Column: Simon Gerrard on shared ownership and leasehold properties
PUBLISHED: 10:44 08 December 2014 | UPDATED: 10:44 08 December 2014
Simon Gerrard, the president of the National Association of Estate Agents explains what to look out for when considering leasehold property and talks through the pros and cons of shared ownership.
I’ve seen a leasehold property, what should I consider before buying?
Owning a leasehold property is a good way to get onto the housing ladder in north and north west London. But when buying there are a number of factors you should take into consideration.
The length of the lease: The lease on a flat would have been granted most commonly for a 99 or 125-year period from a start date. The remaining term left on the lease is therefore what you should concentrate on. Previously a short lease was considered to be one with less than 60 years remaining but today this would be almost impossible to obtain a mortgage on.
Now any lease with less than 80 years is going to impact on the valuation for mortgage purposes. This is primarily because once a lease drops below 80 years, the cost of the lease extension will include the “marriage value” which is basically the difference between the value of the flat with a short lease as opposed to it with an extended lease. This is a complicated calculation that takes into account many factors and should be carried out by an experienced chartered surveyor.
The good news is that since the Leasehold Reform Housing and Urban Development Act came into effect, anyone who has owned a leasehold flat for more than two years has a legal right to a 90-year extension to their lease and a peppercorn ground rent (effectively £0). But this is subject to having a valuation survey, serving the correct notice on the freeholder via a solicitor, paying for the freeholders valuation and the premium – the sum of money paid to the freeholder for the extended lease. It may however be possible to negotiate with the freeholder outside of the act as this can prove more cost effective in the long run.
Bearing in mind that you have to be the registered owner for two years before you have the right to a lease extension, the NAEA would consider flats with less than 82 years as having a short lease.
The maintenance and service charge: Most leasehold flats will have a service charge or a provision to share the maintenance costs and in many cases the buildings insurance is taken out on the whole property rather than individual flats being responsible for their own cover. Since this is going to be an ongoing commitment for as long as you own the flat, it is important that you understand what you are likely to have to pay annually and of any future major works or any payments to a sinking/reserve fund. It may be possible that the maintenance of the building is not dealt with formally but between the lessees jointly. This can be cheaper but presents its own problems as other lessees may be reluctant to carry out maintenance or contribute to the costs. Discuss these details with your solicitor who will explain your obligations before committing to the purchase.
What are the pros and cons of shared ownership?
Shared ownership schemes are provided through housing associations or local authorities and are available for specific properties. You buy a share of your home, typically between 25 per cent and 75pc of the property’s value and pay rent to the housing association on the remaining share.
You will need to obtain a mortgage for the share you are buying, put down a deposit and pass the lenders borrowing criteria. But the amount you need to borrow – and the repayments – will be much less than if you were buying the property outright.
Once you have bought the property you can increase your stake by buying more shares from the housing association. This is known as “staircasing”. However each time you buy more shares the cost will be based on the property’s current value and you will have to pay the association’s valuation costs each time.
While you own the property you will be responsible for 100pc of the up-keep and maintenance costs.
When you come to sell, the process will depend on how much of the property you own. If you own 100pc then you can sell the property yourself but you will have to give the housing association first refusal. The association will have this right for 21 years after you fully own the home. If you don’t own 100pc, the housing association has the right to find a buyer. Some schemes have restrictions on who can apply, for example they may require people to live or work locally, and this may limit the number of potential buyers and make the property more difficult to sell.
The availability of shared ownership schemes has grown and has become an option for many more people as a first step onto the housing ladder. However this option is not suitable for everyone.
If you have a question for Simon Gerrard, email email@example.com. Mr Gerrard is managing director of north London estate agents, Martyn Gerrard.