Extension of Short Leases on Central London Properties

Copyright 2006 Nigel Osgood

Facts

* The shorter the remaining term of the lease, the more difficult it will be to sell the property or for potential buyers to raise the finance

* Potential lenders usually require a minimum term of lease at outset of a mortgage facility and, also, require a 30+ years left on the lease at maturity of the mortgage term

* Properties in prime areas of Central London, typically, have leases attached to them with less than 30 years remaining (some have much shorter remaining terms)

* Since the Commonhold & Leasehold Reform Act 2002, it has been easier for an owner of a short leasehold property to extend the term of the existing lease, if he/she has owned the property for two or more years

* Few lenders have identified and responded to this niche lending opportunity; those that have done so, consider the location of the property and the status of the freeholder to be important factors in the mortgage application process

* Quality estate agents and valuers, experienced solicitors and enlightened independent mortgage advisers will all have significant roles to play in this business arena Financing the Extension of a Short Lease

A freeholder will require a monetary consideration in order to extend a lease and there are, essentially, three options for making that payment:

* Pay the premium to the freeholder out of one’s own financial resources

* Apply to one’s existing lender for a ‘further advance’ in addition to the existing mortgage

* Apply to another lender for a re-mortgage to pay off one’s existing borrowing and raise the additional amount required to pay the freeholder

A lending institution will value the property on the bases of its current short lease and also the future increased lease term.

If approved, the mortgage will be based upon the revised lease term and, when the funds are released to the acting solicitor’s client account, the new lease will be executed simultaneously.

Illustration:

An applicant has a 5yrs mortgage of L350,000 on a 15yrs leasehold property valued at L500,000 and he/she can acquire a 90yrs extension to the lease by paying the freeholder a premium of L250,000. The property’s value will increase to L1,000,000 with the new 105yrs lease in place.

A L600,000 mortgage is approved and the L350,000 borrowing is redeemed and L250,000 is paid to the freeholder.

Purchasing a Short Leasehold Property

As, say, a 15yrs lease reduces so does the value of the property decline; a ‘purchase’ application, therefore, challenges a lender more than a ‘re-mortgage’ application.

It is likely that, after two years of ownership, the purchaser will apply to increase the lease as in the preceding scenario; a lender cannot include that factor when considering a mortgage application for a purchase of a short leasehold property.

Again, using an existing 15yrs leasehold property and a 5yrs mortgage as an example, it is unlikely that a borrower would opt for a ‘capital and interest’ facility, given the likely repayments. An ‘interest-only’ mortgage product is not attractive to a lender because of the fact that the reducing lease is likely to have a declining value.

The answer can be a hybrid of the two loan types i.e. a mortgage that is part ‘capital and interest’ and part ‘interest-only’ in order that a lender’s exposure re. loan/value is not impaired.

Illustration:

A lender is prepared to lend 70% of the purchase price/valuation and requires that the exposure is no more than 70% of the declining value at anytime throughout the mortgage term.

Purchase price/valuation of 15yrs leasehold = L500,000 Valuation of the property with 10yrs remaining = L350,000 Loan term is 5yrs

The lender is prepared to structure a loan on the basis that enough capital is repaid over the five years in order for the exposure to be no more than 70% of the declining value.

In this scenario, L350,000 would have been lent at outset (70% of L500,000 value) and after five years the borrowing would be reduced to L245,000 (70% of L350,000 value).

As the mortgage was for a five years term, the borrower would have to pay off the outstanding L245,000 at this time, having sold the property or from his/her own cash resources or having extended the lease and re-mortgaged.

Summary

The processes of purchasing, re-mortgaging or extending the leases of short leasehold properties require the services of knowledgeable and experienced advisers.

There is a slowly-increasing awareness of the market opportunity by a few of the more forward-thinking and flexible lending institutions.

A huge amount of prime Central London property is short leasehold, owned by highly reputable freeholders that have embraced the enfranchisement Act.

In future, those potential buyers of short leasehold properties or those wishing to extend their existing leases can do so knowing that professional and experienced support is available to them.

Don’t Be Scared By Interest Rates

Let’s look at what we have been hearing. That with rates up, homebuyers will pay thousands of additional dollars on their mortgages. For example, on a $500,000 mortgage, an extra .5% in interest rate adds another $160 a month to the payment. In thirty years, the increased rate costs $57,000 more.

It’s a bit more, but it is part of financing anything. Rates go up and down. That’s how it works. Yes, rates have been steadily rising — from RECORD LOWS. If you look at the last twenty years, you will see that mortgage rates are looking pretty good when compared to some of the highest years. You can still get a mortgage, even if rates go up.

You may not be able to afford the home you really wanted, but you can afford a home. What is the difference that half-a-point will make for you? Well, you might not be able to afford a $300,000 mortgage, but you could a $285,000 one.

The best thing that rising rates has done is emphasized the importance of making smart decisions when purchasing a home. Rule number one — only buy what you can afford. This is increasingly important right now. Many homeowners have stretched themselves to get into homes that have record high appreciation. They now can’t pay their adjustable-rate mortgages and can’t sell for what they owe.

Buying what you afford isn’t just a right now situation. When you are choosing an adjustable mortgage product, you have to look to see if you can afford the worst-case scenario of the highest possible interest rate. If you can’t, you need a new plan or a new prospective home at a lower price.

You need to thoroughly understand all of the risks associated with different types of mortgages. There is fine print that can kill you. But what is causing most of the “payment shock” we are seeing this year is not in the fine print. You know that an adjustable mortgage will increase in interest rate. What you haven’t done is sit down and see how that rate could increase your monthly payments.

You shouldn’t be scared to go out and purchase a home or take out a mortgage right now. What you should be is wise. Make the right financial decisions for your family based on your budget, what you can afford and what the interest rate is right now. Buy what you can afford at a fixed rate and you won’t have to worry about rates going up. If you find that you can’t afford what you want right now at the given fixed rates, be assured that rates will go down eventually. Sit on your money and let it build up while you wait for the right time.

If you are looking on financing a major purchase, like a home or a car, take the time to educate yourself on all of the available options. Remember that everything is your decision. You aren’t stuck with a certain rate, but you can jump into the wrong one. Interest rates will affect you and will affect your budget if you have substantial debt. You will have to make changes. But don’t let these still historically low rates scare you into not receiving all of the advantages that owning a home can bring.

Financial Readiness: How Prepared Are You?

Home is where most people feel safe and comfortable. But sometimes — say, when a hurricane, flood, tornado, wildfire, or other disaster strikes — it’s safest to pack up and go to another location.

When it comes to preparing for situations like weather emergencies, financial readiness is as important as a flashlight with fully charged batteries. Leaving your home can be stressful, but knowing that your financial documents are up-to-date, in one place, and portable can make a big difference at a tense time.

Here are some tips for financial readiness in case of an emergency:

Conduct a household inventory. Make a list of your possessions and document it with photos or a video. This could help if you are filing insurance claims. Keep one copy of your inventory in your home on a shelf in a lockable, fireproof file box; keep another in a safe deposit box or another secure location.

Buy a lockable, fireproof file box. Place important documents in the box; keep the box in a secure, accessible location on a shelf in your home so that you can “grab it and go” if the need arises. Among the contents:

– your household inventory

– a list of emergency contacts, including family members who live outside your area

– copies of current prescriptions

– health insurance cards or information

– policy numbers for auto, flood, renter’s, or homeowner’s insurance, and a list of telephone numbers of your insurance companies

– copies of other important financial and family records — or notes about where they are — including deeds, titles, wills, birth and marriage certificates, passports, and relevant employee benefit and retirement documents. Except for wills, keep originals in a safe deposit box or some other location. If you have a will, ask your attorney to keep the original document.

– a list of phone numbers or email addresses of your creditors, financial institutions, landlords, and utility companies (sewer, water, gas, electric, telephone, cable)

– a list of bank, loan, credit card, mortgage, lease, debit and ATM, and investment account numbers

Social Security cards

– backups of financial data you keep on your computer

– an extra set of keys for your house and car

– the key to your safe deposit box

– a small amount of cash or traveler’s checks. ATMs or financial institutions may be closed.

– Consider renting a safe deposit box for storage of important documents. Original documents to store in a safe deposit box might include:

– deeds, titles, and other ownership records for your home, autos, RVs, or boats

– credit, lease, and other financial and payment agreements

– birth certificates, naturalization papers, and Social Security cards

– marriage license/divorce papers and child custody papers

– passports and military papers (if you need these regularly, you could place the originals in your fireproof box and a copy in your safe deposit box)

– appraisals of expensive jewelry and heirlooms

– certificates for stocks, bonds, and other investments and retirement accounts trust agreements

– living wills, powers of attorney, and health care powers of attorney insurance policies

– home improvement records

– household inventory documentation

– a copy of your will

Choose an out-of-town contact. Ask an out-of-town friend or relative to be the point of contact for your family, and make sure everyone in your family has the information.

After some emergencies, it can be easier to make a long distance call than a local one.

Update all your information. Review the contents of your household inventory, your fireproof box, safe deposit box, and the information for your out-of-town contact at least once a year.