Remortgaging to pay for your lease extension

When you extend your lease, you have to pay your freeholder a "premium" - which is essentially the price for the additional years.

Particularly if your lease extension premium is a large one, for many people the only way to pay for their lease extension is to borrow money.

However, I think most people would agree it makes good sense to borrow money for a lease extension. This is because a lease extension is an investment rather than a cost – i.e. the value of your flat should increase by a greater amount than the cost of the lease extension.

Often drawing down additional funds on your mortgage seems like the best place to borrow the money from in - a mortgage often offers the lowest rate, and has a long repayment period.

When should I borrow the money?

If you’ve got a variable-rate mortgage with no fixed term, you should be able to ring up your bank and borrow more money at any time. If they won’t let you do so on your current deal, you can switch to a new one or even a different lender.

If you’ve got a fixed-term mortgage – usually two or five years – then the best time to borrow money is probably when the current term comes to an end.

Why is the best time to borrow money at the end of your current fixed term?

If you’ve got a fixed-term mortgage you would be forgiven for thinking that you should be able to go to your bank and ask for further borrowing to be added to your existing mortgage deal – but this isn’t generally the case.

For example, imagine you currently have an outstanding balance of £100,000 on fixed rate of 3% until March 2027. You might reasonably expect that if you wanted to borrow an extra £10,000 they’d simply pay you the money and add it to your existing mortgage at the same rate and same term. If this was the case, you’d now owe £110,000 on a fixed term until March 2027.

Usually banks won’t do this.

Instead they require you to take out an additional “product” from them on a different rate and on a new fixed term. This means you end up with two separate mortgages with the fixed-terms ending at different times – which is a nightmare when you come to remortgage in the future.

How to borrow

There are broadly two options when it comes to extending your mortgage. Again, as explained above, it is best to do this when your mortgage is up for renewal and not during the term.

Option 1: Release cash from your mortgage

So long as you have sufficient equity in your property and a big enough income to pay the additional borrowing costs, most mortgage lenders will be happy to increase your borrowing against your property and essentially release cash to you.

You can simply ask for additional borrowings, to bolster your savings.

So long as they are happy to lend you extra money without stipulating what it is for, you are free to spend this money on whatever you want. This could be a new car, home improvements, a holiday or as it happens even a lease extension!

The benefit of doing this is you’ve then got the “cash in the bank” for when you want to pay for your lease extension. You know it is ready to pay the premium when it comes due.

This certainly is the easiest option as you split the process in two – you complete the re-mortgage first, and then extend your lease.

If you plan to do this, we suggest you contact us for a free indication of the premium so you know how much to borrow. It makes sense to borrow a little more than you think you'll need - so you're covered even if the lease extension price is higher than you planned. If you've got some excess after the lease extension is complete, you can often use it to overpay your mortgage without them charging a penalty (although check with your mortgage company).

Option 2: Borrow specifically for your lease extension

Some banks won’t let you do “Option 1” – usually for one for two reasons. This means they require you to extend your lease at the same time as remortgaging.

The first reason is that many banks won’t lend on flats with short leases or ground rents above 0.1% of the property value. For example, at the time of writing the biggest lender, Lloyds Banking Group (which includes Halifax), would only lend on flats on leases with more than 70 years remaining.

The second reason is based on how much you can borrow against your flat with it's existing lease. When you extend your lease your property will jump up in value – because the lease will be longer. For example, it might be worth £150,000 with a short lease but £170,000 with a long one. With your existing short-lease, you might not have sufficient equity in your property to borrow the extra money until the value has been increased by the lease extension. Even if you do have enough equity to borrow the money, it might increase your "Loan-to-Value" ratio, so you no longer get such a favourable borrowing rate.

It is possible that the lender will make it a condition of your mortgage that you extend the lease with the proceeds.

It’s definitely harder to do a lease extension this way – because you’ll need to make sure at the point we’ve sent you the bill for the lease extension you have a current mortgage offer in hand and are ready to draw down the required funds.

Want to go ahead with "Option 2"?

If you want to remortgage at the same time as completing the lease extension, please tell us before you start the lease extension process.

When you re-mortgage (particularly if it is to a new lender) you need a solicitor to handle your remortgage – although this is frequently provided by the lender and included in the fees you pay your lender. Sometimes it is not even clear that a separate solicitor is involved.

If your mortgage lender needs to the lease extension to be completed at the same time as the mortgage, you need to make sure that the solicitor who is handling the remortgage is poised and ready to release the money to us for the lease extension at the right moment.

This means the remortgage and lease extension can be completed simultaneously.

An alternative approach

Particularly if you’re limited to “Option 2”, an alternative approach is to use a different source of funds to pay for your lease extension – either your savings or borrowing from family or on a personal loan.

You can then put this money in your savings and use this money to pay for your lease extension when the bill comes due.

Once the lease extension is completed, you can use “Option 1” to release money from your property when you next remortgage and replenish your savings or pay back the loan.

At what point in the process should I borrow the money?

A statutory lease extension is like a slow moving freight train - it doesn't move very fast, but it is also very hard to slow down once it is going.

There will be a point in the process where the price will be agreed and suddenly you'll be presented with a "Completion Statement" which will include the price for the lease extension itself (the premium) and also the freeholder's fees. You'll usually need to pay this within a few weeks. Failing to complete by the deadline has dire consequences - your lease extension could time out.

Ideally you need to make sure you've got your fees (our costs are £2,580+VAT) and also 10% of what you think the premium will be (which is what the freeholder can ask for as a deposit) before you start the process.

You then need to make sure you start the process of borrowing money as soon as you've got the valuation report and understand what the maximum the lease extension premium is likely to be. This should give you plenty of time to get the borrowing sorted before the lease extension is agreed and you need to pay for it. Make sure you borrow enough on top of the lease extension premium for the freeholder's fees (budget £3,500) and it's advisable to add a bit more buffer for unforeseen circumstances. You can always put the money in a high interest account, or pay back some of the loan or mortgage early once the lease extension is done.

Next steps

If you're interested in doing a lease extension and want to discuss your options or gauge an indication of the amount of money you might need to borrow, please organise a call back using the button below.