Buying a property is hard. You've got to spend hours viewing potential future homes, work out how to move all your stuff, and pass strict affordability checks to get a mortgage.
But if you're buying a flat, there could be another hurdle to jump that you didn't even know about.
The lease trap
If you've been looking at flats, you may be familiar with the terms "leasehold" and "freehold".
Here's how it works:
- If you purchase a freehold property, you own the property and the land it sits on outright.
- If you buy a leasehold property, you own the property for the duration of the lease agreement between you and the freeholder (usually a landlord). While you own your individual flat, the freeholder owns the land and any communal areas in the building. A lease agreement can be as long as 999 years, and when you sell the property the lease is passed on to the new owner. If the lease ends, the property reverts back to the freeholder.
What has this got to do with your mortgage options? Well if you're looking to buy a flat, you need to pay close attention to the length of the lease. You may only want to stay in the flat for a few years, but if the lease length is less than 70 years you could struggle to get a mortgage. Mortgage lenders want the lease to run for at least 25–30 years after the end of your mortgage term.
This is because there's a strong correlation between the number of years left on the lease and the value of the flat. As the lease drops below 100 years, the property becomes less valuable, and the costs to extend the lease increase. Below 80 years the situation becomes urgent. Below 70 years, you would struggle to sell the flat at all.
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What does the lease length mean for you?
You should always ask about the lease length on a flat before you get too far into the process (you could even check when you call to arrange a viewing). Once you know the lease length, you will have some decisions to make.
If it's less than 70 years and you need a mortgage, you might as well ignore this property and move on to the next one. If it's between 70 and 95 years, things get a little more complicated.
The cost of extending a lease
Once you've owned a leasehold property for two years, you can ask the freeholder to extend the lease by up to 90 years (as long as there were at least 21 years on the lease when you bought it).
They will usually charge you a fee for this – and the shorter your lease is, the more it will cost. For example, extending a 95 year lease on a £200,000 flat could cost around £7,500, whereas extending a 60 year lease could set you back a painful £26,500 (according to data from the Leasehold Advisory Service).
Eighty years is an important threshold; when your lease drops below this length, you'll have to pay 50% of the flat's “marriage value” (the amount of extra value a lease extension would add to your property) on top of the usual extension price.
So: if you're interested in a flat with a lease of 70–95 years, you'll need to work out whether the cost of extending the lease will be worth it. Extending the lease will add value to the property, so if a short lease means that the current asking price is low, you could find that you'll save money in the long run.
If the lease is 95 years or more, you should be aware that if you plan to stay there for a number of years you'll need to extend the lease before you sell, in order to get the best price.
The bottom line
When looking at flats, always check the lease length before you make an offer. If a property has a lease length of less than 80 years, a future lease extension could become very expensive, and if it's less than 70 years you may not even be able to get a mortgage.
Getting the best deal on your new flat
If you're a leaseholder you'll have to pay service charges and ground rent, on top of your monthly mortgage payments and household maintenance costs. These are paid to the freeholder and go towards the maintenance of communal areas (for example corridors, lifts and gardens). You may also be asked to pay into a sinking fund to cover unexpected repair work.
These extra expenses mean it's even more important to get the best deal possible on your mortgage. Compare the latest rates to make sure you don't end up paying more than you have to.