If you own property that has a short time left on the lease, a bridging loan can be used to finance the lease extension.
What is leasehold property?
Most flats and some houses are leasehold, which means that the property is owned, but the land on which it is built is the property of the leaseholder. The homeowner must pay a rent each year to the leaseholder.
In theory, if the lease runs out, you may have to move out of the home, but in practice you can pay to extend the lease.
If the lease has 80 years or less to go, the property will be worth less. If you are buying short lease property, you may find it difficult to get a mortgage for it. The answer is to pay to extend the lease. The cost to extend the lease depends on the length of time left on the lease. As a rough guide, to extend the lease on a £200,000 flat by 90 years when there are 79 years left on the lease, it will cost £10,500 including legal and professional fees. This could add £16,000 value to the property. If there are 60 years left on the lease, the cost to extend the lease could be £26,500, but this will increase the value of the property by £38,000. From these figures, it is obvious that it makes financial sense to extend the lease.
Using a bridging loan
If you want to purchase a lease extension but do not have the funds, a bridging loan is a way of quickly raising finance.
If you want to purchase a short-term lease property but cannot get a mortgage for it, a bridging loan can be used to purchase the property and buy the lease extension. The property will then possibly qualify for a standard mortgage.
Purchasing property with a short-term lease can be a sound investment strategy. The cost of the extension will usually be less than the added value of the property, so if the property is sold, a quick profit can be made. You will need to pay interest on the bridging loan, and an arrangement fee may be charged. These costs will need to be considered when calculating the expected profit on selling the property after the lease has been extended.
The loan period can be from one month to two years. If you pay back the loan early, there are usually no exit fees to pay. The property that has the lease is usually used as security for the loan, but other forms of security can be considered. If you do not have a good credit score, this will not necessarily prevent you from getting a loan.
Interest rates and fees vary between lenders. If you want a loan, talk to Ascot Mortgages, who, as a bridging finance broker, can find the best bridging deal. Not all lenders offer loans for short-lease property, but Ascot Mortgages knows the ones that do and will find you the best possible deal.