Leasehold reform is on the way[1] but in the meantime, lease issues still have the ability to upend an investment plan. Generally, property investors and landlords may struggle to purchase a property with a short lease.
Parisa Godaz, one of our esteemed underwriters, put it simply: “Landlords may find it hard to purchase a property when the lease is lower than around 80 years or so.
“Generally, many lenders will not lend on a property with a short lease due to potential decreases in value down the line.”
Unfortunately, this is the case even for experienced investors.
“I’ve had many enquiries from borrowers who have been turned away on the high street because of a short lease, even where everything else ticked all the right boxes,” Parisa continued.
“Say a portfolio landlord finds an opportunity that’s too good to pass up.
“They could be purchasing a pristine residential property at a bargain price, a good £100,000 lower than its full market value. Also, the property has secured tenants who are paying a high level of rent, which would be incoming for at least 5 years.
“All of this should sound like a solid proposition to a lender but, say there was only 60 years left on the lease. By this factor alone, many banks wouldn’t even consider this deal.”
There are a number of remedial actions landlords can take to fix a short lease conundrum. Leases can be extended via numerous methods[2], but doing so will likely prove costly and time consuming. Fortunately, this is where specialist finance can help.
Parisa explained: “A lease extension could cost around £40,000 which, for a purchasing landlord, is no small amount.
“A portfolio owner may be able to cover the lease extension, but it may not leave them with enough funds to complete a purchase. But, at Market Financial Solutions, we can provide purchasing finance for leases as low as 30 years – although it should be noted that shorter leases typically result in lower LTV minimums.
“This investor, balancing a lease extension alongside a purchase, will likely be very squeezed on time. But, we can have funds issued in mere days where needed, providing a bit of breathing room.
“Also, if we’re working with a portfolio landlord, we may be able to offer a large loan as the borrower could service it through the rental income of an already tenanted property. This provides more time to get a purchase sorted, complete a lease extension, and move onto long-term finance.”
A solid investment opportunity doesn’t need to be held back by a short lease, a borrower’s poor credit history, or any other temporary challenge. If there’s a way forward, we will do everything we can to find it.
[1] https://www.propertynotify.co.uk/news/the-leasehold-and-freehold-reform-act-measures-of-success/
[2] https://hoa.org.uk/advice/guides-for-homeowners/i-am-buying/buying-a-flat-with-a-short-lease/
