In this article, we highlight the issues that homeowners may encounter when navigating equity release mortgages and trying to secure one on a leasehold property and explore how these issues may be overcome.
What is a Leasehold Property?
In the UK, properties are typically classified as either freehold or leasehold. While freehold properties grant full ownership of the land and the property, leasehold properties are subject to a lease with the freeholder (landlord) for a specific term, such as 99 or 125 years. Leasehold properties are commonly found in blocks of flats or developments with shared communal areas. Some houses are leasehold, but these are less common as owners often opt to purchase the freehold.
The Challenges with Leasehold Properties:
- Lease Term: Equity release lenders typically require a minimum lease length remaining on the property, usually calculated based on the age of the youngest borrower, and often around 70 – 85 years. This is to ensure that the lease term will exceed the homeowner’s life expectancy as the lenders need assurance that the property can be sold to repay the loan in the future.
- Lease Restrictions: Leasehold properties often have various restrictions outlined in the lease. These restrictions may include subletting, alterations, or limitations on property usage. Lenders will scrutinize these terms to ensure they comply with their lending criteria. If there are excessive or onerous restrictions, it may affect the property’s value and the lender’s willingness to offer an equity release mortgage.
- Ground Rent and Service Charges: Leasehold properties usually involve the payment of ground rent and service charges to the freeholder. Lenders consider these additional costs when deciding if they will lend on a property. Escalating ground rents or onerous service charges may raise concerns of lenders as they could impact the property’s future value.
- Freeholder Consent: Some leases require obtaining the freeholder’s consent for certain actions, including securing an equity release mortgage. The lender will typically require confirmation from the freeholder that they have no objection to the transaction, which can cause issues if the freeholder is difficult to contact or unwilling to provide requested information or documentation.
Overcoming these Challenges:
- Lease Extension or Freehold Purchase: If the remaining lease term is short, homeowners may consider extending it. This can be done simultaneously with the equity release mortgage if the lease extension is on a voluntary (non-statutory) basis. The lease could also be extended prior to obtaining the mortgage but registration would need to be completed at the Land Registry before completion of the mortgage. Where the property is a leasehold house, it may be possible to purchase the freehold from the landlord rather than extending the lease.
Extending the lease or purchasing the freehold can enhance the property’s value and increase eligibility with lenders. However, the process can be expensive and time consuming, so homeowners should be aware that this is likely to cause a significant delay to the release of funds and may result in several re-offers on varying interest rates. - Deed of Variation: Where the terms of the lease are unacceptable to the lender, it may be possible to enter into a Deed of Variation with the landlord to bring the terms in line with the lender’s requirements. This will require the agreement of the landlord and will come with cost implications and time delays for the homeowner, especially if the lender requires the Deed to be registered at the Land Registry prior to completion of the mortgage.
- Professional Advice: Seeking advice from an independent financial adviser (IFA) who specialises in equity release mortgages can help navigate the complexities of leasehold properties. They can provide tailored guidance on the lenders who typically accept leasehold properties and will have an understanding of any special conditions that might be imposed on the mortgage offer.
- Instruct an Expert Equity Release Solicitor: at Tivoli Legal an expert equity release solicitor will check your lease at the outset of the process and will be able to advise if they envisage any problems. We have experience with dealing with the lenders requirements so we can often start work on resolving any issues with the lease before we receive the mortgage offer.
Obtaining an equity release mortgage on a leasehold property requires careful consideration of various factors, such as the lease term, restrictions, ground rent, and service charges. While there may be challenges to overcome, with the right advice and specialist legal team, homeowners can successfully unlock their property’s equity and secure their financial future.
Why wait, instruct us today!
Disclaimer: The information provided in this article is for general informational purposes only and should not be construed as financial or legal advice.