Buying the council freehold and then getting a mortgage!

r44flyer

Hello everyone,

Hopefully someone can offer me some advice on this situation before we start going down official channels. I have a lot of questions, but if anyone can help answer any of them I would appreciate it.

The background...
My mother-in-law's father passed away leaving his ex-council house to his ex-wife and his daughters, split 50/50. The property is leasehold, has an expected value of £90,000 (valuation to be done shortly), 60 years to run on the lease (which is quite short, as I understand) with a ground rent of £25pa.

My fiancee and I are looking into getting a mortgage to buy out the half of the property owned by his ex-wife. The daughters are in no rush to realise their half, thus giving us a potentially obtainable target, as first time buyers, with regard to deposit etc, with a view to buying the other half at a later date.

Some questions...
- Can anyone suggest a potential ballpark cost of purchasing the freehold?

- What may happen to this cost when the lease goes below 60 years?

- Are we likely to be able to obtain a mortgage given the length of the lease?

- What will holding the freehold do to the value of the property?


I'm trying to get my head round things, but so far one big complication I see is not being able to get a mortgage on the short lease. If the in-laws purchase the freehold prior to the buy out, and the value increases significantly, it may go beyond our budget.

- Perhaps a mortgage can be obtained on condition of freehold purchase? I would imagine this would be based on the post-freehold sale value?

There is potential to increase the value of the house through renovation as it is in need of extensive re-wiring, glazing, refurbishment etc. I understand the re-wiring may be a condition of the mortgage as well, and has been budgeted for.

Any advice welcome. I hope the above is clear.

cattie

First off, these are the best people to help with your queries. It's a government funded agency offering help & advice on all aspects concerning residential leasehold property, including purchasing freehold. http://www.lease-advice.org/

There is a set formulae used to work out the cost of buying the freehold, but first a valuer will have to give his opinion. The costs of valuer & all legals have to be met by the leaseholder/s.

It is likely that most lenders would be somewhat reluctant to lend on a property with only 60yrs remaining. Only having 60yrs remaining affects the price & the saleabilty of any such property.

Owining the freehold to such a property may not necessarily increase the value by very much, but it just makes the property a more viable option for getting a mortgage & more attractive when you come to sell.

The other option is to have a lease extension if the freeholder doesn't wish to sell the freehold. If you are in England, then a freeholder doesn't have to agree to a lease extension or sell the freehold if you've owned the property for under 2 yrs. After the 2yr period you have the right to acquire. A lease extension is also worked out using a set formulae & again valuation & legals paid for by leaseholders.

I'm not sure you'd actually find any lenders willing to grant a mortgage on half a property as you mention in your post. You'd need to do some research on this, perhaps go to see a mortgage broker.

r44flyer

Thanks, Cattie. I already discovered lease-advice.org and will look through the site.

Can I assume that the 2 year ownership rule also applies in cases where the property has been inherited? ie. where there has been no opportunity to purchase the freehold prior to inheritance and thus a short lease is an unwanted penalty on the valuation. This could be avoided if his ex-wife is willing to negotiate the purchase given she has held joint ownership for some time.

It may make more sense to arrange a lease extension and I will investigate this at the same time with respect to costs and valuation etc.

r44flyer

I have no idea, Rollerball. I have made that informed assumption following what I have read. If it is true, an extension on the lease to give c.160years is as good as a freehold I suppose.

cattie

r44flyer wrote: »

Can I assume that the 2 year ownership rule also applies in cases where the property has been inherited? ie. where there has been no opportunity to purchase the freehold prior to inheritance and thus a short lease is an unwanted penalty on the valuation. This could be avoided if his ex-wife is willing to negotiate the purchase given she has held joint ownership for some time.

QUOTE]

Yes whenever there is a change of ownership, the 2yr ownership ruling kicks in, even after inheritance.

Richard_Webster

I'm not sure you'd actually find any lenders willing to grant a mortgage on half a property as you mention in your post. You'd need to do some research on this, perhaps go to see a mortgage broker.

Leaving aside for the moment the references to "daughters" (so OP's wife will have a sister or sisters to deal with as well) and the short lease, if we assume that OP's wife is sole daughter then she will only have to pay half the value because the other half belongs to her. This won't be an undervalue transaction because she will paying full value for the share she doesn't own.

Mortgage broker will need this explaining very slowly because he may misunderstand. Once it is explained, most big mortgage lenders will be prepared to base their lending on say 75% of £90K even though OP will only be paying £45K for the half share because at the end they will get a relaisable security worth £90K.

Obviously the lease will need to be extended or the freehold purchased. This will be significantly more expensive than buying the freehold of a lease with say 900 years left because the property will otherwise revert to the freeholder that much sooner and so is more valuable from that point of view. If all parties can agree something there is no reason in principle why the acquisition of the freheold and the purchase of the ex-wife's share cannot take place at the same time "back to back".

The other complication mentioned above is the involvement of the other sisters. We have not been told how many sisters there are. Lets say there are 3 for the purposes of illustrating my point. If nobody bought out a share then the executor of the deceased should transfer the property (using a Land Registry AS1 deed) to the 4 of them so that all 4 names are on the Land Registry title and the shares are expressed to be 50% for the ex-wife and 16.67% for each of the sisters. The other two sisters are entitled to have their names on the title. If OP's wife is only entitled to 16.67% then if she is not buying her sisters out straightaway their names should remain on the title to protect their interest in it.

If their names remain on the title they will have to be jointly responsible for any mortgage that OP and his wife want totake out, as lenders will only normally lend to those who own a property. Will the sisters want that? If they agree to not have their names on the title then they will need to have some further legal arrangemetns to make sure OP and his wife do not sell the property later and pocket the money and disappear!

r44flyer

Richard, thanks for your input. A couple of misunderstandings in your post so I'll correct them...

The house has passed to my mother-in-law (well, to be) and her 3 sisters. The ex-wife's name is not on the deeds, her half is dealt with by legal charge. This, I imagine, is what we would be doing when myself and my fiancee 'buy out' the ex-wife's half, thus the property would transferred to our name, and the other half would be dealt with by legal charge to protect the interests of the other 4, as you say, as they will have no ownership.

Any mortgage would be arranged on the basis of the pair of us owning only half the house. We can only ever realise half of the value if a legal charge covers the other half. Surely my understanding of this is correct? It would effectively be a £40k mortgage on a £45k house, in essence.

All parties are in agreement with the plan.

Does that make sense?

Richard_Webster

Yes, you could have a legal charge in favour of the four sisters for 50% of value but your lender would insist it was a second charge, if it agreed to it at all!

Property worth £90K - so you borrow £40K from bank/building society. You give second charge to sisters for 50% of market value at the time of sale. Property goes down to £75K in value - you still owe bank £40K but you would get less than £35K left from sale (allowing for estate agent's and legal costs) yet sisters would be entitled to £37.5K so you would have negative equity. If bank repossessed (they always look at the worst case scenario) then they would get their £40K back and the sisters would be left with whatever is left.

Using second charges your method would work, but only if:

1. Lender prepared to run with this - which I somehow doubt; and
2. Sisters prepared to accept risk of losing out on their 50% to your mortgage lender.

r44flyer

The risk the sisters are taking with regard to the potential for the value to fall is accepted. Everyone knows it can go up or down, but presently we anticipate the value is about as low as it can be given the condition of the property. Renovation coupled with extending the leasehold should hedge the value significantly against a fairly large percentage drop in value. £90k is generous, we believe, but it is subject to formal valuation, of course. Obviously this is all academic if the mortgage lender doesn't want to know.

Forgive my ignorance, but a second charge means second in line to receive any realisation, is that right? ie. the bank makes sure it gets its share, as first charge(?), before anyone else? If this is the case, surely they have little risk in the event of repossession as they are guaranteed their half and will not be the party to lose out. If in negative equity the bank 'out ranks' the second charge and can demand more than half of the value to recover any deficit, correct? ie. half of the agreed value when the mortgage was arranged.