Types of mortgage FAQ

Buy-to-let

What is a buy-to-let mortgage?


A buy-to-let (BTL) mortgage is used by landlords who intend to rent their home. Most of the larger lenders offer BTL mortgages, as do some specialist lenders. The amount of money that you can borrow depends on how much you can expect to receive through rental income, with most lenders requiring this to be 125% of you monthly mortgage repayments (some might require as much as 145%). The type of property you choose will also affect the lender’s decision.

There are a few differences compared to a residential mortgage:

  • The product fee and interest rates are normally higher.
  • The minimum deposit is generally higher, at around 25% of the property's value (there are a handful of lenders who will consider a lower deposit).
  • Most borrowers opt for an interest-only BTL mortgage deal, which allows them to keep the mortgage payment low and earn more from the monthly rental income.
  • A significant percentage of the mortgage lending isn't regulated by the Financial Conduct Authority (FCA).

To secure a BTL mortgage, you’ll need to satisfy the following criteria:

  • You must be over 18.
  • You must be earning more than £25,000 per annum. A few lenders will ask for less than this and some don’t have a minimum requirement at all.
  • You’ll need to pass a credit check.
  • You’ll need to pass a stress test to prove you can afford the monthly repayments (as well as the interest) and to assess the risk involved. The test applies to the total amount you’re borrowing against the purchase price of the property - known as the loan-to-value (LTV) ratio. Lenders tend to offer a maximum LTV ratio of up to 85%, meaning a deposit of 15% would be required.

What interest rates are available on buy-to-let mortgages?


A wide range of lenders offer buy-to-let mortgage products, so it can pay to shop around. A mortgage adviser will have access to a range of lenders and can help find the most suitable deal for you.

It's common for the interest rates on buy-to-let mortgages to be higher than residential mortgage rates. They can be influenced by a range of criteria, including:

  • the size of the deposit that’s put down
  • how healthy your credit score is at the time
  • the product - how many years fixed rate or variable rate etc

In most cases, the interest rate will vary between two and three percent (as of October 2018). The banks set the standard rates, which may be influenced by the Bank of England’s bank rate.

A variable rate mortgage, such as a tracker mortgage, mirrors the Bank of England’s bank rate, plus a set margin above or below it. This means that your monthly payments can go up or down if the Bank of England’s rate rises or falls. Landlords considering this type of buy-to-let mortgage deal should therefore be prepared for a rise in mortgage payments.

If the Bank of England keeps their rate low during the term of your deal, you may benefit from lower payments than with a fixed rate mortgage (where your monthly payments will remain the same for the term of the deal). But, if the Bank of England’s bank rate rises during the term of your tracker mortgage, your payments may be higher than they would have been with a fixed deal.

What tax relief or allowable expenses are available on a buy-to-let mortgage?


The new buy-to-let tax system introduced in April 2017 means that landlords of residential properties will be restricted to the basic rate of Income Tax. The changes will be fully in place from 6th April 2020. At this point, you won’t be able to deduct any of your mortgage interest payment from your rental income before paying tax – instead, the entire sum of your interest payment will qualify for a 20% tax relief.

Based on the Income Basic Tax rate of £11,001 to £43,000, the higher rate of £43,001 to £150,000, and a personal allowance up to £11,000, it’s estimated that after the restriction, 82% of landlords won’t have any additional tax to pay because their total income, without a deduction for finance costs, doesn’t exceed the higher rate threshold. However, if you’re a landlord with a higher total income than the higher rate threshold, you’ll pay more tax.

Allowable expenses to secure tax relief:

  • must have been incurred by you wholly and exclusively for the purpose of the letting business, such as paying a plumber to repair a faulty boiler.
  • must not be capital expenditure (where spending creates an asset of enduring benefit or when you add something to the property that wasn’t there before). This includes improving or upgrading something that was existing and that increases the property’s value. Instead, these costs should be deducted from capital gains when the property is sold. However, if the kitchen being fitted is like-for-like, of the same standard, size and layout, the cost can be set against your rental income.

Even when an expense is not capital expenditure, to qualify as an allowable expense, it will need to fit into one of two categories:

  • Repairs and maintenance - applied either to items within the property or to the property itself, on a like-for-like basis. You can’t claim for repairs that have been covered by insurance, but you can claim for excess amounts or the parts of the repair work that you’ve had to pay for yourself.
  • Replacement of domestic items - the initial purchases of furnishings and equipment for the property are not allowed, but their replacement (of a similar standard or value) is. This includes movable furniture, furnishings, household appliances, and kitchenware.

Mortgage advisers aren’t qualified to offer tax advice, so it’s recommended that you seek independent tax and legal advice.

How much can I borrow with a buy-to-let mortgage?


Subject to passing the stress test to prove that you can afford the monthly repayments (as well as the interest) and to assess the risk involved, you can borrow up to 85% of the purchase amount.

The test applies to the total amount you’re borrowing against the purchase price of the property - known as the loan-to-value (LTV) ratio. Like any other mortgage, the borrower must put up a deposit for the property. Lenders tend to offer a maximum LTV ratio of up to 85%, meaning a deposit of 15% would be required.

Some lenders are more generous than others and the amount you can borrow on a buy-to-let mortgage is mainly based on the monthly rental you’re getting or are likely to get. However, there are a number of banks and specialist buy-to-let lenders who offer an approach known as ‘top-slicing’, where they’ll allow landlords applying for a buy-to-let mortgage to use both the property’s rental income and their own earned income from employment or self-employment, to enable them to borrow more.

Can I change a residential mortgage to a buy-to-let?


Switching from a residential mortgage to a buy-to-let mortgage is very common - you might be moving home or already have an empty house under a residential mortgage. If you have a residential mortgage but want to switch to a buy-to-let, you’ll need to take the following actions:

  1. Inform your lender. You could be in breach of your loan agreement if you don’t inform your lender, so get in touch and ask them for a ‘consent to let’ form. They may increase your interest rate (typically by around 1%) and will expect you to remortgage to a buy-to-let mortgage at the end of your current deal.
  2. Inform your insurer. You'll need to secure landlord's insurance because standard domestic contents insurance won't cover your property if you're renting it out.
  3. Speak to a letting agent. They’ll be able to help you with the tasks involved in renting out your property and will deal with all the legal and administrative aspects, as well as managing any maintenance that might need to be carried out.
  4. Talk to a tax adviser or accountant. You'll need to be aware of the tax implications that affect buy-to-let homes, such as stamp duty which, in 2016 was increased on buy-to-let properties and is around 3% higher than on residential mortgages.

How many buy-to-let mortgages can I have?


This varies from lender to lender and largely depends on their appetite for risk. For example, some lenders won’t lend to you if you’re a portfolio landlord. Some may also view landlords with multiple properties in the same location as risky, because a downturn in that specific area would affect the rental attractiveness of the properties and ultimately increase the likelihood of their loan not being repaid.

Many of the mainstream buy-to-let lenders will stipulate a maximum number of buy-to-lets and set a limit of around three to five mortgaged properties (or maximum borrowing amount with them). Some lenders may even set limits on the number of buy-to-let mortgages you can have with other lenders.

Any lender will be looking to ensure you can afford the new mortgage on top of your existing mortgage/s. They’ll calculate if any buy-to-let properties in the background are self-sufficient or not (this usually means rental covering the mortgage by anywhere from 100% to 150%, depending on the lender), and whether any second residential mortgages and their running costs are adequately covered by employment income.

Talk to an experienced buy-to-let broker such as Trussle, who can advise you on how best to proceed and whether your existing lender may or may not be the most suitable option for you.

Repayment and interest-Only

What is a repayment or interest-only mortgage?


There are two separate elements to a mortgage - the capital sum you borrow and the interest that the lender charges on the loan.

With a repayment mortgage, you repay some of the capital you've borrowed every month, in addition to paying the interest charge.

Advantages of a repayment mortgage:

  • Your mortgage balance is cleared at the end of the term.
  • You don't have to repay a huge amount of money at the end of the mortgage.
  • Some lenders will allow you to borrow a higher percentage of the purchase price.
  • There’s less chance of going into negative equity if house prices go down, as you’ll be paying off the mortgage balance each month.
  • At the end of the mortgage term, you'll have paid everything you owe and will own the property outright.

Disadvantages of a repayment mortgage:

  • Your monthly payment will be higher than that of an interest-only mortgage each month.
  • You can offset the interest of your repayments against your income tax bill but not the capital payments.

With an interest-only mortgage, you only pay the interest each month and none of the borrowed capital which keeps your monthly payments down, meaning that you earn more profit from the rental income.

Advantages of an interest-only mortgage:

  • Lower monthly repayments.
  • When you come to sell the property, its value might have increased, leaving you in profit after you’ve repaid the mortgage.
  • It could free up money to spend on buying or improving other buy-to-let properties.
  • You can offset the interest payments against the rent you receive to reduce your income tax bill.

Disadvantages of an interest-only mortgage:

  • When the mortgage ends, you’ll still owe 100% of the money you borrowed.
  • There’s always a risk that the value of the property will drop.
  • You may end up having to sell the home for less than you paid.
  • You pay more in interest over the mortgage term because you haven't been paying off the borrowed capital.

How much can I borrow with either a repayment or an interest-only mortgage?


There are two different ways of repaying a mortgage loan - paying the interest-only on a monthly basis or a monthly payment of some of the capital owed, plus the interest charge. However, the size of your mortgage isn’t determined by its repayment terms.

The first and most important consideration before applying for a mortgage is how much you can actually afford to borrow. As with all types of mortgages, this depends on your income or rental income, the size of your deposit, and what the lender will determine that you can afford to repay each month.

Banks and building societies take into account a number of different factors when calculating how much they’ll be prepared to lend to you (including monthly outgoings, your credit rating, and any debts) so the actual amount you can borrow may vary considerably. If you have history of receiving bonus income, commission, or overtime this may increase the amount you can borrow.

To find out how much you could borrow based on your circumstances, you can use Trussle’s online affordability calculator.

What happens when a repayment or interest-only mortgage ends?


Your mortgage will usually end when the term you agreed at the start is up.

With a repayment mortgage, you’re not going to be left with a huge amount of money to pay at the end of it because you’ll have been paying back some of the capital you've borrowed every month, on top of the interest charge. If you made additional over-payments, you’ll reduce the overall term and be mortgage-free sooner. Plus you’ll may have been able to save money on interest. Once your mortgage ends, you’ll be the owner of all the equity in your home and your lender will remove its charge against the property.

With an interest-only mortgage, you'll have paid the interest you owe, but when it ends, you’ll have to repay the capital as well, which means finding a large amount of money. There’s a rare exception - if you’re on a lifetime mortgage which will stay in place, meaning you can remain in your home until the last of the mortgage policyholders dies.

If you have a standard interest-only mortgage, your lender will have asked how you intend to pay back the loan. This is known as a 'repayment vehicle' and is something the lender will look into meticulously to ensure you are in a position to pay the balance at the end of the term. Lenders will only offer interest-only borrowing where it’s responsible to do so and right for the customer. Common ways of doing this include:

  • cashing in on stocks, shares, ISAs, or savings
  • selling other properties you may own
  • through pensions, endowment policies, and investment bonds

If you don't have sufficient funds available to pay back the loan at the end of the mortgage term, you may be able to remortgage but this can be difficult. Another option is to switch to a repayment mortgage or partial repayment mortgage before the term is up. You may otherwise need to sell your home and use the proceeds to repay the outstanding mortgage balance. If you’ve owned the property for 25 years or more, there’s every chance that its value will have gone up substantially and you could have more than enough leftover to put towards a new home.

Fixed, tracker, and variable rate

What are fixed, tracker, and variable rate mortgages?


A fixed rate mortgage is when the interest you’re charged stays the same, so you'll pay the same amount every month over a fixed period of time, which can be anything from two to 10 years. Your mortgage broker will discuss your plans at the property and circumstances before recommending the most suitable duration for the fixed rate deal. These types of mortgages often allow you to overpay up to 10% of the mortgage balance a year without being charged. If you repay the full amount however, you will incur an early repayment charge. The interest rates of fixed deals are typically higher than those of variable rate deals.

A tracker mortgage is a form of a variable rate mortgage (other types include Standard Variable Rate (SVR) mortgages and discounted variable rate mortgages). With a variable rate mortgage, the interest rate can change at any time.

Tracker mortgages move directly in line with the Bank of England’s (BofE’s) bank rate, plus a few percent - if the BofE rate goes up, your mortgage deal’s rate will go up by the same amount – if it falls, so will your monthly mortgage payments. Tracker rates are typically lower than fixed rates, with a shorter life of two to five years, though some lenders offer trackers that last for your full mortgage term (known as lifetime trackers), or until you switch to another deal. Some tracker mortgages have no early repayment charges, affording you the flexibility to make larger overpayments or even repay in full, without being penalised.

Is a fixed, tracker, or variable rate mortgage right for me?


The key difference between a fixed rate mortgage and a tracker rate mortgage (which is a type of variable rate mortgage) is that with a fixed deal, your monthly payments won’t change, but with a tracker deal they could go up or down because the rate follows the Bank of England’s bank rate, plus a few percent.

Deciding which one is right for you depends on your financial situation and how much risk you can afford to take.

A fixed rate is short-term special rate - whatever happens to interest rates, your repayments are fixed for the length of the deal - the ‘introductory period’ – whether it's for two, three, five, seven, or 10 years. After this time, you’ll go onto the lender’s Standard Variable Rate (SVR). With a fixed rate, you’ll know exactly what your mortgage will cost, your payments won't go up and you’ll be able to budget around it.

If you opt for a variable rate mortgage, the rate can move up and down depending on growth and inflation. Variable rate deals fall into three categories: trackers, Standard Variable Rates (SVRs) and discounted variable rates.

Tracker mortgages are popular, but come with uncertainty - if rates rise, so will yours. The rate can be set in different ways - some are guaranteed to stay the same for a number of years, some can change at any time, and others move up and down if either the Bank of England’s bank rate or the lender’s SVR changes (which it can at any time). Over the long term, a tracker mortgage can be the cheapest option, depending on whether the base rate goes up or down.

If you need greater budgeting certainty, you may prefer a fixed rate mortgage. But, if interest rates go down, variable, tracker, or discount rates are usually best because their rates will fall and you would pay less. They also often start with lower interest rates and less fees than fixed mortgages. Of course, it’s impossible to predict whether future interest rates will go up or down.

If you’re able to afford the interest rates and therefore your mortgage repayments potentially going up, then a variable, discount, or tracker deal could work out cheaper than a fixed rate deal. If you don’t think you could afford higher repayments if rates go up, or if you want the peace of mind of stable payments for budgeting purposes, a fixed rate mortgage might the best option for you. But it’s worth noting that if you want to leave the deal before the initial period ends, you'll usually incur an early repayment charge.

What happens when a fixed, tracker, or variable rate mortgage ends?


When the initial period of a fixed rate deal comes to an end, your lender will automatically transfer you to their higher-interest Standard Variable Rate (SVR) deal. It’s normally best to start looking to switch to a new mortgage deal three months before this happens, so you’ve plenty of time to avoid the SVR.

Tracker mortgage deals typically run for two to five years or the entire term of the mortgage if it’s a lifetime tracker. Although you may be borrowing money over a 25 year period, your special interest rate deal will eventually run out. When it does - in two to five years, depending on your deal - you’ll automatically be switched over to your lender’s SVR. Usually this rate will be significantly higher than the rate you were on. To avoid unnecessary interest payments, you could switch to a new deal with another lender or stay with the same lender and complete a product transfer - you don’t always have to change lender to get a better deal.

See whether it’s time to switch by using Trussle’s remortgage calculator.

Capped rate

What is a capped rate mortgage?


Capped rate mortgages are a type of variable rate mortgage. But there’s an important difference - they have an interest rate ceiling or cap, beyond which your payments can’t exceed, no matter what the tracked rate rises to. If the interest rate falls, you’ll benefit financially, paying less in interest. And you’ll get a certain degree of protection if rates rise.

A capped rate is normally only for an introductory period, which can typically be anything from two to five years.

This type of mortgage is pretty rare and tends to appeal to people who are worried about interest rates soaring. Although the interest rates can go up or down with the base rate or your lender's SVR, a capped rate mortgage comes with a guarantee that it won’t rise above a certain amount. The cap tends to be set quite high and the starting rate is generally higher than normal variable and fixed rates.

Flexible mortgage

What is a flexible mortgage?


Some mortgage deals allow you to make overpayments, underpayments, and perhaps take payment holidays to suit your financial situation.

If you want a mortgage that works for you and fits around your unique situation, a mortgage deal that has these features may be a suitable option.

Many people take a flexible mortgage deal because they allow you to make additional payments to your mortgage and pay less in interest overall.

Common features of a flexible mortgage include:

  • overpayments - without any limits or caps and, without a charge
  • underpayments
  • payment holidays
  • a reserve account from which you can access overpayments you have made
  • ability to offset savings

First-time buyer mortgages

How to get a mortgage as a first-time buyer?


Once you’ve got a deposit together, which is the amount you can put towards the purchase price of your home, you’ll need to think about your overall budget and what type of mortgage deal is suitable for your financial circumstances. This is where mortgage advice can help, such as a traditional mortgage broker, an online mortgage broker, or a lender (bank or building society). With access to over 90 lenders and thousands of products, Trussle can search the market and find the right mortgage for you. And, because its services are online, the process will be quick and hassle-free.

By looking at your wages and expenses (plus any dependents), your broker will work out how much you can borrow so you have a better idea of the type of property you can afford to buy. This might be a good time to start looking at properties.

Your adviser will recommend a suitable mortgage deal that matches the amount of deposit you can afford to pay upfront and inform you of deals, should you be able to contribute a slightly larger deposit.

Once you’ve decided on the mortgage deal you want, you’ll have to go through a series of checks to make sure you can afford to take it on. You’ll need to prove your income, your outgoings, and undergo a ‘stress test’ to satisfy your lender that you’ll be able to afford your repayments.

The information you’ll need to provide includes:

  • proof of ID
  • proof of address
  • proof of income
  • bank statements
  • proof of deposit

Your deposit could represent anything from 5% of the value of the property – though the more you have, the cheaper your mortgage is likely to be. There are additional charges you’ll need to allow for, such as solicitor’s fees, valuation costs, and insurance (home and building) payments. However, as a first-time buyer, you won’t need to pay any stamp duty - a tax which goes towards the verification of legal contracts - on the first £300,000 of any property worth up to £500,000.

Do first-time buyers receive better mortgage rates?


The more you can save up for a deposit, the more options will open up for you. However, the very best deals are reserved for borrowers with the largest deposits - if you can put down 40% of the property's value, you're likely to get a more competitive deal in return. If you need help saving up a deposit, there are schemes giving you the option to pay a lower deposit, such as the Help to Buy scheme which can be used on the purchase of properties up to the value of £250,000 or £450,000 in London.

Other benefits of being a first-time buyer include:

  • no ties, no chain
  • quicker process
  • more flexibility

Many lenders do offer deals that only first-time buyers are eligible for, and many of these include cashback to help towards costs associated with purchasing your first home.

The right mortgage for a first-time buyer will depend on your individual circumstances. A fixed rate mortgage can offer stability because the interest rate remains static for a certain period of time. Variable mortgages typically have lower interest rates available, but the rates can fluctuate and increase, impacting your monthly payments, which may not be the right option for you if you’re working to a set budget each month.

But don’t focus solely on the interest rate. Instead focus on the ‘true cost’ over the duration of the deal, which includes repayments, interest, fees, and any incentives such as cashback. ‘Best buy’ mortgages usually aren't offered for long.

As a first-time buyer you won’t need to pay any stamp duty – a tax which goes towards the verification of legal contracts – on the first £300,000 of any property worth up to £500,000. To qualify, you must have never owned a property anywhere in the world, shared ownership properties with housing associations, or jointly owned a property.

What mortgage options are available for first-time buyers?


Generally, the same mortgage options exist for first-time buyers as they do for second-time buyers. However, many lenders offer exclusive deals with incentives designed specifically for first-time buyers, such as cashback and fee-free mortgage products.

Mortgage types to consider include:

  • fixed rate
  • tracker
  • discounted variable rate

There are also a range of financing options available to help first-time buyers to get onto the housing ladder, such as:

  • help-to-buy equity loan
  • help-to-buy ISA
  • shared ownership - where you buy a proportion of your new home and rent the rest, increasing your ownership over time as you wish

Other options

Are mortgages available without early repayment charges?


Early repayment charges may apply to all kinds of mortgages, be they fixed rate mortgages or variable rate mortgages such as tracker and discount deals.

Many but not all lenders will allow you to clear an extra 10% off the balance each year without extra charges. Some with allow you to pay more of this without charges, but if you settle your entire mortgage before the deal ends you’ll then have to pay a certain percent of the total loan.

For example, some lenders don’t impose early repayment charges on some of their deals, meaning that should you want to make overpayments on your mortgage, you won’t be restricted by the usual limit of 10 percent of your outstanding balance. Also, if you sell up and want to clear the mortgage before the five years is up, you won't be hit with expensive fees when you redeem early.

What is a secured loan and is getting one a good idea?


A mortgage is a form of secured loan. It’s secured against an asset, which in this case is your home. As the bank has a lower risk because it can collect the collateral if you default on payments, this type of loan generally has a lower interest rate.

Other types of secured loans include:

  • car loans - similar to a mortgage, the car itself as collateral for the loan. If you default on payments, the car can then be repossessed.
  • secured credit cards.
  • title loans - when you use a paid-off vehicle as a collateral for another loan.

A secured loan can be a good way to build credit if you go through a reputable lender, like a bank or credit union. However, it’s important to make sure you make your repayments on time - the danger of a secured loan is that you may lose whatever you set up as collateral if you fail to make your payments on time.

How do mortgage offset accounts work?


Having a mortgage offset account where your savings are linked to your mortgage, is a flexible way of using savings to offset the interest. Instead of earning interest on your savings, the money is set against your mortgage and as a result, you pay less interest on that debt.

For example, if you had a £150,000 mortgage and £30,000 in savings, you’d only be charged interest on £120,000. Your monthly repayments will probably be based on the full £150,000, meaning you overpay each month and your mortgage is paid off more quickly.

Benefits:

  • You’ll be mortgage-free sooner.
  • You can access your savings at any time.
  • You’ll save tax - because you don’t earn any interest if the money is offset against your mortgage, there’s no tax to pay, making this an attractive option for higher taxpayers.

What is a bridging loan and how does it work?


A bridging loan is can be useful if you need to borrow money for a short-period. The most common use of this type of loan is to help find a new house purchase while you’re waiting for your existing property to sell. Bridging loans can also be used as a short term loan to help you buy a property at auction, where you’ll need the money immediately but may not have sold your current property yet.

Generally, they’re valid for a six month period but can be extended for up to 12 months. Some high street lenders offer bridging finance and there are several specialist bridging loan companies.

There are two types of bridging loan: 1. A ‘closed’ bridge - where there’s a guaranteed exit in place. 2. An ‘open’ bridge - where long term finance isn’t in place.

You can normally borrow up to 70 to 75% of the property value you’re putting up as security if it’s a ‘first charge’ (there’s no other mortgage secured on it) and you’re able to make the interest payments.

Advantages of bridging loans:

  • Can be arranged quickly - often within a few hours
  • If you opt to have the interest retained you don’t have to pay interest until the whole loan is repaid
  • Flexibility - the loan can be paid off as soon as you’re able to

Disadvantages of bridging loans:

  • High interest rates
  • Fees can be expensive
  • Can be a risky option if you have no timescale of when the sale will happen

What is an unencumbered property?


An unencumbered property is one that you own outright with no mortgage or loans secured against it. If you’re mortgage free, there are a number of reasons why you may look to remortgage on an unencumbered property:

  • To raise finance for home improvements.
  • To move home, but keeping your existing property to rent out.
  • To purchase an investment property.

While taking on a mortgage may be financially beneficial, you should consider the following:

  • Will you be comfortable with a new financial commitment and making these new payments?
  • All mortgages carry risk - failing to keep up with repayments could result in repossession.
  • Remortgaging an unencumbered property to consolidate debt may not always be the best idea because you may be stretching your debts over a longer term on the mortgage, which in turn means that you could end up paying more interest overall. Your mortgage broker will be able to advise if this is a favourable move for you.

Lenders treat mortgages on unencumbered properties the same as any other mortgage - they’ll still carry out standard assessments such as income, affordability, LTV (Loan-to-Value), outstanding debts, and employment status.

What mortgage options are available when buying a second home?


A mortgage can be used to finance a second home – not to be confused with a remortgage or second charge mortgage.

If you wish to live in the second home, your application will be treated as a second home mortgage because you already have a residential mortgage that you’re currently paying.

Normally, in order to get a second home mortgage, you’ll need a larger deposit than you required for your first mortgage. Second home mortgage deals also tend to carry higher interest rates than standard mortgage deals.

The financial assessments should be the same as they were with your first mortgage application, but your lender will be extra cautious because you’ll be taking on two mortgage repayments and associated running costs of the properties each month.

Not all mortgage providers offer second home mortgages so it’s worth seeking the advice of a mortgage broker who can take you through your options.

Leaseholding

How much does it cost to renew or extend a lease?


A leasehold renewal and a leasehold extension are broadly the same thing - the only difference being that, under a lease renewal, there is a legal instant in time between the expiry of the original term and the commencement of the renewal term. A lease extension is a continuation of the original lease, without interruption.

Most flats are leasehold which means that you have the right to occupy for a fixed period of time but don't own the property outright. Most people renew their lease long before it expires.

Under the 1993 Leasehold Reform Act, you’re legally entitled to get 90 years added to their lease, if you’ve owned the flat for at least two years. Should you let your lease drop to 80 years or less, your freeholder stands to profit a lot. This is because after that you’ll pay 50% of the flat's 'marriage value' (the amount of extra value a lease extension would add to your property) on top of the the usual lease extension price. If your lease has 83 years left, it's time to look seriously into this.

Extending short leases is pricey. If your lease is shorter than 60 years, seek advice from a solicitor about how much it will cost (the leasehold calculators won't work below 60 years).

Costs of extending or renewing a lease include:

  • Legal costs - the less the freeholder tries to drag it out, the cheaper your legal costs
  • Lease extension valuation - typically cost about £400 to £900 depending on your flat’s value
  • Stamp duty - applicable above £125,000
  • The premium price of the new lease*
  • Deposit - either 10% of the lease cost stated in the notice or £250, whichever is greater

* Under the 1993 Act, the premium is the total of:

  • the reduction in the value of the landlord’s interest in the flat (the difference between the value of his interest now with the present lease and the value of his interest after the grant of the new lease with the extra 90 years.)
  • the landlord’s share of the marriage value (the potential for increase in the value of the flat arising from the grant of the new lease). The Act requires that this ‘profit’ should be shared between the parties
  • compensation for loss arising from the grant of the new lease

Should I buy a flat with a short lease?


Solicitors generally advise against buying a flat when the lease has less than 70 years left to run, for a few key reasons:

  • It’s difficult to get a mortgage on a property with a 'short' lease.
  • The value of a leasehold flat diminishes as the lease gets shorter so saleability options will be limited.
  • You’ll be charged a higher premium to extend the lease.

In principle, there’s no problem buying a flat with a short lease, provided that its price reflects this. In practice it can be more difficult, particularly if you need to take out a mortgage to buy the property. A number of lenders consider a ‘short lease’ as being less than 80 years, which is the point at which ‘marriage value’ (the potential for increase in the value of the flat arising from the grant of the new lease) kicks in.

If you do consider buying a flat with a short lease, your lender may only grant a mortgage on the basis that you’ll apply for a new lease which you’ll have to wait two years to do.

How much does converting a leasehold to freehold cost?


Leaseholders have a legal right to buy the freehold of their home if they meet certain criteria.

Buying the freehold of a house is fairly straightforward. However, purchasing the freehold of a flat can be a little more complicated because:

  • it can cost as much as extending the lease of the property
  • you’ll need to get the other residents of the block involved
  • you’ll still have to contribute towards service charges

The cost of buying the freehold depends on a number of factors, which include:

  • the annual market rent value
  • the ground rent
  • the number of years left on the lease
  • the value of the house today
  • the shorter the lease, the more expensive the freehold will be

A chartered surveyor should be able to calculate the value of the freehold. Once you’ve determined the cost of the freehold, you’ll need to consider the other costs involved - as with most property sales, there’ll be other fees to pay on top of the initial valuation costs (not just yours but the freeholder’s as well):

  • Legal fees - you’ll need a specialist solicitor to draw up a participation agreement and issue a tenants’ notice on the landlord.
  • If the freehold costs more than £125,000 then you’ll be liable for stamp duty.
  • The landlord could ask you to pay three times the annual rent of the property as a deposit.