In 2017, it’s estimated that around one in 7 buyers have purchased leasehold homes.
The Government has recently announced plans to reform the rules and ban new build houses from being sold as leaseholds, but millions across the UK already own leasehold homes, so what will the impact of this be on those that already own a leasehold house? Will the value of their homes be affected? In this blog, we explain all…
What is a leasehold property?
If you buy a leasehold property, you will only own it for a fixed period of time and you will have a legally-binding agreement with the ‘landlord’ or ‘freeholder’ – the person or business that owns the freehold for your property. This agreement will tell you for how many years you will own the property.
If / when the lease comes to an end, the ownership of the property will return to the ‘landlord’ or ‘freeholder’ and you will no-longer own the home (even if you have fully paid your mortgage).
Most flats are leaseholds, but in the 2000s it became increasingly common for new-build houses to be sold as leasehold properties, which has ultimately led to the ban.
Can the lease be extended? How much does extending a lease cost?
The lease on a property can be extended, but this comes at a cost. The exact cost depends on how long you have left on your lease and the value of your property.
The below chart shows the typical cost of extending your lease depending on lease length (but be aware, the costs to extend your lease could be much higher – as these figures are based on a flat valued at £200,000 with a 999-year lease).
To demonstrate how lease extension costs can spiral when lease length gets below 60 years, in May this year, a flat in one of London’s most expensive squares where flats typically sell for £7,000,000, sold for just £90,000 as it had just 14 months left on the lease. This lease will cost £900,000 to extend for just 20 years.
What are the leasehold rule changes for new-builds?
The government’s changes will ban builders from selling new-build houses as leasehold in England and ground rents on flats could be cut to as low as zero.
The 8-week consultation entitled ‘tackling unfair practices in the leasehold market’ closes today and the findings can be read here: https://www.gov.uk/government/consultations/tackling-unfair-practices-in-the-leasehold-market
What’s the impact for those stuck with a leasehold house, or for those considering buying one?
In many cases, leasehold properties are subject to ground rates and other clauses that incur additional costs – and some of these can be costs that increase either with the value of the property, or at certain milestones. It is these spiralling cost increases, along with the increasing costs of lease renewal, that can render a property unsellable at market value as it would also become virtually unmortgageable for any potential buyer.
For example, ground rents may start off as £200 per year on the property, but double every 10 years. This would make annual ground rent £6,400 by year 50 of the lease.
In addition, clauses can include a mortgage fee if the lessee decides to remortgage at any point. This could be 0.05% of the home’s value for example, or a £150 charge for remortgaging a house valued at £300,000. Other mainstay charges could even include a fee (usually around £50 plus VAT) if the property owner wants a pet.
The key for leasehold home owners is to buy the freehold (if possible), or keep your lease length above 100 years. This will keep lease extension costs relatively low and mean potential buyers will be able to acquire a mortgage for the property should you decide to sell.
If you’re buying a new build house, leasehold should no longer be a problem following the ban. If you are considering purchasing an existing leasehold house, be sure to check the length of the lease, research renewal costs and research the possibility of purchasing the freehold.
Testament to the importance of this, below is a real case study from TheToysAreALIVEITellThee on Mumsnet:
“Bought our first and current home 7 years ago. Was told by the solicitor that it was Leasehold with 63 years left but not informed what the implications of this were, just that it could mean we'd have a problem if we wanted to sell in the near future and she would advise that we either extend the lease or purchase the freehold when we can - great. I was young, excited that our offer had been accepted and we'd be moving into our dream home and trusted that the solicitor knew their job.
"Fast forward 7 years and 2 DC later and finally… [I] start looking into buying the freehold.
"I feel sick, have read that it can cost tens of thousands of pounds, extending the lease can be just as costly, and if we just let the lease run out the land reverts back to the leaseholder and we can be forced to then pay them RENT for our own home that would have been fully paid off.”
If your lease has become expensive to renew or if you’re struggling to sell your property because of unexpected lease costs, get in touch with one of our team. We’re cash buyers and in a position to purchase any leasehold property – regardless of the lease term remaining.
You could sell your home in as little as seven days. If you’re in need of a swift sell, why not visit our homepage and enter your postcode for an instant cash offer on your home.