Length and value of Leasehold

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Tuesday 1 July 2008 10.34am
Hi all, hope someone can help;

We own a one bed flat, with a leasehold that was 99 years when it was built in 1989 - This makes it about 80 years now.

we've had a letter from a company advising us to buy more years on our lease to make it back up to 99, because apparently lenders are less likely to lend for a mortgage on lease lengths less than 80 years, and the lower it gets, the more unlikely they are to lend - and this apparenly causes loss of value in the flat.

Why is this?
People in my opinion on average don't live in one bed flats very long - why is it necessary to have a lease that is longer than the average lifespan of most people? Surely a mortgage company should only start to worry if the lease gets below 20 years? and how come the price to buy more lease goes up the longer you leave it - that should be the same per year
If I want to buy 20 years now - at an example cost of 20, then surely next year buying 21 years will cost 21, and buying 30 years in 10 years time - 30 (give or take a few points interest)

also - if I intend to stay here for 5 more years, with the same mortgage, why bother extending the lease now, why not in 4 years time?

I just don't get it - could someone please explain?
Thanks
Tuesday 1 July 2008 10.50am
I think you'll find that it is down to marriage value which kicks in at under 80 years (although at this point, the cost of the marriage value will be low).

http://www.homemove.co.uk/news/03-12-2007/how-to-extend-your-flat-lease.html

http://www.findaproperty.com/displaystory.aspx?edid=00&salerent=0&storyid=10207

Quote:
why is it necessary to have a lease that is longer than the average lifespan of most people? Surely a mortgage company should only start to worry if the lease gets below 20 years?

No, because if you default, you are left with a worthless asset - because nobody else will buy it - because even if they do, nobody will buy it from them... so they won't pay much for it.

Quote:
and how come the price to buy more lease goes up the longer you leave it - that should be the same per year If I want to buy 20 years now - at an example cost of 20...

Because you are buying the right to occupy your flat from 2089 to 2108 - essentially worthless at the moment, so relatively cheap.

Imagine it reaches 2088 and you want to buy the same time period, i.e. the next 19 years. Effectively you'd be paying 20 years full market rent up front - imagine the bill for doing that for 2009 to 2028.

Helpful?
Tuesday 1 July 2008 4.13pm
yes and no. i'm still confused.

I'll try and get independant financial advice - Thanks anyway.
Tuesday 1 July 2008 4.20pm
It's relatively simple, I think, Jon.

As Mapmaker says, if you concentrate on what it is that you're buying (and Mapmaker's example, using the years of rent, is v good imho), and put yourself in the seller's shoes, then it makes sense.

...if you press it, they will come.
Tuesday 1 July 2008 7.13pm
A lease - of the sort you have on your flat - is a right to occupy your flat for free (plus a service charge of a few hundred a year) for the length of the lease.

Buying a long lease is effectively buying, up-front, a number of years of rent.

Here we are at 1 January 2008. Forget inflation (so your rent will never ever go up), and let's say you would pay 1,000 per annum rent for 2008 - and for every subsequent year.

If on 1 Jan 08 you put 952 on deposit in the bank, at 5% interest, it would be worth 1,000 on 1 Jan 09 - so would pay your rent for 09.

If on 1 Jan 08 you put 907 on deposit at 5%, it would be worth 1,000 on 1 Jan '10.

If on 1 Jan 08 you put on 863 at 5%, it would be worth 1,000 on 1 Jan '11.

In the above example, you had 3,722 on 1 Jan 08.

Therefore, both you and the seller of the lease of a flat don't see much difference between you giving him 3,722 on 1 Jan 08, or 1,000 on each of 1 Jan 08, 09, 10 and 11.

Now, if you put 19.21 on deposit at 5%, it would be worth 1,000 on 1 Jan 2089 (isn't compound interest amazing). So to extend your lease for the one year 2089, you can either pay 19.21 today, or 1,000 in 81 years time.
Tuesday 1 July 2008 9.32pm
All very accurae. However, on teh point that the leaseholder is making re the fact that it will be difficult to get a new mortgage, I don't agree. I have a mortgage, and my lease is less than 70 years. None of the mortgage providers had any problems with that and i did get a good deal
Tuesday 1 July 2008 9.49pm
I had 71 years on a lease on my old flat. I wish I'd extended it before 80 years as it would have cost me a lot less to extend, due to the marriage value thing.

People are put off by a low lease as they don't like the uncertainty of how to extend it and the unknown cost.

I got a report done by a valuer (about 400 I think) and then used this when negotiating the sale price of my old place. I didn't have to pay to extend the lease, but got my purchaser to do so all on the same day as my sale went through. Of course if I had had a longer lease I could have got more for my old flat.

I think the company was called myleasehold.com. You send them your lease and a valuation of your property and he works it out. Probably takes him ten minutes with excel and he sends you a standard report giving a range of values depending on discount rates (interest rates). It's then up to you to use this when negotiating to extend the lease.
Wednesday 2 July 2008 2.53pm
Just remember that if property prices drop 50%, so will the cost of extending the lease. You might be buying at the peak if you do so at the moment...
Thursday 3 July 2008 12.44pm
ok, some of that I understand.
another point - how come a normal lease starts at 99 years, and yet it becomes 'short' at only 79 years!

I start to suffer from the problems of a short lease, even though it's only 20% (20 years) less than a full lease.

when be originally bought, I thought that buying a house or a flat were the same thing - you buy, you pay a mortgage, and at the end, the place is yours. Ok so you have to pay ground rent on a flat, as you don't own the entire building, but I didn't think about a lease, and that if we stayed in our flat long after we'd payed off all the mortgage, we'd end up with absolutely nothing the year the lease runs out.

it's just another way of someone else taking more of my (hard earned?) cash. that's life, and if I don't like it I can always move house. Which I won't do until i've extended the lease to make it more attractive to the next buyer.

Thanks all for advice.
Thursday 3 July 2008 2.11pm
JonR wrote:
ok, some of that I understand.
another point - how come a normal lease starts at 99 years, and yet it becomes 'short' at only 79 years!

I start to suffer from the problems of a short lease, even though it's only 20% (20 years) less than a full lease.

Mrs I is only about 20% shorter than me, and she's definitely short ;0)

...if you press it, they will come.
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