Can you really buy an apartment in London at a 25% discount?  Sounds too good to be true, right?  Well, I do believe that if something sounds too good to be true then it usually is but if you are well informed and smarter than other people then genuine bargains can be found.  You see there is often the exception that proves the rule.

I recently took some training on lease extensions and what I discovered was truly mind-blowing.  Most apartments in the UK are leasehold rather than freehold.  What this means is that the apartment that you buy has a lease term which could be for say 100 years or 1,000 years.  When the unexpired lease term falls to less than 80 years then the value of that apartment starts to fall.  If the remaining term is 70 years or less most lenders will not offer a  mortgage on it because a 25 year mortgage would reduce the unexpired term to 45 years once the mortgage is repaid.  By this stage, the value of the apartment will be much lower,  maybe by as much as 30%-40% lower!

 

 

So what most leaseholders do is purchase a lease extension from the freeholder to extend the term by say 90 years typically.  There is a formula for calculating the cost which can give you an approximate cost by using one of the many lease extension calculators from a Google search.

 

 

I did a search on Rightmove and I found a 2 bedroom apartment in an expensive part of London for £975,000.  In the same search, I found an identical apartment for £475,000.  Why the difference in price?  The lower-priced apartment had an unexpired lease term of 30 years whereas the higher-priced one had an unexpired term of more than 100 years.  Hence the price differential.

I calculated that the cost of the lease extension, stamp duty and legal fees would add £250,000 to the purchase price but that would still mean the apartment could be bought for £725,000 instead of £975,000.  A discount of just over 25%.

 

 

Remarkable, eh?  Sounds too good to be true, right?  Definitely not.  Take off your cynic’s hat and consider this as a smart way to buy an apartment in London or anywhere else in England.  Obviously you should first seek professional advice before investing in such property.  Nonetheless it is an interesting strategy and one seriously worth considering.  You know it makes sense*.

 

*RISK WARNING 

The FCA does not regulate property investing. The value of investments can fall as well as rise. You may not get back what you invest. The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction. All information is based on our current understanding of taxation, legislation, regulations and case law in the current tax year. Any levels and bases of relief from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. This blog is based purely on personal opinion and experience.