Do I borrow and renew lease now?

by Readers Question

8:40 AM, 13th November 2020
About 3 weeks ago

Do I borrow and renew lease now?

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Do I borrow and renew lease now?

I own a flat in the South of England which produces about £400 monthly positive cashflow. It also has around £30,000 of equity currently.

However, the lease is down to 57 years and I have 7 years left on a very low mortgage rate. Quote to renew the lease is £23500 + legals.

The question is do I borrow and renew lease now, assuming a 5 year secured loan at 3%, costing around £500 a month or do I wait until nearer the end of the mortgage term and enjoy another 5 years of positive cashflow and renew or sell losing the equity then?

My properties are my only source of income and £500 a month negative cashflow may be affordable but will restrict lifestyle for a while. Any thoughts would be most welcome, particularly if you have any idea how much more the cost of renewing the lease 5 years later might be.

Many thanks

Richard


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Comments

Alan Bromley

9:46 AM, 13th November 2020
About 3 weeks ago

This surely depends on your personal circumstances: your age, whether you have dependants, whether you plan to sell the property in your lifetime, and so on. If it's more a source of income than an investment it may not be worth it at the current time. There is the added complication of the marriage value, which others on here know more about than me. It's worth considering various scenarios.

James Masters

10:00 AM, 13th November 2020
About 3 weeks ago

Have a word with a decent property accountant. I seem to remember some rules when you get to around 50 year lease - and how any lease extention premiums can be deducted for CGT. This might impact your options, depending on your strategy and if a future plan includes selling and your CGT position.

Personally I'd extend now (or better still enfranchise) as that marriage value is only going to increase.

Craig Shepheard

10:03 AM, 13th November 2020
About 3 weeks ago

The Longer you wait then the more the renewal cost will be.

Darren Peters

10:32 AM, 13th November 2020
About 3 weeks ago

You can use the Leasehold valuation calculator to get a very rough idea.
https://www.lease-advice.org/calculator/

Don't pay too much attention to the following figures but, using a fictional flat of value, £100,000 with ground rent of £10pa the calculator gives
£19-£20,000 plus costs to add 90 years to a Lease with 50 years remaining but
£15-£16,000 plus costs to add 90 years when there's 57 years remaining.

Ie a 25% increase in cost of renewing if you wait 7 years.

Again, your case might be very different. One thing to consider is that, depending on your circumstances, you might only want to add 35 years to your Lease for a lower price. You may be able to negotiate this direct with your Freeholder to get the minimum extension necessary to suit your requirements at a lower price.

As things stand your property will be near impossible to remortgage and be difficult to sell as only cash buyers would take it on. With the Lease over 90 years both options open up.

Corral

11:43 AM, 13th November 2020
About 3 weeks ago

We also have some leases that have been allowed shrink below the 80 year threshold. Factors to consider:-
CAPITAL LOSS which you have been exposed to is the amount you will have to spend to extend the lease.
LACK OF SELLING OPTIONS Because the lease is short –It will be mostly attract purchasers that specialise in “Bottom Fishing the Market” would show an interest, (while leaving the obligation on you to complete the lease purchase prior to exchange of contract).
YOU MAY HAVE TO RE-MORTGAGE – and probable be requested to extend the leases simultaneous with draw-down!
CURRENT LENDING RATES! Are favourable - In a few years the impact of Covid, Brexit, and the ensuing economic challenges may have an undesirable impact on borrowing!
Perhaps you could release equity on another property to complete this lease!
MATHEMATICAL COMFORT If you are thinking of disposing of the property your Capital Loss will be a deduction.
SPEAK TO YOUR ACCOUNTANT re “Future Proofing” your portfolio. There comes a time when strategic loss, and timing can be a tax-advantage.
GET A SURVEYOR to Provide “a lease extension valuation under the provisions of the Leasehold Reform Housing and Urban Development Act 1993” That will give you the lowest price - the possible negotiable price - and the upper end of the scale. The Surveyor will cost circa £1,500 and his telephone guidance may be worth a lot more!
THE REAL FIGURE is, and will be, the one you negotiate with the Leaseholder! Because we are in the same boat I can say it is rarely wise to allow leases to shrink! Our capital gain on a few properties (which we have with 10 years) has been virtually wiped out by not attending to this.
WE SPOKE WITH Mark Alexander of this site – and he gave us a multi-faceted approach that maximised on options.
Best of Luck.

Mike

13:24 PM, 13th November 2020
About 3 weeks ago

The main thing to consider is you have 57 years lease left on this property, you are getting your rental income from it regardless of how many years lease is left, add your current age to it, what is your total , so let us assume you are now 55 years old , so that adds up to 112 years, can you outlive this figure, most likely answer is no, not many people live past 90 or perhaps lucky ones 100 years.
So why do you want to take on a debt for your future dependents, if assuming you do have children, by the time your life ends, there most probably will still be some years left on that lease, so let your children who inherit your estate sort it out, let them take out a loan or a mortgage and extend its lease if they want, or sell it on at a silly price due to the fact there might only be a few years left on the lease, so live for now, do not take on any loans or mortgage as you depend on this income now.

I am in the same boat, I have 50 years lease left, and I am over the age of 65, I am not renewing it, I was given a bald park figure of 50K to renew it on a property that is worth around 240K, a two bedroom first floor flat with no garden in East London, so after I am gone, I couldn't care less how much it would cost my beneficiaries if they wanted to renew its lease, or accept a very low price if they must sell it without renewing the lease.

You worked hard in your life, for yourself, not for others to benefit from it, unless you have loving children and you do not want them to suffer in future, so as everyone has said it depends on your individual circumstances.

BernieW

13:40 PM, 13th November 2020
About 3 weeks ago

There's information about "short leases" and what to do about them here > https://berniewales.co.uk/short-leases/

My questions would be 1) How much is your mortgage? and 2) Would you be better off paying down your mortgage early/earlier, so you don't need a lease extension for a re-mortgage? If you can pay off the mortgage then you can carry on for the next 50+ years taking the increased profit rent ... and hand the flat back at the end of the term.
Don't extend unless you have to.
Don't remortgage unless you have to.

Darren Peters

13:45 PM, 13th November 2020
About 3 weeks ago

Reply to the comment left by Mike at 13/11/2020 - 13:24
I agree with Mike but the mortgage may be an issue for Richard.

It's not clear whether the mortgage ends in 7 years or just goes from a low rate to a higher rate. It's unusual to have a 7+ years special rate (though there are some 10 year fixes) so I suspect the mortgage will be ending.

If it ends, and a new mortgage is needed by Richard it may not be available.

silversurfer2017

19:59 PM, 13th November 2020
About 3 weeks ago

Get your ALEP solicitor to apply for a statutory lease extension of 90 years at peppercorn (zero) ground rent and then when you get the landlord's counter notice, apply immediately to the first tier property tribunal to agree a figure for the lease premium plus the landlord's costs being the cost of his solicitor and his valuer. Miraculously you will then start to get some good compromise offers from the landlord. Play hardball, do not accept his first offer, wait until at least his third offer as he drops his price. The last thing he will want to give you will be a 90 year extension at zero ground rent. His source of income from this lease will dry up. I speak from experience having recently done two lease extensions.

Mike

3:03 AM, 14th November 2020
About 2 weeks ago

Although I am not going to renew lease on my flat, as it gives me absolutely no advantage whatsoever, as I would not have given any part of this property to anyone other than perhaps charities, so if I die and there is still 30 years lease on it, and the property yields let us say 100K as opposed to its true value of say 400K in 20 years from its current value of 240K now. So whatever it yields to my beneficiaries, it is still some money they can happily do with it, if they inherit it from me and choose to sell it.

However,. I can if I want , offer silly money like 20K to the free holder to renew it to 99 years total, even though he indicated he is looking close to 50K, he will be a total loser if he don't accept my 20K now as by the time I have gone, he too would be close to going, what benefit would that give him at his old age? 20K can be a lot more beneficial to him now than 50K or even 100k when he himself may be close to going, unfortunately he is a trust, so I guess they may not accept a lower offer.

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