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 on their mortgage.
It is worth noting that this article is not financial advice, not least because Homehold is not a financial advisor.
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.
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 this?
If you’ve got a fixed-term mortgage you would be forgiven for thinking that you should be able to approach 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 2% until March 2025. You would hope 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 2025.
Usually banks won’t do this, they’ll 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.
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.
So long as they are happy to lend you extra money without you specifying what it is for, you are free to spend this money on whatever you want – a new car, home improvements or even a holiday.
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 do 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.
Once you have an idea about the costs you can then secure the additional borrowing, and then come back to us to start the lease extension process with one of our lease extension specialists.
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. 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"?
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 you want to remortgage at the same time as completing the lease extension, please tell us beforehand. If your mortgage lender needs to the lease extension to be completed at the same time as the mortgage, we’ll suggest you use the same solicitor for the remortgage that will complete the legal work in relation to your lease.
This means that they can complete both the remortgage and lease extension simultaneously. If you use a different solicitors for each transaction you can end up in a chicken-and-egg scenario where your remortgage solicitor can't draw down funds until your lease extension is complete. The solicitor handling your lease extension can't complete the lease extension until they've paid your remortgage funds to your freeholder. Using a single solicitor avoids this issue.
Please note that if you do want to use the same solicitor to do both transactions they will have to do a separate piece of legal work in relation to your remortgage which is not related to your lease extension. This work usually costs in the region of £500+VAT and you'll need to work directly with the solicitor on it. This extra cost is another reason we try and avoid doing this.
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 use this money to pay for your lease extension.
Once the lease extension is completed, you can use “Option 1” to release money from your property and replenish your savings or pay back the loan.
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.