Tens of thousands of the capital’s leaseholders are set to lose at least £244m of their collective property wealth this year because they are trapped with mid-term leases, according to new research.
Data from Lifetime Mortgage Gateway Logistics, highlights that over 98,000 London homeowners are on what are known as a “mid-term” lease – those with 80 years or less to run – and face a raft of problems unless they choose to extend their leases.
Not only do mid-term leaseholders find their property loses value each year, but they also find it impossible to release equity from their home or to sell it at a reasonable price.
The only way mid-term leaseholders can secure the value of their property is to extend their lease by 90 years – a process known as enfranchisement (which is a right to the compulsory purchase of a 90-year extension) – but this can cost tens of thousands of pounds, making it unaffordable for most people, especially those in retirement with a fixed income.
The trap is, if you have less than 75 years remaining of your lease you are unable to borrow money using your property as security, to pay the enfranchisement costs. Equity release is only available if you have more than 75 years remaining on your lease.
While the Government this month announced new legislation to help leaseholders, the new rules only apply to new leasehold contracts. Therefore, it does not help the estimated 480,000 existing leaseholders with mid-term leases in England and Wales, including the 98,000 in London.
Guy de Jersey, a director at LMGL, the provider of LMG, says: “We’re all told that property values go up and that’s that. But what tens of thousands of Londoners with mid-term leases don’t know is that their equity in their homes is depreciating in value a bit every year. It doesn’t matter whether you live in Mayfair or Mile End, if your lease has less than 80 years left to run and you don’t do anything about it, then the fact is your property may not drop in absolute value but it will lose relative value with each year that the lease shortens.
“The only way you can arrest the slide is to extend your lease by 90 years, but this can cost tens of thousands of pounds. While many Londoners may be living in properties worth £1m or more, very few people have that sort of money lying around.”
de Jersey continues: “The media has done a great job of shining a light on some unfair practices prevalent in the leasehold system in England and Wales, which has prompted the Government to take action. However, nobody is talking about the issue of how to help mid-term leaseholders who are unable to afford to enfranchise, such as those who are retired.
“The Government’s new rules do not help existing leaseholders and so they have been left to find a solution themselves. Unfortunately, unless you have thousands of pounds sitting around to pay for the enfranchisement process, the harsh reality is there will be tens of thousands of people stuck with a depreciating asset, possibly facing large bills such as service charges.
“This is the trap springing shut: there is no equity release available if you have a lease of less than 75-years, so you can’t borrow money to buy the 90-year extension to stop the depreciation, you can’t borrow money to pay a significant bill or help out a loved one, and ultimately you have to sell your home at a discounted price.
He concludes: “That is why we launched LMGL this year, to help homeowners of equity release age, living within a retirement fixed income and trapped with mid-term leases, to extend their leases. For many, this will be a welcome option to stop the depreciation and access finance to boost their retirement.”
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