Ground Rent doubling every 20 years...

RachelleT

Hi all,

I would like some advice please.

I am in the final stages of buying a Shared Ownership 1-bed flat costing £275,000.

I have just found out that the ground rent on a 125 year lease is going to start at £250 per year, doubling every 20 years. This will mean that by the time the lease is up, the ground rent will be £16,000 per year!

As it is a shared ownership scheme, it doesn't affect me now, but it will affect the sale ability of the property. Especially as not all mortgage lenders will agree to this lease.

Please may I get your thoughts on whether I should still go ahead with the property?

I do not want to take the high-risk with just the hope that the government will create a law to abolish these kinds of ground-rent costs.

Any help is appreciated. Thank you.

davidmcn

RachelleT wrote: »

I have just found out that the ground rent on a 125 year lease is going to start at £250 per year, doubling every 20 years. This will mean that by the time the lease is up, the ground rent will be £16,000 per year!

Which is roughly equivalent to what £250 125 years ago would be worth now. I think it's the ones which e.g. double every 10 years which are more problematic.

RachelleT

Thank you, that is useful to know

thelem

Doubling every 20 years is equivalent to an annual inflation rate of just under 3.6%. That's higher than the govenment's target of 2% and higher than inflation has been over the last decade, but it's much lower than inflation was in the 70s.

So, in itself it's not something to worry about too much, but it might put off potential future purchasers.

westernpromise

Over 125 years you'd pay £395,000 in ground rent. If you started at £250 and went up by the BoE's inflation target of 2% a year, you'd pay £136,000 over the same period. The difference, £260,000 over 125 years, is what this lease is worth to the freeholder.

If I've done it correctly in Excel, a cashflow that returns £260,000 over 125 years has a Net Present Value at a discount rate of 2% of just under £50,000. If you used a rate of 4% it falls to £26,000. In effect your vendor is selling you the flat for £275k or whatever and can then sell the lease on for another £25k meaning they get £300k of which only £275k, the nominal selling price, is transparent to you.

John-K_3

But why would you use the current BOE target rate for a 125 year period?

Tom99

westernpromise wrote: »

Over 125 years you'd pay £395,000 in ground rent. If you started at £250 and went up by the BoE's inflation target of 2% a year, you'd pay £136,000 over the same period. The difference, £260,000 over 125 years, is what this lease is worth to the freeholder.

If I've done it correctly in Excel, a cashflow that returns £260,000 over 125 years has a Net Present Value at a discount rate of 2% of just under £50,000. If you used a rate of 4% it falls to £26,000. In effect your vendor is selling you the flat for £275k or whatever and can then sell the lease on for another £25k meaning they get £300k of which only £275k, the nominal selling price, is transparent to you.

[FONT=Verdana, sans-serif]The discount rate for a fixed ground rent will be more like 6% pa so NPV of £250pa doubling every 20 yrs is only NPV £7,666.

[/FONT] [FONT=Verdana, sans-serif]If rent went up in line with inflation and inflation was 2.5% pa (pretty low historically) the NPV would be £6,124

[/FONT] [FONT=Verdana, sans-serif]So basically very little difference.[/FONT]