Leaseholder looking to purchase Freehold, good idea or not?

Tom_Brine

Hello All

I am hoping for some advice. In July 2013 I purchased a new build Leasehold property from Barratt Homes.

I recently remortgaged after my initial two year fix ended. I am currently paying £799 a month on a five year fix with Santander at 2.59%. The total mortgage term is 13 years 3 months and the outstanding debt is £107300. The property has 148 years remaining on the lease and was valued in December 2015 for the remortgage as worth 155,000. I pay Barratt Homes £150 a year for ground rent.

I contacted Barratts recently to begin enquiries around purchasing the freehold of the property and they replied with the following message;

If you wish for your property to become Freehold then you would need to purchase your Lease from Birmingham City Council directly and they would provide you with a cost, you would also need to purchase your sub-lease from Barratt West Midlands. If you just wish to no longer pay Ground Rent to Barratt West Midlands then you can request to purchase just the sub-lease from us.

I can advise that the cost of purchasing the sub-lease from Barratts would be £4,500.00 plus legal fees at £450, plus VAT at 20%. Any disbursement costs would also be added to this total but the approximate total cost would be around £5,040.00

This would mean not having to pay the £150 annual ground rent to Barratts any more.

Quite a bit more than I had anticipated (no experience) and its only the sub lease from Barratts, there would be a further, I imagine more expensive, purchase to be made from Birmingham City Council after sorting out the sub lease rights.

The house is a three story detached, it neighbours to a terrace block with social housing though it is not physically attached to these. It was purchased not as a home but as an investment (I have two lodgers and a reasonably well paid job, the house is almost paying for itself and I am able to save more per month now towards my next purchase than I was when renting plus every month I gain equity in the lease)

The idea was I would leave the house in 6-10 years time to move into my "home" whilst retaining the property to provide a rental income. Part of me thinks theres no point as I will be dead before the lease runs out but another is saying if I ever have a family I will want to possibly leave it to them.

Does anyone have any experience in this, is the above price reasonable? Is it worth doing? Would the cost reduce as the length of my lease reduces or not?

Mossfarr

I own and rent out a leasehold property which is a former council owned house. My lease has 966 years on it and the ground rent is 'one peppercorn' so I don't actually have to pay anything. I have just started the process to purchase the freehold as I believe it will be much easier to sell (when the time comes). I have agreement from the freeholder to sell it to me at a very reasonable price so to me it absolutely makes sense to buy it.
Whilst I am no expert I have been doing quite a bit of research on the issue. One thing I did discover is that the cost of purchasing the freehold actually increases quite significantly the shorter it becomes.
There was a thread on here quite recently by a lady who had inherited her parents home. She was devastated when she discovered that the lease was very close to expiry so she was about to lose the house as she did not have the funds to purchase the freehold.
In your position I would buy it. None of us know what the future holds, you may decide to sell your property which would be very difficult with such a short lease. Longer term if you wanted to leave the property to any children it could be virtually worthless. That would be such a waste of everything you've invested in it!

HappyMJ

Tom_Brine wrote: »

Hello All

I am hoping for some advice. In July 2013 I purchased a new build Leasehold property from Barratt Homes.

I recently remortgaged after my initial two year fix ended. I am currently paying £799 a month on a five year fix with Santander at 2.59%. The total mortgage term is 13 years 3 months and the outstanding debt is £107300. The property has 148 years remaining on the lease and was valued in December 2015 for the remortgage as worth 155,000. I pay Barratt Homes £150 a year for ground rent.

I contacted Barratts recently to begin enquiries around purchasing the freehold of the property and they replied with the following message;

If you wish for your property to become Freehold then you would need to purchase your Lease from Birmingham City Council directly and they would provide you with a cost, you would also need to purchase your sub-lease from Barratt West Midlands. If you just wish to no longer pay Ground Rent to Barratt West Midlands then you can request to purchase just the sub-lease from us.

I can advise that the cost of purchasing the sub-lease from Barratts would be £4,500.00 plus legal fees at £450, plus VAT at 20%. Any disbursement costs would also be added to this total but the approximate total cost would be around £5,040.00

This would mean not having to pay the £150 annual ground rent to Barratts any more.

Quite a bit more than I had anticipated (no experience) and its only the sub lease from Barratts, there would be a further, I imagine more expensive, purchase to be made from Birmingham City Council after sorting out the sub lease rights.

The house is a three story detached, it neighbours to a terrace block with social housing though it is not physically attached to these. It was purchased not as a home but as an investment (I have two lodgers and a reasonably well paid job, the house is almost paying for itself and I am able to save more per month now towards my next purchase than I was when renting plus every month I gain equity in the lease)

The idea was I would leave the house in 6-10 years time to move into my "home" whilst retaining the property to provide a rental income. Part of me thinks theres no point as I will be dead before the lease runs out but another is saying if I ever have a family I will want to possibly leave it to them.

Does anyone have any experience in this, is the above price reasonable? Is it worth doing? Would the cost reduce as the length of my lease reduces or not?

With the changes made recently to SDLT (Stamp Duty) it's no longer worth retaining you house and buying another one as you will have to pay an extra 3% SDLT on the whole purchase price.

My advice....just sell it as is. Sooner rather than later. If the fact it's leasehold puts off a purchaser then you and your solicitor can explain that they can buy the freehold and sublease.

You can keep your £5,040 in the bank and earn enough interest to cover the £150 ground rent so it's not actually worth doing. You can renew the lease at the 80 year point which will cost you no more than doing it now.

With 148 years remaining on the lease you've got 68 years before you need to do that.

G_M

£5,040.00 / £150 = 33.6

If you stay for 34 years you'll be in profit!

Tom_Brine

I am not in the position to sell the property as I am currently saving for my next purchase. In five years I will have accumulated £110,000 savings plus whatever equity is in the property at that point (this is not taking into account purchasing the property freehold and sub lease). This is the point at which I would start to look to purchase my next house.

You mention an extra 3% stamp duty. I thought this was only for buy to let mortgages? As I intend on my next purchase being my home then it would not apply? The house I am currently in would become the rental property.

I also do not wish to sell yet as the property is almost paying its own mortgage with two lodgers. From April this year all that will be tax free as the rent a room tax free allowance is increasing to over £7000. Which mean I would be foolish to sell? I'm essentially living for free in the property (well just over £100 per month) and am able to save more money as a result. £500 a month goes into my employers sharesave scheme. And I can save another £700 into regular saver accounts. The truth is it will become more expensive if I move out, but I am intending on clearing the mortgage in under 10 years.

It seems I need to do some more research as the answers to date (thanks both for your views) contradict each other in terms of the price to purchase the freehold changing or not. I have also asked Barratts to confirm if I purchase the sub lease from them what is their lease term with the council as it may be much longer than the period they leased the property to me.

G_M

Tom_Brine wrote: »

You mention an extra 3% stamp duty. I thought this was only for buy to let mortgages? As I intend on my next purchase being my home then it would not apply? The house I am currently in would become the rental property.

The extra 3% SDLT is on 2nd residential properties (though the final rules are not yet fixed).

davidmcn

Your title deeds ought to tell you the term of the head lease. I would expect the value to be pretty low, but you'd need to contact the council.

Getting rid of the sub-lease will at least make a future sale more straightforward, as purchasers won't be put off by the existence of the lease and you won't need to pay the leaseholder's admin costs for dealing with the assignation. But I don't know that it would make much difference in the price you achieve.

davidmcn

HappyMJ wrote: »

You can keep your £5,040 in the bank and earn enough interest to cover the £150 ground rent

If you can find somewhere that pays 3% net, yes.

G_M

davidmcn wrote: »

If you can find somewhere that pays 3% net, yes.

eg

http://www.lloydsbank.com/current-accounts/club-lloyds.asp

4% gross = 3.2% net.

And after April 2016, all bank savings rates will be paid gross, with tax only needing to be declared /paid if > £1000

AnotherJoe

Given the huge cost and low rent it makes no sense to purchase it. Even if you stayed in for 48 years it would still have a 99 year lease, eg a common term.
Yes it may put some off but you can point out to them the cost/benefit balance and even drop a K or two if they are keen to buy but dont like that, and still be quids in.

As for SDLT, yes you've misunderstood it completely. The rule (that they are proposing) isn't that you are allowed one residential property and one BTL. If you own a house, then you pay extra on subsequent purchases whether the first or second is your residence or you rent one or both.