Leases on BTL properties

THE QUESTION

When looking to buy a BTL property at what point does the length of the lease term start becoming a factor and should be taken in to account?

THE ANSWER

80 years is a pivotal number, because you cannot get the freeholder to extend the lease until it reaches 80 year point. However, from a mortgage lenders point of view 80 years is not that pivotal, it is quite easy to get a mortgage below 80 years but it does start to get problematic the further you drop below 80 and when the lease has 70 years or fewer to run it starts to become an issue for mortgage lenders.

Mortgage lenders like to have a comfort zone of years left on the lease at the end of the mortgage and this will vary lender to lender, some want as much as 45 years, others will be happy with 30 years and most would be somewhere in between. Given that most people take a 25 year mortgage then 70 years become the pivotal number in terms of getting mortgage lending. Below 70 years and your choice of lenders steadily decreases until you get to 55 years where it is pretty much impossible to get a mortgage. The purchase of flats with less than 55 years on the lease becomes cash buyer territory.

One other point to remember is that the cost of extending the lease becomes progressively more expensive with each successive year below the 80 year mark.

In a stagnant market the value of a flat decreases with each passing year that the lease ticks down, so flats with say 60 years or less are worth significantly less to reflect the cost of extending the lease.

Short lease flats represent a buying opportunity to cash buyers to buy well below market value, extend the lease and benefit from an increase in the market value beyond the cost of extending the lease.

Savvy investors know that it is not required to own the property for two years before getting the lease extended, if the current owner kicks off the lease extension process by issuing what is known as a Section 42 Notice.  The new buyer, having had that assigned to them, then completes the extension of the lease after purchase.

The even-more-savvy investors know that you don't even need to be a cash buyer to profit from this.  You can use bridging finance to fund the purchase, extend the lease, then sell or refinance.

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