the Vendor and Freeholder.
You would not, however, want to be on the bridge for long, so you would need to have a suitable remortgage lined up to repay the debt shortly afterwards. The remortgage would then be based on £1,600,000 as the lease extension would be in place. It’s important to note that some remortgage lenders apply a minimum ownership rule based on the registration date at Land Registry, which can be 6 months or more, so they would not be appropriate choices to repay bridging finance.
When working with this two-stage approach, you must ensure that the higher borrowing level provided by the bridge is achievable on affordability calculations for the remortgage lenders. It’s, therefore, vital that you work closely with a professional property finance broker, such as Niche Advice, to look at how you can finance a lease extension and who can arrange financing for both parts of the transaction.
