Some lenders have found a way to mitigate risk where the leaseholder owns all, or a controlling share, of the freehold
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. However, there is nothing to stop someone from owning a freehold in, say, a limited company and then owning the leasehold personally.
Many lenders will not accept this scenario, which is a challenge for brokers as we have seen an increase in this type of case.
Anecdotally, the increase is happening because of a perception among many investors that creating leaseholds enhances the value and/or return on the property more than renting out the entire property on a multi-unit freehold basis. Whether this is 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 because they feel disgruntled.
You would think that, where the leaseholder has a non-controlling share of the freehold, the potential lender would not have a problem – and, for the most part, you would be right. However, there are some instances where this is not the case: for example, if 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 ‘help out’ the leaseholder should the leasehold property be repossessed.
Lenders would expect their solicitor 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, for example, has recently clarified its policy: it will lend as long as it can take a charge on the freehold as well as on the leasehold. 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 to both freehold and leasehold. Other lenders that do not accept these cases include The Mortgage Works and TSB.
Moving on – last week we published our latest Complex Buy to Let Index (Q3 2015). The results revealed several interesting facts.
For example, the number of available products jumped 35 per cent from last year to an average of 953, with September exceeding 1,000 several times. We continue to see an increase in enquiries (if not yet transactions) for limited company products.
However, after a very strong first half, the market has cooled and consolidation is the order of the day, with remortgages maintaining their dominance as investors take full advantage of continuing low borrowing rates.
David Whittaker is managing director at Mortgages for Business