Purchas of 1 bed flat - Lease 993 with Ground rent £300 RPI review 10 years

ClsNp

Hi All,

We are in the process of buying a 1 bed flat in Dartford near London that is relatively new, build in 2016.

Currently the ground rent is at £300 and the review period is in January 2026 and it is being reviewed by RPI every 10 years at 1st October- 31st September Financial year. 

We are looking to live in the flat for about 10 years and then sell it. However, we are worried that the ground rent will increase a lot because of the inflation and we wont be able to sell it in 10 years time. 

We were thinking about deed of variation or extending the lease to get it to 0 but both of this would cost a lot. We are also not sure if we can even increase 990 years lease to more as well.


Any advice would be very helpful as we are thinking to pull out..

eddddy

Are you buying with a mortgage, and if so, is your mortgage lender happy with the ground rent? 

I suspect they'll want you to take out indemnity insurance, as the ground rent is currently over £250.


A  statutory lease extension might cost around £20k to £25k - plus £3k to £5k in costs - to get rid of that level of  ground rent (But get that confirmed by a valuer, if you're thinking of going down that route.)

But you'll have to have owned the flat for 2 years before you can start the statutory lease extension process - or you could ask the current owner to start the process before completion. (And you should be able to extend a 990 year lease.)


The cost of a deed of variation would be whatever you can negotiate/agree with the freeholder. Most freeholders would see this as an opportunity to make a chunk of extra money - so they'd probably want more than the £20k to £25k they'd get from a statutory lease extension.

ClsNp

Mortgage agreed with Barclays, with indemnity policy of course. My concern is the ground rent increase according to RPI in 2 years and the resale after 10 years. 

Olinda99

yes the ground rent increase coyld well be onerous.

I would not buy it.

eddddy

ClsNp said:

Mortgage agreed with Barclays, with indemnity policy of course. My concern is the ground rent increase according to RPI in 2 years and the resale after 10 years. 

Can you explain your concern in a bit more detail? Why do you think you might not be able to sell the property in 10 years time?

As I explained, the cost of reducing the ground rent to zero via a Statutory Lease Extension would probably be about £20k to £25k plus costs.

ClsNp

Over £250 ground rent is a concern for lenders for properties outside London. I might have gotten a mortgage offer but this is because we had 40% deposit. Now, how much would the ground rent increase from £300 in two years time with RPI review basis every 10 years? The next buyer would be in the same situation like me in the next 10 years and the ground rent would be higher as well. Not to mention the service charge in 10 years time. 

user1977

Olinda99 said:

yes the ground rent increase coyld well be onerous.

I would not buy it.

What makes you think it would be onerous? If it's merely indexed with RPI then it's going to be the same in real terms in 2026 as it was in 2016. It's the rent reviews which go up exponentially with no reference to inflation or any sort of index which are more problematic.

eddddy

ClsNp said:

Over £250 ground rent is a concern for lenders for properties outside London. I might have gotten a mortgage offer but this is because we had 40% deposit. 

• The majority of mortgage lenders accept indemnity insurance for this

• The 40% deposit almost certainly won't make any difference.

The risk is that the lease will be forfeited. (i.e. the flat is repossessed with no compensation) if you are late paying the ground rent. So without indemnity insurance, the would bank lose 100% of their security. Whether they've lent 60% or 90% of the flat's value is irrelevant.

But having indemnity insurance means the bank lose nothing.

However, you would lose your 40%. So arguably, you'd be better off if you only had a 10% deposit. Then you'd only lose 10% instead of losing 40%.

• BUT.. There's a bill going through parliament at the moment, which seems to remove this risk entirely.

ClsNp said:

Now, how much would the ground rent increase from £300 in two years time with RPI review basis every 10 years? 

In the last 10 years it has gone up by about 50% - so let's say it increases to £450

(£450 was the figure I assumed in calculating the cost of a statutory lease extension)

ClsNp said:

The next buyer would be in the same situation like me in the next 10 years and the ground rent would be higher as well. 

What situation do you mean? You've been offered a mortgage, so you're able to buy the flat.

The law will have probably changed by then, but if it hasn't your buyer will need to get indemnity insurance - just like you.

ClsNp said:

Not to mention the service charge in 10 years time. 

Service charges generally increase with inflation. That's true of all leasehold properties - it's not related to ground rent.

JM68

eddddy said:

Are you buying with a mortgage, and if so, is your mortgage lender happy with the ground rent? 

I suspect they'll want you to take out indemnity insurance, as the ground rent is currently over £250.


A  statutory lease extension might cost around £20k to £25k - plus £3k to £5k in costs - to get rid of that level of  ground rent (But get that confirmed by a valuer, if you're thinking of going down that route.)

But you'll have to have owned the flat for 2 years before you can start the statutory lease extension process - or you could ask the current owner to start the process before completion. (And you should be able to extend a 990 year lease.)


The cost of a deed of variation would be whatever you can negotiate/agree with the freeholder. Most freeholders would see this as an opportunity to make a chunk of extra money - so they'd probably want more than the £20k to £25k they'd get from a statutory lease extension.

Just out of interest how did you calculate the lease extension cost estimate?  I have tried before to find a calculator that factors in RPI increasing clauses in ground rent and failed.  I know the net present value of a fixed ground rent gets discounted.  But if the ground rent is to be re-valued by RPI then would the premium (for that element of the lease extension) not be based roughly on £300 per year for full term of 990 years, as that is the revenue stream they would be foregoing in 'real terms'?

eddddy

JM68 said:

 But if the ground rent is to be re-valued by RPI then would the premium (for that element of the lease extension) not be based roughly on £300 per year for full term of 990 years, as that is the revenue stream they would be foregoing in 'real terms'?

What you say would be absolutely correct, if the ground rent increased every year with RPI.

But it doesn't - it only increases every 10 years.

So for example, the OP's ground rent might increase to £450 in 2026, and it will stay at £450 until 2035 even though RPI would be increasing during that 9 year period.

So for 9 years out of every 10, the OP will be paying less than RPI.

NameUnavailable

Lenders are concerned about GR over £250 (outside of London) BUT most also have their own limits on what GR is acceptable as a % of the value of the property.

So many factors to consider!

Personally I would look for something with a low fixed GR or ideally peppercorn.