How to set your flat free

A new law means it's easier to buy the freehold on your flat. Just watch out for hidden costs, says Stephen Pritchard
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The Independent Online

Owning a leasehold house or flat means inhabiting something of a property no-man's-land. Buyers do not own their homes outright at all. Instead, they are buying the right to live in the property, typically for 99 or 125 years. And, in addition to the mortgage, leaseholders must pay a ground rent to the freeholder, as well as service charges for the management of the block.

Owning a leasehold house or flat means inhabiting something of a property no-man's-land. Buyers do not own their homes outright at all. Instead, they are buying the right to live in the property, typically for 99 or 125 years. And, in addition to the mortgage, leaseholders must pay a ground rent to the freeholder, as well as service charges for the management of the block.

The property boom has increased the number of leasehold properties on the market, as developers have constructed purpose-built flats and converted industrial buildings into apartments. Some of these come with a share of the freehold, but the majority are leasehold - and over time, all leasehold properties lose value, because, technically, they could revert to the freeholder at the end of the lease.

Although this rarely happens (lessees usually either extend their leases or arrange to buy a share of the freehold), a lease with 75 or fewer years left to run can decrease the value of a flat. And, according to Ray Boulger, senior technical manager at the mortgage brokers Charcol, short leasehold properties - with as few as 25 years left to run, and fairly common in London - are generally unmortgageable on standard terms.

Fortunately for buyers, the Commonhold and Leasehold Reform Act of 2002 is being phased in, and it has removed some of the most troublesome barriers to enfranchisement, the technical term for buying a share of a freehold.

Under previous laws, owners in a block who had not lived there for three years, or who were non-resident, such as landlords or buy-to-let investors, were excluded from the vote needed to approve a freehold purchase. This made it hard for owner-occupiers to gather enough support for enfranchisement.

The new rules are more relaxed, and also oblige freeholders to sell as long as they can agree a price with their leaseholders. To prevent landlords from using price as a barrier, the Government has set a formula to calculate the "marriage value", or increase in the value of a property, through owning the shared freehold.

The formula is based on the market value for comparable properties and the length of the unexpired lease. The shorter the remaining lease, the more expensive the share of freehold, says Jeremy Leaf of the Royal Institution of Chartered Surveyors. But, he points out, the price can always be negotiated, and owning the freehold "can make a substantial difference to a property's saleability." Enfranchisement is not a cheap process, however, as leaseholders have to pay survey and legal fees as well as the cost of the freehold itself; they will also need to set up a management company. For overstretched flat owners, finding several thousand pounds for a share of the freehold may be a struggle.

Mortgage lenders, though, will usually help. "Most lenders will give a further advance," says Charcol's Boulger. "But if you do not have enough equity in the property, you would need a new valuation, based on owning a share of the freehold."

Arranging a valuation is relatively straightforward. Buyers can tie in the release of extra funds with the transfer of the freehold, although they will need to meet at least some legal costs up front. Fees for a further advance are typically £150-£200.

In a stable or rising property market, a higher valuation is almost guaranteed for a flat with a relatively long lease. Buyers may find it more difficult if prices are falling, however, so it will pay to gauge market conditions first.

Most lenders, if they agree to a further advance, will charge their standard variable rate; some will give borrowers access to fixed and discounted deals, too. This is unlikely to cause problems for leaseholders with average properties with longer leases, as the cost of the share of the freehold is likely to be in the low thousands.

For short-lease properties in expensive areas, such as central London, the situation is more complicated. These properties can sell at a considerable discount to longer-lease or freehold homes - and the 2002 Act means there are fewer bars to enfranchisement after purchase. But buyers need to take the process in two steps. Boulger cautions that few lenders will grant repayment mortgages on short-lease properties. Instead, buyers may have to take out an interest-only mortgage and set aside the money they save to put towards the freehold.

Boulger advises picking a loan with few, if any, penalties, and then remortgaging when the enfranchisement process goes through, as the cost of a freehold - or extended lease - for a short lease property could exceed its purchase price. "But this could still suit some buyers, especially investors, as the yields can be good," he says.

For further information, see the Government-backed website www.lease-advice.org/

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