Renewing a lease

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What to think about when renewing your lease

Buying a property with the intention of letting it for short-term rental income, and longer-term growth can be a good way of investing your surplus funds. If you’re willing to put in the effort that being someone else’s landlord can involve – or able to instruct a lettings management company – then property can often bring higher financial rewards than alternatives such as bank accounts or stocks and shares.

The property you buy for rental, like owner-occupied properties, can be either freehold or leasehold. As buy-to-let properties tend to be cheaper, smaller properties such as apartments, it’s not unusual for a landlord to have to consider the implications of owning a property on a leasehold basis.

Owning a leasehold property isn’t as secure as owning a freehold property, but you do have certain rights. Most importantly, once you have owned (not necessarily lived in) the property for two years, you have the right to ask for an extension of the lease, or to ask for the option to purchase the freehold. As leasehold properties are virtually worthless without a current leasehold agreement, then it’s vital to keep a keen eye on the remaining length of time on your lease.

Purchasing the freehold

Purchasing the freehold is called enfranchisement. It can be a complicated process, and is usually the more expensive option. This process will mean you will own the whole property outright, and it will likely increase the property’s value. However it will not be possible in all cases, especially for those properties which are only a small part of a larger building, such as an apartment in a block.

Extending the lease

Extending the lease is usually an easier and cheaper process than enfranchisement and is important if you want to hold the long-term value of your property. Leasehold properties start to lose their value at less than 60 years remaining on the lease, so it’s wise to start the process before you get below this level. MoneySavingExpert say that this point is around 80 years left on the lease.

When extending the lease, you will have to take into account legal fees, valuation fees, and stamp duty (for extensions of £125k or over). While it’s wise to extend your lease before it gets too low, if you extend your lease too frequently, then you face paying out a large sum for the privilege. Knowing when to extend your lease is key, and it is prudent to take legal advice, as getting it right could save you thousands of pounds over the lifetime of your ownership.

Finance

Whether buying the freehold or extending the lease, the question of finance is a valid one. If you’re a cash investor, then you’ll need to investigate likely future costs at the outset so you can make sure you will have enough set aside for when the time comes for lease extension. If you have a mortgage on the property, then it may be possible to extend your mortgage – please speak to your lender for more advice. As your lease extension is likely to add value to your property, extending your mortgage should not be too troublesome, but you will probably be required to pay for a new valuation and/or survey to satisfy the bank.

Whatever route you think is best for you, it’s always best to get expert legal and financial advice in order to protect your investment for years to come.

Guest blog by Cheryl on 0800 334 5570

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