Many properties throughout the UK are owned on a leasehold basis, which gives the owner the right to live in the property long term. However, as this lease runs out it becomes more and more expensive to renew, and as a result, it can often be difficult for lease owners to sell their properties. All too often a leaseholder is forced to choose between letting their lease run down or paying a high fee in order to extend it, a process which is difficult to finance for most homeowners.
However, there are methods which can be used to create the capital necessary to finance a short lease extension, and these loans come from bridging lenders. Bridging finance is a highly flexible tool which can be put to use in a wide variety of scenarios; it’s typically used within the property development sector as a quick way to kick-start projects and is a highly flexible form of finance. This article will discuss the needs of lease extensions and what leaseholders need to understand when looking for a lease renewal. Anyone considering a bridging loan for a lease extension should take on board the various information highlighted throughout, and should also consult their financial advisor before proceeding with a loan.
The first thing to fully understand is what a leasehold is, and why it needs extending. There are two forms of property ownership in the UK; freehold, and leasehold. In essence, freeholders own the land on which a property stand, while a leaseholder only owns a portion of the building; most buildings with their own “footprint” are freehold, while most flats are leasehold (because they share the same footprint as other flats). There are exceptions, however, and many houses bought under a shared ownership scheme are leasehold as well.
Typically a new leasehold will run for about 125 years, more than enough time for most homeowners. However, there is a ticking clock called “marriage value” on all leases which kicks in at the 80 year mark; at this point, leases become much more expensive to renew. Once marriage value becomes a factor, the owner of a property must pay their freeholder half of the value they add to their property through the lease extension. As the lease grows shorter and shorter the potential added value grows higher and higher, and so the cost of extending the lease increases. There’s no penalty to the owner for having a short lease per se, but it means it grows harder and harder for them to afford to extend it, and once it expires they will lose the property altogether.
Because of the costs of renewing a short lease, and the potential to lose the property if it expires, most mortgage providers will not lend on properties with a lease of fewer than 75 years (though some specialists will lend on properties with slightly shorter leases). This poses another problem; as soon as a lease becomes “short”, it becomes much harder to sell, because the majority of buyers need the backing of a mortgage in order to make a purchase.
We’ve seen how a leasehold can become a race against the clock, with each year adding more and more to the cost of extension. With lease extensions costing upwards of six figures for a very short lease on a valuable property it’s clear that some form of finance is necessary, and bridging loans are ideally suited to this purpose. Because a bridging loan is a high-value, short-term secured loan, it can be put to a variety of uses, including financing a lease extension, and bridging lenders routinely approve loans from as little as £10k to as much as £10 million (and even, in some cases, in the hundreds of millions).
What makes bridging loans so useful is that they can be secured on assets that mortgages can’t be; on a property with a short lease, for instance. This means that someone looking to purchase a lease extension can quickly and easily secure the funding they need to begin the leasehold renewal process.
The most common use of a short lease bridging loan is to help a buyer purchase a property which cannot be mortgaged. Such properties are often purchased at auction rather than being advertised on the open market, and as such must be paid for in full within just 30 days, and this is where bridging lenders are able to really shine; many bridging loans go from application to approval in just 24 hours, with funds following shortly afterwards. The loan itself will often cover both the purchase of the property itself and the cost of renewing the leasehold; the buyer can then complete the lease extension process and seek a mainstream mortgage to repay the bridging loan.
Up until recently, there was no guarantee that a property’s freeholder would grant a lease extension, but there is now a statutory extension available to all leaseholders. This allows anyone who has lived in the property for 2 years to purchase a lease extension at a fair value, but it is also possible to seek an informal lease extension. This can be negotiated between the leaseholder and the freeholder at any time and may have any combination of costs and benefits for either party.
Because it may be sought quickly, many property developers will arrange an informal lease extension with a property’s freeholder before proceeding with the purchase. The costs of maintaining a bridging loan for the two years prior to extending the lease are very high; however, it is possible to “inherit” an extension application from an outgoing leaseholder. In this case, the developer might ask the seller to begin a lease application before leaving the property, which the developer can then continue with once they own the property themselves.
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