A lease extension bridging loan is a short-term facility used to extend the leasehold on a property before it’s sold or mortgaged.
If you purchase a property with a short amount of time left on the lease, you are likely to pay well below the market value. Properties with less than eighty years on the lease are usually sold at a significantly discounted price. If the lease is extended, the value of the property increases significantly.
A lease extension bridging loan lets you purchase the property and extend the lease after completion. Now having a long lease this should immediately increase the value of the property.
For Example: You wish to purchase a leasehold property at auction that has under 80 years left on its lease. Because of the short lease, it is being offered for a discounted price of £100,000. You need to pay £25,000 to the land owner to extend the lease by 90 years, so you take out a bridging loan to purchase the property and extending the lease. With the extended lease, the value of the property increases to £150,000 and you are able to secure a long-term mortgage against it, which you use to repay the bridging loan.
Here are the key differences between leasehold and freehold properties:
In a leasehold, if the lease term expires, the ownership of the property would revert to the owner of the freehold (even though you own it). This means that the value of a leasehold property can be greatly affected by the time left on the lease.
Recent Legal Updates: The Leasehold and Freehold Reform Act, which makes significant changes to existing leasehold legislation, became law in May 2024, although it is yet to fully come into effect. In addition, while the Labour government elected in July 2024 has dropped its promise to further reform the leasehold system within its first 100 days of government, the party says it still remains committed to doing so.
As the time left on a lease decreases, so does the value of the property. This makes it difficult for mortgage lenders to provide funding. If they did, the value of their security asset would depreciate quickly and they may even lose it to the freeholder.
Similarly, if the borrower defaults on the loan, the leasehold property will be difficult to sell, by virtue of the fact that it doesn’t qualify for a mortgage.
There’s also the extra issue of “marriage value,” which stipulates that if a lease has less than 80 years left, the leaseholder must pay the freeholder a portion of the increase in the property's value that results from the extension of the lease.
It’s important to note that this law has technically been changed, but it’s still in effect pending the introduction of new statutory instruments (the specific regulations required to implement a law) and it’s not yet clear if leaseholders will have to pay new fees.
A lease extension bridging loan lets you purchase a leasehold property and extend the lease. You repay the bridging loan by refinancing with a regular mortgage, for which the property qualifies given the fact it has an extended lease and higher, more stable value.
The loan will usually cover the cost of the property and the lease extension.
Bridging loans are ideal for extending leases because borrowers can use assets that don’t qualify for traditional mortgages as security. The speed of the application process also makes bridging loans suitable for properties that require quick payment, such as those purchased at auction.
In some cases, the lender will expect you to extend the lease before completion, but usually this can be done afterwards.
Related articlesLast updated: 23 August 2024 | © KIS Bridging Loans 2024