Impact of lease reduction on shared ownership property

martyp

Hi all,

Hoping someone can please clarify with regards to my lease situation as it sprung up as a concern when remortgaging and understand it can be a big cost impact.

My house was built I think 1990 with a 99 year lease as a 50% shared ownership with the possibility to staircase and completely own the freehold with 100%

Now 32 years later with I assume 67 years left I didn't know how it may affect the following:

1) Buying another 10% or 25% share

2) Buying the other 50% with the freehold

3) Selling the property as 50% shared ownership

4) Remortgaging in years to come

Any help would be much appreciated, I have £30k left on my 50% share on a 5 year 1.49% fix so really want to try and get rid of as much as possible with overpayments in the next 5 years. I pay £136 a month for the mortgage and £203 a month rent. Theoretically the other half is around £80-90k I think so would be I'd imagine around £350 or so a month mortgage. I'm aiming to get rid of my current mortgage and then buy the other half as house prices seem to be stabilising a bit and the rent isn't that bad (Total of £339 rent and mortgage is way less than the £650 rental value). I've upped my overpayments from £200 a month to £250 now (max before ERC is £330)

eddddy

For buying another 10%, 25% or 50% - the house will probably be valued as though it is a freehold house. (So the lease length makes no difference.)

So it would cost you 10%, 25% or 50% of the value of a freehold house.

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Getting a mortgage on a house with 67 years left on the lease will be very difficult (maybe impossible) - so that is likely to stop you remortgaging with another lender.

It will also be difficult to sell - as they buyer probably can't get a mortgage.

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The best solution would be to buy the other 50%, so that you own the freehold. Then it will be a 'normal' house for selling and mortgaging. 

Alternatively, you can ask your landlord about getting a lease extension, and how much they would charge. A lease extension should make the house mortgageable again.

ResourcesShared

It would probably be best to seek specialist advice from an independent financial advisor (one with experience in shared ownership). However, I hope the following observations are useful.

Lease extension becomes much more expensive once there are fewer than 80-years remaining on the lease, In fact, it becomes more expensive with each year that passes after the 80-year threshold has been breached. How much would lease extension cost? It will depend in part on your own housing association's policies. Some calculate the premium on the total value of the property; some just on the value of the equity share held by the shared owner.

Unfortunately, any property loses value each and every year (all things being equal) once the 80-year threshold has been breached. It therefore becomes increasingly difficult to obtain a mortgage. Having only 67 years remaining would make it difficult to sell your 50% share (other than to a cash buyer, which might mean accepting a very low offer).

However, if you can afford to obtain the freehold by staircasing to 100% that may be an effective way of dealing with the problem of lease extension, and could make your home easier to sell in the future.

You mention that your rent is affordable. But it's worth checking annual rent review terms in your lease. The standard model lease term is RPI plus 0.5%, or RPI plus 2% on some older leases (perhaps including your own?). This could start to be more problematic for some shared owners now that RPI is rising so fast and so high. Particularly as shared ownership leases tend to include an 'upwards only' clause meaning that rent doesn't go down, even if RPI does.

Buying another 10% or 25% share (assuming you could actually obtain a mortgage to do so) would reduce your exposure to rent increases somewhat (although you'd need to assess that benefit in relation to risks arising from mortgage interest rates). However, you'd be purchasing additional shares in a depreciating asset (one going down in value). Some people report that it can be more difficult to sell shares over 50%. Though in your case the short lease is the biggest obstacle to selling. Staircasing to 100% would eliminate the rent completely, of course.

I hope you find a good solution to your situation. I'd be interested to hear what you decide to do.

eddddy

ResourcesShared said:

Lease extension becomes much more expensive once there are fewer than 80-years remaining on the lease, In fact, it becomes more expensive with each year that passes after the 80-year threshold has been breached. How much would lease extension cost? It will depend in part on your own housing association's policies. Some calculate the premium on the total value of the property; some just on the value of the equity share held by the shared owner.

It sounds like you might be describing extending a lease on a flat. Extending a lease on a house is different.

See: https://www.lease-advice.org/faq/i-cant-afford-to-buy-the-freehold-of-my-house-can-i-extend-my-lease-instead/

But since the house is shared ownership the OP doesn't have a right to a statutory lease extension, so the HA can make up whatever rules they like anyway.



(Also this thread is a few weeks old now.)

martyp

Thanks all, sorry I only just got an email to advise of a response on this today so missed the first reply on it.
Really appreciate all the advice, very helpful.

At the present time I'm still on my current strategy of overpaying the 50% share on mortgage with the plan to pay it off in around 5 years. No plans on selling at the moment so still primary interest is buying the freehold.
I started my 1.49% 5 year fix earlier this year which I hope will make paying off the £30k remaining easier.
I've missed the boat on a good interest rate for a mortgage on the other 50% now I think but keeping an eye on the housing market.
Looking at what a mortgage would cost me on the other half, around £375 on top of the £136 that would take about £170 out of the overpayments after the benefit of not paying rent although I would also have to pay building insurance as well.
With the possibilities of house prices stabilising or even falling I am thinking I'd see how things go into 2023.

My housing association offered me a £500 cashback incentive to staircase once and I think that may have been around 2008. Unsure whether it was something they did after a few years of purchase or if they were trying to cut any losses by luring me into purchasing whilst property prices were impacted by the financial crisis of the time.
I didn't take them up on the offer as at the time I was unemployed so getting the mortgage would have been difficult if even possible.

I had a substantial pay rise to help with the cost of living from work and my energy is fixed until January 2024 so putting my extra disposable income into the overpayments although still wary that I'll likely be hit by a big price increase in 2024 when the fix ends so the overpayments are a small insurance policy as I can then underpay potentially if it came to it.