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Leaseholders left in the dark
Homeowners who buy leasehold new build properties, hoping to buy the freehold later may be in for a shock, says Sarah Moore.
Homeowners who buy leasehold new-build properties are facing unexpectedly high bills when they later try to buy the freehold. Under current rules, a leaseholder has a right to buy out their freehold after two years. However, during this time the original freeholder (often the developer) can still sell it on and is under no obligation to tell the leaseholder before or after this has happened. So some owners who decide to buy their freehold find that it has been sold on to an investment firm without their knowledge and the price demanded is now out of their budget.
Take the recent example of a first-time buyer who bought a house from well-known property developer Taylor Wimpey, says BBC.co.uk. At the time of purchase, the buyer was quoted £2,600 to buy the freehold. She declined for financial reasons. When she went back to the developer two years later, she found that it had been sold on to a private investment company, who quoted £32,000 for the freehold.
Under English and Welsh law, there is a "right of first refusal", where the freehold must be offered first to the current leaseholder, but this applies only to flats, not houses. That reflects the fact that the vast majority of houses were traditionally sold as freeholds, meaning the buyer owns the house and the land it sits on, while flats were sold as leaseholds, meaning the buyer owns the property for the length of their leasehold agreement.
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However, in recent years it has become more common for new-build houses to be sold as leasehold properties around 6,000 new houses were sold in this way in 2015. This is because property developers can increase their profits by selling the freeholds on to professional investors, who see freeholds, and the associated ground-rent payments, as safe long-term investments.
New-build properties with long leaseholds of, say, 999 years, are often marketed as "virtual freeholds". The implication is that the lease is so long as to be as secure as a freehold. But this is less reassuring if the ground rent is set to double every ten years as in a highly publicised case last year or when it becomes difficult to find a buyer willing to take on a leasehold house.
The government referred to this problem in its housing white paper, stating that the selling of freeholds and ground rents leaves leaseholders "in the dark" and is "not in consumers' best interests". It has pledged to look into this matter further, but until then buyers must read the small print to ensure they know their rights.
Buy-to-let landlords face a refinancing crunch
"A growing number of landlords are at risk of becoming buy-to-let mortgage prisoners'," says Sarah Davidson on ThisIsMoney.co.uk. Earlier this year, the Bank of England imposed new restrictions on buy-to-let lenders that will require many landlords to show that the rental payments they receive exceed their mortgage costs by a greater amount than before. These may make it difficult for many buy-to-let borrowers on short-term fixed-rate deals to refinance their existing mortgages once their fixed rate comes to an end and they move onto higher variable interest rates.
"Previously many lenders allowed landlords to borrow on the basis of whether they would be able to cover 125% of their mortgage costs with their rent if their mortgage rate rose to a stress rate' of 5%," says Olivia Rudgard in the Daily Telegraph. "Now, however, most large lenders have increased these figures to 145% of their mortgage costs and a stress rate' of 5.5%." Landlords with low mortgages relative to the value of their property and high rental yields may not be affected their mortgages will still be deemed affordable. But those with large mortgages and low rents such as many in London are likely to need to inject more equity if they want to refinance to a new, lower-rate deal.
In theory, "the rules make an exception for landlords who are remortgaging, as long as they do not borrow any more money", says James Pickford in the Financial Times. But "few lenders are taking up the exemption". Factor in the cuts to tax relief on mortgage interest payments that take effect in April, and the buy-to-let market faces growing headaches that may hasten the end of the amateur "dinner-party landlord".
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Sarah was MoneyWeek's investment editor. She graduated from the University of Southampton with a BA in English and History, before going on to complete a graduate diploma in law at the College of Law in Guildford. She joined MoneyWeek in 2014 and writes on funds, personal finance, pensions and property.
