The challenges surrounding short lease properties have long been a concern for real estate professionals, investors, landlords and homeowners.
With limited mortgage options, declining property values, and complex legal considerations, obtaining financing for leasehold properties with a diminishing term can be a daunting task.
However, specialist lenders and bridging finance can offer viable a pathway for both potential new buyers and existing leaseholders to secure funding, extend leases, and enhance property value.
As a lease approaches the 80-year mark, its value diminishes, making it increasingly difficult to secure traditional mortgage finance. This is largely due to depreciation of the lender’s security and challenges in resale.
RELUCTANCE TO LEND
Mortgage providers are reluctant to lend on short lease properties as their collateral value declines over time while if a borrower defaults, repossessing and selling a leasehold property with a short lease is far more complicated, as many buyers will struggle to secure a mortgage.
Then there’s marriage value costs. When a lease falls below 80 years, the leaseholder must compensate the freeholder for the increase in value resulting from an extension.
While the Leasehold and Freehold Reform Act 2024 has received royal assent and is set to bring changes, most of its provisions are not yet in force. Many require further consultation and secondary legislation, leaving continued uncertainty in the market.
These factors mean that landlords and homeowners often find themselves needing to extend a lease before securing long-term financing, a challenge that bridging finance can help solve.
Pre- and post-completion financing solutions
Whether purchasing a leasehold property with a short lease or looking to extend an existing one, securing appropriate funding is key. There are two main scenarios in which bridging loans provide an effective solution.
- Financing lease extensions pre-completion
For the aforementioned reasons, traditional mortgage lenders are often unwilling to approve financing for short lease properties. A lease extension bridging loan allows buyers to purchase the property and simultaneously extend the lease, increasing its value and mortgage eligibility. Once the purchase and subsequent extension is complete, the borrower can refinance onto a standard mortgage, repaying the bridging loan in full.
- Funding lease extensions for existing owners
For current leaseholders looking to extend their lease but lacking the upfront capital, bridging finance offers a flexible short-term funding option. This allows leaseholders to extend their lease, thereby increasing their property’s value and potentially its loan to value ratio, enabling them to secure long-term mortgage financing at more competitive rates.
Why bridging finance is a smart solution
Bridging loans are particularly well-suited for lease extensions because they offer:
- Access to funding where traditional lenders decline – Bridging lenders accept properties that do not yet meet standard mortgage criteria.
- Speed and flexibility – Bridging loans have a faster approval process, which is essential for time-sensitive transactions, such as auction purchases where investment opportunities often arise for properties with short leases.
- Customisable loan structures – Loans can be structured to cover both the property purchase and lease extension costs, reducing upfront financial strain.
The importance of working with specialists
With evolving leasehold reforms, complex legal frameworks, and lenders’ unique product criteria, policies, and case packaging requirements, seeking support from experts with a long history in short lease financing is crucial.
As specialists in this market, we have extensive experience handling intricate cases and strong connections with specialist lenders, ensuring clients secure the most favourable terms within the tightest possible timeframes while avoiding potential pitfalls.
This enables agents to focus on what they do best – securing listings and selling properties – while also positioning them to help their clients successfully navigate homebuying and investment strategies.
LOOKING AHEAD
Ongoing changes in the leasehold sector present both challenges and opportunities for existing and potential homebuyers, property investors, and estate agents. Having a trusted referral process with a specialist finance broker can make all the difference in ensuring a smooth transaction and long-term financial stability for clients navigating short lease properties.
Donna Francis is Managing Director at Envelop Finance
