Remortgage a Short Lease Property

What Counts as a Short Lease?

There is no single official definition of a short lease, but in the mortgage market, a lease is generally considered short when it has fewer than 80 years remaining. This threshold is significant for two reasons.

Firstly, most mortgage lenders have minimum lease length requirements, typically between 70 and 85 years at the point of application, with some also requiring a minimum term remaining at the end of the mortgage. A lease below 80 years will therefore fall outside the criteria of many mainstream lenders.

Secondly, the cost of extending a lease increases significantly once it falls below 80 years. This is because the Leasehold Reform, Housing and Urban Development Act 1993 provides that once a lease drops below 80 years, the freeholder is entitled to a share of the marriage value (the increase in property value that results from the lease extension). This can add thousands of pounds to the cost of extending.

From a practical standpoint, leases can be broadly categorised as follows:

• 80+ years — Generally acceptable to most mainstream lenders, though some prefer 85 or even 90 years.
• 60–80 years — Fewer lenders will consider these, and rates may be higher. Extending the lease is strongly recommended.
• 40–60 years — Significantly fewer lending options. Specialist lenders may still consider the property, but extending the lease should be a priority.
• Under 40 years — Very few lenders will offer a mortgage. Extending or renewing the lease is essential.

If you are unsure how many years remain on your lease, you can check your lease document or contact your freeholder or managing agent.

How a Short Lease Affects Your Remortgage

A short lease affects your remortgage in several important ways:

Reduced lender choice

As the lease gets shorter, the number of lenders willing to offer you a mortgage decreases. This reduced competition can mean you end up paying a higher interest rate than you would on a property with a long lease.

Lower property valuation

Surveyors take lease length into account when valuing a property. A shorter lease generally results in a lower valuation because the property becomes a wasting asset as the lease diminishes. This lower valuation increases your loan-to-value ratio, which can push you into a higher rate band.

Higher LTV ratio

If the property is valued lower due to the short lease, your loan-to-value ratio will be higher than you might expect. This can affect the rates available to you and, in some cases, may mean you do not have enough equity to remortgage at all.

Affordability considerations

Some lenders may factor in the potential cost of a future lease extension when assessing affordability, which could reduce the amount they are willing to lend.

Conveyancing complications

The legal process for a remortgage on a short lease property can be more complex, as the solicitor needs to advise the lender on the implications of the lease length and any relevant statutory rights the leaseholder may have.

Despite these challenges, it is important to know that options do exist. Specialist lenders and whole-of-market brokers can often find solutions even for properties with relatively short leases.

Extending Your Lease Before Remortgaging

In most cases, extending your lease before remortgaging is the best course of action. A longer lease improves your property's value, opens up more lender options, and can result in significantly better mortgage rates.

Statutory lease extension rights:

If you have owned your leasehold flat for at least two years, you have the statutory right under the Leasehold Reform, Housing and Urban Development Act 1993 to extend your lease by 90 years on top of the remaining term, with the ground rent reduced to zero (a peppercorn).

For example, if your lease has 65 years remaining, after a statutory extension it would have 155 years remaining at a peppercorn ground rent. This would make the property attractive to virtually any lender.

The cost of extending:

The cost of a lease extension depends on several factors, including the remaining lease length, the property value, the ground rent, and the yield rate used in the calculation. As a rough guide:

• Extending a lease with 75 years remaining might cost several thousand pounds.
• Extending a lease with 60 years remaining could cost significantly more.
• Extending a lease with fewer than 50 years remaining can be very expensive.

The cost increases as the lease gets shorter, which is why acting sooner rather than later is generally advisable. A specialist lease extension surveyor (known as a valuer) can provide you with an estimate of the likely cost.

Informal vs formal process:

You can either negotiate an informal extension directly with the freeholder or serve a formal Section 42 notice to exercise your statutory rights. The formal route provides more certainty and legal protection, but the informal route can sometimes be quicker and cheaper if the freeholder is willing to negotiate.

Lender Options for Short Lease Properties

While many mainstream lenders will not offer mortgages on properties with particularly short leases, there are options available:

Mainstream lenders with flexible criteria

Some high street lenders have more flexible lease length requirements than others. A few may accept leases with as few as 55 or 60 years remaining, provided other aspects of the application are strong. Requirements change regularly, so it is important to check current criteria or work with a broker who stays up to date.

Building societies

Some building societies take a more flexible approach to short leases, particularly local or regional societies that understand the local property market. They may be willing to consider applications on a case-by-case basis where larger lenders would automatically decline.

Specialist lenders

There are specialist mortgage lenders who specifically cater to properties that fall outside mainstream criteria. While their rates may be higher, they can provide a solution when other lenders will not.

Existing lender product transfer

If you have an existing mortgage on the property, your current lender may offer you a product transfer (switching to a new deal without a full remortgage application). Product transfers often do not require a new valuation or affordability assessment, which can mean the short lease is less of an issue. However, the rates offered may not be the most competitive on the market.

Working with a whole-of-market mortgage broker is particularly valuable when you have a short lease, as they can quickly identify which lenders are most likely to accept your application and offer competitive terms.

Can You Remortgage to Fund a Lease Extension?

One option that some homeowners explore is remortgaging to raise the funds needed to pay for a lease extension. This can be a practical solution, but it requires careful planning.

How it works:

You apply to remortgage for a higher amount than your current mortgage balance, with the additional funds used to pay for the lease extension. The new mortgage amount needs to be affordable and within the lender's LTV limits.

Key considerations:

• The lender needs to be willing to lend on the property with its current short lease in order for the remortgage to go through. This can be a catch-22, as some lenders will not lend on a short lease even if the plan is to extend it.
• Some lenders will consider the post-extension lease length when making their decision, particularly if the lease extension is being arranged simultaneously with the remortgage.
• You need enough equity in the property to accommodate the additional borrowing for the lease extension premium.
• The increased mortgage amount means higher monthly payments, so affordability is a key factor.

Alternative funding options:

If remortgaging to fund the extension is not possible, you might consider other options such as personal savings, a bridging loan (to be repaid after remortgaging on the extended lease), or negotiating a payment plan with the freeholder.

A mortgage broker experienced with leasehold properties can advise on the most practical approach for your specific circumstances.

Practical Steps for Remortgaging a Short Lease Property

If you need to remortgage a property with a short lease, here is a practical step-by-step approach:

Step 1: Check your lease length

Find out exactly how many years remain on your lease. This information should be on your original lease document, but you can also check with the Land Registry or your freeholder.

Step 2: Get a lease extension valuation

If your lease is below 80 years, contact a specialist lease extension surveyor to get an estimate of the likely cost of extending. This will help you understand the full financial picture.

Step 3: Speak to a mortgage broker

Contact a whole-of-market mortgage broker who has experience with short lease properties. They can assess your situation and advise on whether it makes more sense to extend the lease first or to remortgage on the current lease and extend afterwards.

Step 4: Consider your options

Based on the broker's advice, decide on the best approach. This might be extending the lease first, remortgaging to fund the extension, arranging a product transfer with your existing lender, or finding a specialist lender who will accept the current lease length.

Step 5: Instruct a leasehold solicitor

Whether you are extending the lease, remortgaging, or both, instruct a solicitor who specialises in leasehold matters. They will handle the legal aspects and ensure everything is done correctly.

Step 6: Be patient

Remortgaging a short lease property can take longer than a standard remortgage. The lease extension process, if you pursue it, can add several months. Factor this into your timeline, particularly if your current mortgage deal is ending soon.

With the right advice and a clear plan, remortgaging a short lease property is achievable, even if it requires a few extra steps along the way.