Leasehold property owners warned about negative equity

Calculator and pen

A leading chartered surveyor, e.surv, has warned that property owners with leasehold properties are in danger of falling into negative equity when the time remaining on their lease falls to 80 years or less. As many as 1.43 million properties in the UK could be in danger of losing thousands of pounds’ worth of value, according to recent research released by the firm.

Whilst 89.9% of property in England and Wales is freehold, meaning that the owner owns both the land and the property on it, the remaining tenth is leasehold – meaning that the use of the land is effectively rented from the freeholder. Due to intricacies of freehold law and shared ownership of land, most flats are leaseholds.

This means that a larger proportion of landlords than homeowners are likely to own leasehold properties, as flats are particularly popular among property investors. Additionally, landlords who use buy-to-let mortgages to purchase properties often do so on an interest-only basis, further increasing their risk of falling into negative equity.

The majority of new leasehold properties are effectively ‘permanent’, at least insofar as the lease is likely to outlive the property itself, with leases that can last for as long as 999 years. However, a number of older properties were built with much shorter leases – usually between 99 and 125 years – and it is the owners of such properties who are in danger.

When a lease has less than 80 years left to run, a lender is unlikely to grant a mortgage for it; and when a property cannot be mortgaged, its value decreases significantly. This can leave the owner able to sell only to cash buyers, and at a significant potential loss.

Lease extension and buying freehold

Though it can be costly, the price of extending a lease or acquiring the freehold of your property (known as ‘enfranchisement’) may be significantly less than the cost of having an unsellable property.

To find out how long you have left on your lease and how much extending it may cost, you can use the Leasehold Advisory Service’s lease extension calculator. If you wish to extend the lease or buy the freehold, you must ask your freeholder.

As it can be a very complicated legal procedure, we also recommend that you use an experienced conveyancing solicitor when selling or purchasing a leasehold house or flat.

This information should not be interpreted as financial advice. Mortgage and loan rates are subject to change.