FTB, lease extension options?

jncr

Hi,

Fiancee and I are looking to buy our first home in London. We've found a flat we like, have a deposit gathered, a mortgage agreement in principle and are considering making an offer.

It has 82 years left on the lease, and I'm lead to understand that's a bad thing, as by the time we have the right to renew, it will become significantly more expensive.

We're both quite confused by leaseholds - I understand the words involved but it all seems quite feudal, and I'm not sure how it really works in the modern world. What are our options?

It seems like we can either:
1) Buy as is and swallow the renewal costs later down the line
2) Try and get the vendor to renew the lease (presumably with an upward reflection in the sale price)

or

3) Some other jiggery-pokery?

I've seen mention of vendors starting the process and then handing over the right to extend to buyer, or the lease extension being completed at the same time as the purchase and added to the mortgage amount, or other?

Our mortgage will be 90% LTV, so if I'm understanding it correctly we won't be able to add the amount to the mortgage, as it will take us into Higher Lending territory.

Massive thanks for any help, this is all a lot to try to understand

partialycloudy

I would personally offer a purchase price to INCLUDE a lease extension. The lease extension can be done while the purchase goes through....otherwise I wouldn't touch it with a barge pole!

kingstreet

If the purchase price/value of the property increases as a result of the lease extention, you will be able to borrow 90% of that, provided the surveyor agrees the price is reasonable.

tim123456789

partialycloudy wrote: »

I would personally offer a purchase price to INCLUDE a lease extension. The lease extension can be done while the purchase goes through....otherwise I wouldn't touch it with a barge pole!

The value of the propery with a longer lease will have increased by the cost of the longer lease.

As a vendor, I would resist such a request if it were made to me.

tim

partialycloudy

tim123456789 wrote: »

The value of the propery with a longer lease will have increased by the cost of the longer lease.

As a vendor, I would resist such a request if it were made to me.

tim

Not necessarily. Our lease extension is costing us £19,000 and it will not add that much value to what we bought it for. Granted we were ripped of massivley and under advised by our solicitor at the time.
So you need to make sure that you are purchasing the flat (with no extension) at the correct value (not some overflated price picked out of thin air) and its relative to the fact the lease WILL need extending within the next few years.

propertyman

The point to understand is that the relationship between the cost of a lease extension and the value of the property is not fixed. As above a £19k extension does not mean a £19k increase or decrease in price. That's because £19k is only in part about the flat value and involves a number of other factors.

For most people the issue is looking at the flat and comparing the value to comparable properties with longer leases, and negotiating a price, and then a discount to reflect the shorter lease, which you can live with, and more importantly raise money for.

Prices are often put on property for sale and then agreed with no information on lease terms. If the EA doesn't say its X years and waffles, then go to HMLand Registry and for £3/4 it will tell you. Dont spend any money on anything until you know that.

If it is under 90 years and you are paying the same as comparable properties, then you are very likely to be paying too much.

jncr

Many thanks everyone, I feel (a little) more informed now.

Propertyman, the EA told us 82 years with no hesitation. There's a massive variation in quality and size in the area, but from looking at a few which are quite directly comparable, this one is definitely on the cheaper end. I did just find a similarly-sized place in the same area, with a 140-year lease, asking for £25,000 (~12%) more. I know this is your field, so really appreciate the input.

Partialycloudy, can I ask how long is left on your lease before the extension? That's a genuinely terrifying amount of money.

propertyman

I can explain the theory with an example however I can't truly help you as I don't know values of every area.

A local valuer does know local values and can establish the comparable levels that your proposed purchase is "worth".

As a primer and very rough guide you can use the various lease calculators and if you take the current ground rent and multiply by 20, the premium is then 2 parts

a: premium -ground rent x 20,
the extra you pay not to pay any future ground rents

b: a + "for sale" price = value to be compare
allowing a few % as your new lease is 90 + 82years not 90- 125 and you don't pay ground rent.

You then use the calculators to reduce the value of the flat you enter until that and the resultant premium come toward your comparisons.

partialycloudy

jncr wrote: »

Many thanks everyone, I feel (a little) more informed now.

Propertyman, the EA told us 82 years with no hesitation. There's a massive variation in quality and size in the area, but from looking at a few which are quite directly comparable, this one is definitely on the cheaper end. I did just find a similarly-sized place in the same area, with a 140-year lease, asking for £25,000 (~12%) more. I know this is your field, so really appreciate the input.

Partialycloudy, can I ask how long is left on your lease before the extension? That's a genuinely terrifying amount of money.

Don't worry ours was at the pittyful end of 58 years! So yours is not likely to by anywhere near that amount.....but I would get a quote from the free holder before going a head so you are atleast forwarned. The current owner can do this for you.

tim123456789

partialycloudy wrote: »

Don't worry ours was at the pittyful end of 58 years! So yours is not likely to by anywhere near that amount.....but I would get a quote from the free holder before going a head so you are atleast forwarned. The current owner can do this for you.

Sorry,

Are you saying you paid 19,000 to extend a lease of 58 years to 148 years and it didn't add 19K to the value of the property?

I don't believe you (in the sense that I think you seriously wrongly calculated one or other of the valuations).

tim

partialycloudy

It didn't add value to our orginal purchase price. At 58 years it was virtually unsellable so getting the lease done has just made it sellable and for probably the amount we bought it for...So now we are left paying off a 19K loan for the next 10 years.

If the OP is 100% sure the purchase price is correct to include the fact the lease needs to be done, then fine crack on. But in our case, we were advised it had been priced to reflect a short lease which we now know to be a blatant lie but in our FTB nievety believed what we were told at the time.