Ground rent query - is this reasonable

AdrianC

If you don't think it reasonable, then does it matter what the lender thinks...? After all, you don't want to buy the place any more, right?

Tom99

[FONT=Verdana, sans-serif]The ground rent will be £512,000pa by year 95 and a total of nearly £7m will have been paid in ground rent. The cost of buying out the ground rent now is likely to be £100,000 or so. [/FONT]

mrschaucer

You are saying it increases by 0.08. Do you actually mean that? Or is it 0.8? Or 8? What does it actually say on the lease? Your examples are of an increase of 8% per annum, which is dreadful, agreed. If it's 0.08% then we are talking pence ...

Davidbrentssister

mrschaucer wrote: »

You are saying it increases by 0.08. Do you actually mean that? Or is it 0.8? Or 8? What does it actually say on the lease? Your examples are of an increase of 8% per annum, which is dreadful, agreed. If it's 0.08% then we are talking pence ...

The lease says 0.08 which I took to be 8% and is in line with the increases over the last 3 years. That is something else I can clarify with the solicitor.

I hadn't realised the implications of the rising ground rent an increase of £40 a year sounds reasonable but now I see to buy this flat would not be wise. If this ground rent issue could be resolved I would though.

AdrianC

If you're multiplying this year's payment by 0.08 to get next year's increase (1.08x to get next year's payment), then that's 8%.

And, of course, it's compounded.
Year 1 - £100
Year 2 - £108
Year 3 - £116.64
Year 4 - £125.97
Year 5 - £136.04
Year 6 - £146.93
Year 7 - £158.68
Year 8 - £171.38
Year 9 - £185.09
Year 10 - £199.90

So basically, yes, it's a way of saying "doubles in ten years", without looking so scary, but with a lot more revenue for the freeholder.

So starting from £100pa...

Doubles in 10 years = £1,000 for first 10 years, £2,000 for next 10, £3,000 for 20yrs
8% PA = £1,448.65 for first 10 years, £3,127.54 for next 10, £4,576.19 for 20yrs.

And you're worried your lender might say "No"?

Davidbrentssister

Originally I was worried the lender might say no.

But seeing reading all the replies on here has made me reconsider buying the flat at all. As I am worried about saleability in the future.

Tom99

Davidbrentssister wrote: »

Originally I was worried the lender might say no.

But seeing reading all the replies on here has made me reconsider buying the flat at all. As I am worried about saleability in the future.

[FONT=Verdana, sans-serif]Yes you should be, the ground rent over 95 yrs will be £6.9m![/FONT]
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[/FONT][FONT=Verdana, sans-serif]When you buy out the ground rent using a statutory lease extension the present value of the future rents has to be calculated.[/FONT]
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[/FONT][FONT=Verdana, sans-serif]This is done by discounting each years future rent at a discount rate which typically might be 6%. So a payment of £1 next year is worth 6% less now ie approx 94p[/FONT]
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[/FONT][FONT=Verdana, sans-serif]The trouble with your ground rent is that it inflates at 8% a year so it is inflating at a greater rate than the discount rate. So, rather than each future years rent getting less and less valuable in current value, it still grows in value.[/FONT]

[FONT=Verdana, sans-serif]Take just next years rent as an example:[/FONT]
[FONT=Verdana, sans-serif]
[/FONT][FONT=Verdana, sans-serif]£370 this year so £399.60 next year. Then discount next years rent at 6% gives a current value of next years rent at £399.60/1.06=£376.98. So next year rent is more valuable in current terms than this year rent.[/FONT]
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[/FONT][FONT=Verdana, sans-serif]The rent in year 95 will be £512,902.41 and discounting that at 6% gives a current value of £2,144.29 so you can see that the current value of the rent in year 95 is nearly 6x the value of this year rent.[/FONT]

[FONT=Verdana, sans-serif]Totting up each years rent discounted at 6% give a current value of £96,181 and in addition to buying out the ground rent you will have to buy out the freehold reversion.[/FONT]
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[/FONT][FONT=Verdana, sans-serif]The current value of the rent is very sensitive to the discount rate, for example at 5% it would be £175,216 and at 7% £56,214.[/FONT]
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[/FONT][FONT=Verdana, sans-serif]You should definitely avoid this property until the vendor sorts out the ground rent.[/FONT]