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Buying a Long Lease

The process of buying a long lease is very similar to that of buying a property freehold. There are however a few important additional considerations relating to: the value of the lease, financing, running costs, shared property.


Value of Long leases

The main concern of the value of a long lease is the value when you come to sell it. If there is say several hundred years left, then clearly there is little to worry about and you may even sell the lease for more than you bought it for. Down to a certain point, the value of the long lease starts to diminish in value and becomes worthless when the lease expires.

If there is only a short time left on the lease, you will have to compare it with simply renting on a short lease. This is best illustrated with an example:

You have either i) the option of paying £60,000 for a 10 year lease with an annual ground rent of £50 per year or simply renting or ii) the option of renting another property on a short lease of 10 years for an annual rent of £5000 per year. Under the long lease option you will have to pay £60,000 + £50 x 10 = £60,500. With the short lease option you have to pay £5,000 x 10 = £50,000. Clearly for this example, it is better to take out a short lease.

In this example we have assumed the following: rent on the short lease stays constant and you are not borrowing to purchase the long lease. In reality rent from a short lease is subject to periodic increases and you may be borrowing to purchase the long lease making the consideration somewhat more complicated as fluctuating interest rates need to be taken into consideration.

If you intend to sell the property in your lifetime and the lease is within the diminishing value period by the time you sell, your buyer will have the same considerations as you when you bought the property, hence to avoid any worries about diminishing value it is better to buy a long lease with as long as time possible left to run.


Financing a Long Lease

Lenders will have little problem offering a loan for a long lease provided there is a reasonably amount of time left to expiry beyond the end of the mortgage itself. They need to be sure that the value of the lease does not diminish during the period of the mortgage it is providing security for. If lenders feel there is any risk of diminishing value of the lease, they may ask for a shorter term or only offer a mortgage with a higher rate of interest. Some lenders may refuse to offer a morgage altogether if there is to little time left on the lease.


Running Costs

If you are buying a long lease on a house, you are only likely to have to pay a small annual ground rent. If you are renting a flat, there may be other costs that need to be considered like maintenance charges on the building, and costs for things like lighting, heating and maintenance for shared areas.


Shared Property

When buying a long lease on a flat, you will have extra considerations that affect the value of your lease. The main concern is what neighbours you have. The way they treat common areas like stairways and their own accomodation will have a bearing on the value of your flat when you come to sell.

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