A good deal ... or not

THE QUESTION

A good friend of mine has just exchanged on two properties at auction yesterday. The properties are leasehold apartments with a long term lease on them for 15 years from 2007.

He’s looking for a good mortgage broker who could provide a mortgage on the two properties that can be turned around within the auction timescales of 28 days? He can pass any credit hurdles and has financial backing, but would like to finance the majority with a mortgage.

THE ANSWER

My brokerage can obtain bridging finance from one of our lenders to enable your friend to meet the 28 day deadline. You’ll find that traditional BTL mortgages can’t fulfil the 28 day term.

To complete this purchase within the required 28 days, he will have only two ways to realistically hit that timescale, cash or bridging finance. However, he may decide that completing on the sale will only compound the problem he has created for himself.

Assuming I have correctly understood that your friend has bought two leasehold apartments with only 7 of the 15 years left on the leases before each apartment reverts to the freeholder and they lose the right to occupy each apartment. This means that your friend has zero chance of getting a mortgage on these flats at any point, let alone within 28 days. Mortgage lenders like a minimum remaining lease of at least 25 years plus the term of the mortgage.

With only 7 years remaining on each lease, no mortgage lender will touch these properties with a bargepole. Any property whose value is going to decrease with each passing year and will hit zero before the mortgage term expires.

Within those 7 years, there should be the opportunity to negotiate a lease extension with the freeholder, but that is most likely to be at a significant cost to your friend. Further, unless you have a benign freeholder, there is no obligation on the freeholder to begin negotiations to extend the leases until your friend has owned the property for two years. Two years plus of sitting on bridging finance is an awfully expensive cost to incur.

I would suggest your friend, if he hasn’t already, do some hasty due diligence on what the flats are likely to each be worth if they had 100 + year leases.

The upside may just be, if your friend has bought at the right price, even though the cost to extend the leases may be significant, the increase in value of the apartments when on a 100 plus year lease may be greater than the cost of extending the leases.

Now, there may actually be a chink of light here. One of the specialist bridgers my brokerage deals with has a 3-year bridging product at an annual rate of 6.99%. Completing the purchase with this product would then give your friend three years in which to negotiate the lease extension with the freeholder and that should be sufficient to conclude such negotiations. With new 100 plus years leases, normal BTL mortgages can then be arranged on each apartment

So having committed to purchase the two unmortgageable apartments by exchanging contracts at auction, your friend may do well to consider which is the lesser of three evils

1. Complete the purchase using bridging finance and wait out the two years to begin lease extension negotiations
2. Use the 3 year 6.99% bridging option to achieve the same result as a) but at a significantly lower cost
3. Conclude that the cost of extending the lease back to 100 + years compared to how much the value will increase, plus the borrowing cost incurred in the interim, does not make this a viable project and the least costly way out is to forfeit the 10% deposit by not completing the purchase.

If your friend needs to discuss this further do ask him to give me a call.

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