Remortgage a Leasehold Property

How Does Remortgaging a Leasehold Property Work?

Remortgaging a leasehold property follows the same basic process as any other remortgage. You apply to a new lender (or renegotiate with your existing one), they value your property, assess your affordability, and if approved, the new mortgage replaces your old one.

However, because leasehold ownership involves a lease agreement with a freeholder, there are additional factors that lenders take into account:

• Remaining lease length — This is the single most important leasehold-specific factor. Most lenders have minimum lease length requirements, typically wanting at least 70 to 85 years remaining on the lease at the point of application.
• Ground rent — Lenders will look at the ground rent payable and, crucially, whether it contains any escalation clauses. Doubling ground rent clauses or ground rent linked to RPI (Retail Price Index) can cause problems with some lenders.
• Service charges — Annual service charges are factored into your affordability assessment. High service charges can reduce the amount you are able to borrow.
• Freeholder management — Lenders prefer properties where the freeholder or managing agent is reputable and the building is well maintained. Outstanding major works or section 20 notices can complicate matters.

The conveyancing process for a leasehold remortgage can take slightly longer than for a freehold property because your solicitor needs to review the lease and obtain information from the freeholder or managing agent.

Lease Length: The Critical Factor

The remaining length of your lease is the most important factor when remortgaging a leasehold property. Lenders view a declining lease as a depreciating asset, and most have strict minimum requirements.

Typical lender requirements:

• Most mainstream lenders require a minimum of 70 to 85 years remaining at the time of application.
• Some lenders also require a minimum number of years remaining at the end of the mortgage term, often 30 to 40 years.
• A lease below 80 years is generally considered short and can make it significantly harder and more expensive to remortgage.

Why 80 years matters:

Under the Leasehold Reform, Housing and Urban Development Act 1993, qualifying leaseholders of flats have the right to extend their lease by 90 years on top of the remaining term, at a peppercorn (zero) ground rent. However, once a lease drops below 80 years, the cost of extending it increases significantly because the freeholder becomes entitled to claim a share of the property's marriage value.

If your lease is approaching 80 years or is already below it, extending the lease before remortgaging can be a wise move. While it requires an upfront investment, it can improve your remortgage options significantly and protect your property's long-term value.

Leasehold reform:

The UK government has been progressing leasehold reform legislation that may make it cheaper and easier to extend leases in the future. However, it is generally advisable not to wait for potential future changes when your lease is already short, as the cost of extension increases as the lease gets shorter.

Ground Rent and Its Impact on Remortgaging

Ground rent is the annual charge paid by leaseholders to the freeholder. While a modest, fixed ground rent is unlikely to cause any problems with lenders, certain types of ground rent clauses can make remortgaging more difficult.

Types of ground rent:

• Peppercorn rent — A nominal or zero ground rent. This is the most lender-friendly option and is now required on all new residential leases in England and Wales following the Leasehold Reform (Ground Rent) Act 2022.
• Fixed ground rent — A set amount that does not change over the life of the lease. Most lenders are comfortable with this.
• Ground rent with fixed increases — For example, a ground rent that increases by a set amount every 10 or 25 years. Lenders will assess whether the ground rent remains reasonable over the mortgage term.
• RPI-linked ground rent — Ground rent that increases in line with the Retail Price Index. Some lenders are cautious about this as future increases are unpredictable.
• Doubling ground rent — Ground rent that doubles at set intervals. This is the most problematic type and many lenders will decline applications where the ground rent could become onerous over time.

If your lease contains a problematic ground rent clause, you may wish to explore whether your freeholder would agree to a deed of variation to amend the clause, or whether you qualify for a statutory lease extension that would replace the ground rent with a peppercorn rent.

A specialist leasehold solicitor can advise on the best approach for your specific situation.

Service Charges, Major Works, and Section 20 Notices

When you apply to remortgage a leasehold property, the lender will consider the ongoing costs associated with leasehold ownership as part of their affordability assessment.

Annual service charges:

Service charges cover the cost of maintaining communal areas, buildings insurance, and other shared expenses. These are treated as a committed expenditure when calculating how much you can afford to borrow. High service charges can reduce your borrowing capacity, so it is important to be upfront about these costs from the start.

Major works and section 20 notices:

If your building has planned or ongoing major works, this can complicate a remortgage application. A section 20 notice is a legal requirement for landlords to consult with leaseholders before carrying out qualifying works costing more than a certain threshold per leaseholder.

If you have received a section 20 notice or know that significant works are planned, this could affect your remortgage in several ways:

• The cost of the works may be factored into your affordability assessment as a future liability.
• If the works relate to structural issues, the lender may want reassurance that the building will be properly maintained.
• Some lenders may delay the application until the works are completed if they could affect the property's value.

Building safety and the Building Safety Act:

Following the introduction of the Building Safety Act 2022, leaseholders of flats in buildings over 11 metres are protected from historical building safety remediation costs in many circumstances. If your building has safety issues, such as non-compliant cladding, the impact on your ability to remortgage will depend on the specific circumstances and the availability of an EWS1 (External Wall System) form or equivalent assessment.

Tips for Getting the Best Leasehold Remortgage Deal

Here are practical steps you can take to improve your chances of securing a competitive remortgage deal on your leasehold property:

Check your lease length early

If your lease is below 80 years, seriously consider extending it before remortgaging. The cost of a lease extension is an investment that can both improve your mortgage options and protect your property's value.

Request a management pack early

Your solicitor will need to obtain a management information pack from the freeholder or managing agent. This can sometimes take several weeks, so requesting it early can help avoid delays. The pack typically includes details of service charges, ground rent, buildings insurance, and any planned major works.

Understand your service charges

Be prepared to provide details of your annual service charges to your lender. If there have been any recent significant increases, be ready to explain why.

Address ground rent concerns

If your lease has a potentially problematic ground rent clause, explore your options for a deed of variation or statutory lease extension before applying. This can significantly widen your choice of lenders.

Work with a knowledgeable broker

A mortgage broker who understands leasehold properties can help you navigate the additional complexities and find lenders whose criteria best match your situation. They can also help manage the process to minimise delays.

Keep your building well maintained

If you are part of a residents' management company or right to manage company, ensure the building is well maintained and that the reserve fund is adequate. Lenders are more comfortable lending on properties in well-managed buildings.

Leasehold vs Share of Freehold: Does It Make a Difference?

If you own a leasehold property but also hold a share of the freehold (either directly or through a freehold management company), this can work in your favour when remortgaging.

Benefits of share of freehold:

• You typically have more control over extending your lease, often at minimal cost.
• Ground rent is usually a peppercorn or very low amount.
• You have a say in how the building is managed and maintained.
• Lenders generally view share of freehold properties favourably.

However, it is important to note that even with a share of freehold, you still need a valid lease in place. The lease should be long enough to satisfy lender requirements, and all the usual leasehold considerations still apply.

Right to manage:

If you do not own a share of the freehold but have exercised the right to manage, this gives you control over the management of the building but not ownership of the freehold. This can still be viewed positively by lenders as it suggests the building is actively and responsibly managed by the residents.

Collective enfranchisement:

If you and your fellow leaseholders are considering purchasing the freehold collectively (known as collective enfranchisement), this can be a worthwhile investment that improves your property's value and mortgage options. However, the process can be complex and may require specialist legal advice.

Whatever your leasehold arrangement, a good mortgage broker can help you find the most competitive deal for your specific circumstances.