Leases, how long is long enough?
Leases have been in the press recently for all the wrong reasons. One issue is rent and that will be the subject of a separate blog; length or ‘Term’ as it is known, is discussed here.
Given that when you buy a property with a remaining lease Term longer than your mortgage and probably longer than you expect to live, what is the problem?
In a nutshell, a number of lenders have become sensitive to lease length; most buyers require a mortgage to purchase and if the property is not easy to mortgage you reduce the pool of potential buyers and that in turn devalues your property as fewer people can buy it.
In general, lenders agree new leases of flats should be 125 years or more at grant and new leases of houses should be 250 years or more. There is less uniformity concerning the remaining Term of existing leases but recently a number of lenders have specified a minimum remaining Term of 85 at the date of purchase. This appears to be calculated by taking 80 years (the length at which the cost of extending a lease, for technical reasons, increases dramatically), adding two years which is the time you need to own a lease before you are entitled to extend it by right, and adding a further three years for good measure.
It follows, that anyone buying leasehold property with a remaining Term of close to 85 years needs to factor into their purchase the cost of extending their lease and should they let the Term drop below 80 years before extending that cost will increased dramatically and continue to increase year on year. Anyone planning to sell with a remaining lease Term of less than 85 years need to extend in good time too, as the process can take a number of months.
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