Leaseholder and freeholder – what’s the problem?

If you were a buy to let lender, would you lend on a property where the mortgage applicant owned the leasehold and all (or a controlling share of) the freehold?

Technically, the law prevents this from happening – freeholds and their leaseholds must be owned by separate legal entities but there is nothing to stop someone from owning a freehold in say, a limited company and then owning the leasehold personally.

There are many lenders that won’t accept this scenario and from a broker perspective, this is a challenge because we have seen an increase in this type of case of late.

Anecdotally, the increase is happening because there is the perception among many investors that creating leaseholds enhances the value and/or return on the property more than renting the entire property out on a multi-unit freehold basis. Whether or not this is actually true probably depends on individual circumstances.

The sticking point for lenders is that should they need to repossess the leasehold property, the freeholder could make it very difficult to achieve an onward sale.

For example, they could raise ground rents or service charges to an unacceptable level just because they feel disgruntled.

You would think that where the leaseholder has a non-controlling share of the freehold the potential lender wouldn’t have a problem and for the most part you are right.

However, there are some instances where this is not the case. For example, if say, the freehold is owned by someone who is married to the leaseholder.

This is likely to be a no-no for lenders because the freeholder may well “help out” the leaseholder should the leasehold property be repossessed.

Lenders would expect their solicitors to pick up this type of relationship in a Land Registry search during the application process.

Fortunately some lenders have found a way to mitigate their exposure to risk where the leaseholder owns all (or has a controlling share of) the freehold and so are willing to lend.

BM Solutions has recently clarified its policy on this. It will lend as long as it can take a charge on the freehold as well as the leasehold. In this regard, brokers have been asked to add notes to the application advising if this is the case.

Aldermore has never had a problem with these cases and like BM Solutions applies a similar charge over both freehold and leasehold policy.

When our lending brand Keystone Buy to Let Mortgages had a funding line from Aldermore, it too accepted these cases. We are working on including these in the New Classic Range very soon. Other lenders which don’t accept these cases include The Mortgage Works and TSB.

If you need to place a case of this type but are struggling to get your head around this issue do get in touch for help.

Moving on. Last week we published our latest Complex Buy to Let Index (Q3 2015). In brief, the results revealed several interesting facts.

The number of available buy to let mortgage products jumped 35% compared to the same time last year. In Q3 2015 there were an average of 953 products available with September witnessing many occasions when numbers exceed the 1,000 mark. We continue to witness an increase in enquiries (if not yet transactions) for limited company products.

However, after an exceptionally strong first half of 2015, the market has cooled somewhat and consolidation is now the order of the day with remortgages maintaining their dominance as investors take full advantage of low borrowing rates whilst they last.

Rents failed to keep pace with racing property prices and so yields continue to plateau. Returns on vanilla buy to let have now fallen to the psychologically crucial 5% mark.

Landlords with reasonable borrowing costs and a strong portfolio of these sorts of properties will still be making a solid income from such investments – but this changes the case for those considering new purchases.

With average yields on HMOs still nearer 10%, more complex property types are likely to attract a growing portion of new investment.