Extend the lease or not to extend?
This is the question asked frequently. I assure you are not alone in this; thousands of leaseholders are asking this question, especially when they are purchasing the leasehold property or after some time when they come to realisation that years have passed and lease term just shortened.
- 1 Extend the lease or not to extend?
- 1.1 Extend the lease to remove ground rents
- 1.2 Extend the lease to allow a sale completion
- 1.3 Extend the lease for mortgage purposes
- 1.4 Extend the lease to avoid extra costs when lease falls below 80 years
- 1.5 How to go from here
- 1.6 Frequently asked questions
It may be in your best interest to check what is the current remaining unexpired term on your lease. In general, it is accepted by everyone in the industry that if the lease is beyond 82 years you are on a safe side and you should continue enjoying occupation of your property without any worries about losing value due to a short lease.
But if your lease is extremely close to 80 years mark you should start thinking about residential lease extension. Because if you can get the lease extension before the lease falls below 80 years you will save tremendous sums and by that, we mean thousands of pounds.
However, the lease length is overlooked by the leaseholders and it often falls below 80 years. This situation is dangerous financially because to extend leasehold flat lease will cost significantly more compared to the cost of extending the lease which is beyond 80 years.
Here are some good reasons to extend leasehold property lease:
Extend the lease to remove ground rents
If you follow a statutory residential lease extension route you can get rid of the current ground rents that you may have. The new extended lease will be at the peppercorn ground rents meaning zero.
It is very common that leasehold flats have prescribed ground rents ranging anywhere from a pound to thousands of pounds. If you are with the latter, you are very unlucky and lease extension could cost quite a sum.
However, it is a necessary action to complete if you do not see yourself paying ground rents in the long-term and because there is no other way to remove them from the equation.
If you are paying say hundred pounds every year and you plan to live in your flat for a long time, getting rid of the ground rents will prove beneficial as in the long-term you will save more.
However, this does not always apply, and the savings you will make may be very low as it all depends on the type of lease structure you have.
Extend the lease to allow a sale completion
If you are homeowner who is struggling to sell the property because of the short lease – you are not alone. There are more than 2.5 million leasehold properties in United Kingdom and in one way or the other some issue will pop up during the sales process either delaying or preventing a sale.
This particularly applies if your buyer is using a traditional homeowner’s mortgage to purchase the property from you, their lenders might not be so keen to lend on a leasehold property with a short lease. In leasehold terminology short lease is considered any lease with the remaining term below 80 years.
You as the property owner have an option to avoid this type of situation and you can do that by assigning your right to extend the lease to the buyer. This type of transaction is called Section 42 assignment, so your buyer does not have to wait for 2 years until they qualify for a residential lease extension under Leasehold Reform, Housing and Urban Development Act 1993.
Extend the lease for mortgage purposes
As mentioned above, leasehold interest is created for a fixed time period and when lease term reaches close to 80 years it starts to affect the property value. The general perception suggests that lease should be extended prior it falls below 80 years, ideally earlier than until it reaches 82 years.
When looking at CML table containing minimum lease term lenders are willing accept, it appears that it varies a lot from lender to lender but it is suggested that if lease is below 80 years you will be restricted to a small number of lenders with enough risk appetite to lend on a short lease.
This could also affect the interest rates you might be offered and loan to value ratio which means you might need to put more deposit to access the mortgage product or have higher income to afford the mortgage payments.
Therefore, it is paramount to consider extending the lease as soon as possible to avoid this type of scenario.
Extend the lease to avoid extra costs when lease falls below 80 years
To show a difference between the premiums to extend the lease with above 80 years and to extend the lease with below 80 years. We produced a table with the following scenarios and on the assumption that there are no ground rents:
As you can see four years apart, but the cost to extend leasehold flat lease can be become double if you wait for your lease to fall below 80 years. Of course, this is only hypothetical scenarios and in real situations premium might not necessarily be double, this all depends on the property location and lease terms in place.
This type of increase in premium happens because of a formula called marriage value which is essentially a difference between a short lease and a long lease property values. This difference is then divided equally between you and your landlord and his share is forms part of the lease extension premium total.
How to go from here
If you wish to progress with the lease extension you will need to instruct solicitor and lease extension valuation surveyor.
The solicitor will perform all required checks and serve the correct notices whilst surveyor will provide a valuation report for a lease extension.
When lease is finally agreed you will get an additional 90 years extension on top of existing lease term and your ground rents will be at the peppercorn. This happens only if you extend the lease via statutory process.
If you still not sure whether you wish to extend or wait for a better time you can check how much does lease extension cost via our free lease extension calculator.