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Shortening leases put 450,000 homeowners at ‘mortgage prisoner’ risk

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Written by: Les Steed
14/04/2022
The cost-of-living crisis is turning hundreds of thousands of homeowners on fixed retirement incomes into mortgage prisoners as their leases have become too short, posing a serious threat to pensioners looking for equity release.

An estimated 400,000 homeowners in England and Wales are unable to remortgage or switch lenders as their leases are less than 75 years, which is generally too short to qualify for mortgage finance including lifetime mortgages.

A further 50,000 homeowners are expected to see their leases tick down below the 75-year mark over the next five years, putting them at risk of being denied a mortgage or a remortgage, according to a study by Lifetime Mortgage Gateway Logistics (LMGL).

This will force them to extend their lease by 90 years which can cost tens or hundreds of thousands of pounds.

The cost of extending is unaffordable for most, and could put older borrowers at a disadvantage as extending their lease would help them access finance.

Mid-term lease devaluation

The LMGL added that mid-term lease properties devalue annually after the 80-year mark unless the lease is extended. As the mid-term lease shortens, it surrenders value, and the cost of the 90-year lease extension, paid to the freeholder, increases in approximate proportion.

This means that the leaseholder’s home loses value and will continue to do so every year, while the freeholder’s asset increases at the leaseholder’s expense.

This loss of value is a turn-off for mortgage providers that generally won’t provide lifetime mortgages to these leaseholders.

According to LMGL, the lease value as a percentage of freehold drops to around 22% at the five-year mark.

Lease extension process ‘complicated and extremely expensive’

The lease extension process, also known as enfranchisement or the right to buy, is “complicated and extremely expensive” according to LMGL, especially for those who are retired and on fixed income.

However, without a lease extension, homeowners may be unable to access equity.

The problem is further compounded by the cost-of-living crisis, putting homeowners in a situation where their home is surrendering value to the freeholder, but they can’t remortgage and they can’t access equity that may be tied up in their property to meet any unexpected costs.  This traps them financially.

Statistics from specialist later life finance company, Key, show that 38% of all their lifetime mortgages are used to refinance existing mortgages.  This is the largest single use of later life loans.

Guy de Jersey, director at LMGL, said the situation shouldn’t be ignored by leaseholders.

“If your lease has less than 75 years left to run and you don’t do anything about it, the reality is most mortgage lenders will not want anything to do with you, leaving you with no possibility at all of a lifetime mortgage,” he warned.

“While many homeowners may be living in properties worth £1m or more, very few people have that sort of money lying around.”

He said that it had 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, adding that for many it would be a “welcome option” to halt depreciation and boost income in retirement.

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