Pt 3. Laws and legal concepts relevant to financial advice - Ownership of property

Question 1

What is a freehold property?

Answer 1

This means both building and land stands on is owened until such time as owner decides to sell it or dies, in which case it becomes property of their estate.

Question 2

What is a leasehold property?

Answer 2

This means land on which building stands is not owned outright by buyer, instead leased from person who owns freehold rights at a rent.

Lease is typically for 99-125 years.

At end of term, land and buildings on it revert to the freeholder.

Question 3

What is the Commonhold and Leasehold Reform Act 2002?

Answer 3

The aim is to provide an alternate leasehold and eventually replace it.

e.g. owners of flats under commonhold are called unit owners, owning flats in perpetuity and are members of the Commonhold Association.

Question 4

What is a Commonhold Association?

Answer 4

They own the land, the building and common parts.

Unit-owners have a vote in operation of the Association, reponsible for the management, maintenance, repair and servicing of the building.

Question 5

What is the use of commonhold?

Answer 5

• No preferred way to own properties in buildings occupied by multiple users.
• Used by many occupiers of leasehold properties continuing to own these on basis of long leases, using services of management companies for everyday maintenance.

Question 6

How does leasehold properties affect lending decisions?

Answer 6

• Mainstream lenders will only consider lending if lease has at least 25 years to run after completion of mortgage term.
• Safety margin - reuired so if borrower defaults, and property has to be sold to repay debt, it can still be sold at a reasonable value
• It may be difficult to get a mortgage on leasehold with less than 60/70 years to run on lease.
• Lenders lend on leasehold flats if terms of lease set out responsibility for common repairs, with flat owners in block forced to share part of cost.
• It can be difficult to ensure all freeholders pay their fair share of repair costs.

Question 7

How do you overcome difficulties of leases running out?

Answer 7

The leaseholder has the right to:

• Buy the freehold
• Extend the lease

Question 8

What are the terms of the Commonhold & Leasehold Reform Act 2002?

Answer 8

• Leaseholder has the right to buy or extend the lease provided they have lived in property full-time for last 2 years; lease must have been for period of 21 years.
• Act has introduced changes to freehold purchase and lease extension, includes reduction of number of leaseholders within block of flats, whose agreement is required to enforce sale of freehold from 2/3 of leaseholder to 1/2.

Question 9

What is a Leasehold Reform (Ground Rent) Act 2022?

Answer 9

• This received Royal Assent on 8th February 2022, seeking to restrict ground rents on newly created long leases of houses and flats to an annual rent of one pepercorn intended to represent no financial value.
• Provisions of the Act are expected to commence within 6 months, you may wish to monitor developments within this area.

Question 10

What is a joint tenancy?

Answer 10

• This means that neither individual can sell without the other’s agreement, with each having equal share of property and when one dies, the survivor inherits others share of property without probate being needed, regardless of provisions of any will.
• Joint owners are spouses/civil partners, but may not be suitable for other partnerships.

Question 11

What is tenancy in common?

Answer 11

• When each owner holds share separately, and can dispose of their share as they wish, and when they die their share goes to their estate, and disposed of according to will or law of intestacy.
• This is useful when ownership is not spouses/civil partners, and need not involve equal shares.

Question 12

What is a shared ownership?

Answer 12

This is when purchases buy a share of the property, with the remaining share being owned by the housing association.

The purchaser pays rent to housing association on share.

This allows purchaser to increase share in property (staircasing), by buying additional shares in property, up to 100% ownership.

Possible to sell shared ownership property, and move elsewhere.

Any new purchaser takes on property at existing owned/rented split, with option to increase ownership in future.

Question 13

What is a help to buy: equity loan 2021-23?

Answer 13

• The Governemnt lends the borrower up to 20% (40% for home buyers within Greater London) of the cost of their new build property.
• This means borrower only needs 5% cash deposit, and 75% (55% within Greater London) mortgage to make up the rest.
• Borrower will not be charged loan fees on 20% (40% in Greater London) for first 5 years.
• Equity loans are only currently for first time buyers.
• Regional price caps apply, and property must be bought from a registers housebuilder.

Question 14

What is a mortgage guarantee scheme?

Answer 14

• In a bid to transform Generation Rent to Generation Buy, a residential mortgage scheme was announced in March 2021 budget.
• Run from April 2021 - Dec 2022.
• Aimed at increasing availability of 91% to 95% loan-to-value mortgages, with government guaranteeing portion of mortgage over 80%.
• Max. property value is £600,000, with mortgages arranged on repayment basis.
• New builds and existing properties are eligible, not second homes and buy to lets.