There are a number of key differences between buying a leasehold property and one where you own the freehold. That’s mainly because there is a third interested party in the purchase – the freeholder – and the lease contains numerous terms and conditions that need to be investigated and agreed to. So, when you’re raising finance to buy a flat, you need to be prepared for several things that are particular to the purchase of this kind of leasehold property.
• You really should have at least 80 years remaining on the lease. Most lenders won’t consider flats with less than 70 years, as it starts to seriously affect the value of the property. That’s because the cost of extending the lease can increase and the freeholder may decide not to renew it at all (although that’s very rare). The Council of Mortgage Lenders website has a complete list of all lenders and what minimum term they require.
• You might need a higher deposit than for a freehold property of the same value. Lenders tend to offer lower loan to values on leasehold properties, usually depending on the length of the lease.
• Mortgages for new-build flats will almost certainly have a lower loan to value because so many lenders got burnt in the last recession, due to an oversupply and inflated purchase prices charged up to the crash. If you’re looking to borrow 75% or more, regardless of the value of the flat, you’re likely to have to put down at least £25,000.
• If you’re buying a studio flat, you should be aware that around half of lenders won’t consider lending on studios at all. Of those that do, nearly all will require the property to be a minimum size of 30 sqm.
• The smaller the block, the better. Most lenders prefer flats in buildings of five floors or under because as the number of flats in a block increases, so does the likelihood of them being let out. That increases the risk of management and maintenance problems, which affects the overall value of the property. If you’re in a high-rise of more than 7-10 storeys, you’re likely to find only a very limited number of lenders will consider your application. In addition, lenders like to limit their exposure to a maximum of 10% of the units in a block, so you might find that certain deals aren’t available to you, simply because that lender has already hit its maximum number of loans.
• Age matters. Older properties and particularly ex-local authority blocks have a reputation of being harder to maintain, with communal facilities falling into disrepair – and that impacts negatively on the value, so lenders are not always keen to lend on these.
• The process from initial application to mortgage offer will almost certainly take longer than with a freehold property. The mortgage lender can’t produce the offer until they have received the conveyancer’s report, and it takes time to make all the necessary legal checks on the terms of the lease, management company accounts etc.