Regulated Bridging Loan on Leasehold Flat – Short Lease Problem

The situation

A buyer in London identified a flat they wanted to purchase at £585,000. The property was in good condition, in the right location, and at a price that reflected a modest discount to comparable flats in the building. The discount existed for a reason: the lease had 62 years unexpired.

Most mainstream mortgage lenders will not lend on residential leasehold properties with fewer than 70 to 85 years remaining, depending on the lender. The widely applied rule is that the lease must have at least 70 years unexpired at the end of the mortgage term. On a 25-year mortgage, that means requiring 95 years at the point of application. With 62 years on the clock, this flat was unmortgageable through conventional channels.

The buyer understood the situation. They had the right to apply for a statutory lease extension under the Leasehold Reform, Housing and Urban Development Act 1993, which would grant a new 90-year extension on top of the existing term, taking the total to around 152 years. But to exercise that right, they first had to own the flat. And to buy it, they needed finance that was not available from a standard mortgage lender.

The complications

A regulated bridging loan was the right tool, but lender selection required care. Not all bridging lenders will take a short-lease leasehold flat as security, particularly in London where the lease extension process, freeholder behaviour, and ground rent structures can vary considerably from building to building.

The exit strategy had to be robust. For a bridging lender to approve a loan, they need confidence that the exit will work. In this case, the exit was a standard residential remortgage following lease extension. The lender needed to be satisfied that the lease extension could be completed within the bridge term, that the extended lease would be acceptable to mainstream mortgage lenders, and that the remortgage would be achievable on normal terms given the buyer's income and the property's value.

There was also a ground rent consideration. Some London leasehold properties carry ground rents structured in ways that make them unattractive to mainstream mortgage lenders even after a lease extension, particularly where ground rents double at intervals or are set at a percentage of the property value. We reviewed the existing lease carefully before proceeding to confirm the ground rent structure was not going to create a problem at the remortgage stage.

How we structured it

We identified a regulated bridging lender experienced with short-lease London leasehold security. Their underwriters understood the statutory lease extension process and accepted the exit strategy on the basis of a clearly evidenced plan: the buyer's solicitor had already made contact with the freeholder's managing agent, lease extension premium estimates had been obtained from a specialist surveyor, and the buyer had confirmed their income and credit profile was suitable for a standard residential remortgage on a 125-year extended lease.

The bridge was structured at £380,000, representing 65% of the property value on the short-lease basis. Interest was rolled up for the term. The buyer paid the bridging costs from their own funds at completion, leaving the bridge in place as a clean first-charge loan against the property while the lease extension process ran in parallel.

Solicitors progressed the lease extension under the statutory route. The freeholder served a counter-notice, as expected, and the premium was negotiated and settled within five months of the initial section 42 notice. The new lease was registered at the Land Registry, and the property was remortgaged onto a standard residential product within eight months of the bridging loan completing.

A short-lease flat in London is not unmortgageable. It is a sequencing problem. Buy with a bridge, extend the lease, remortgage. The numbers have to stack at each stage.

The outcome

The buyer purchased a flat that no standard lender would touch and, within eight months, held it on a 125-year lease with a conventional residential mortgage in place. The total cost of the bridging facility, including rolled-up interest and arrangement fees, was covered by the discount achieved on the purchase price relative to comparable long-lease flats in the building.

At the point of remortgage, the flat's value had increased modestly. More importantly, the extended lease removed the short-lease discount entirely, so the buyer went from a property with a structural valuation problem to one that any mainstream lender would accept as standard security.

The ground rent, which we had reviewed at the outset, was confirmed as a peppercorn on the new lease following the extension, removing any concern about its future mortgageability.

What this demonstrates

Short-lease flats in London regularly become available at a discount that reflects their unmortgageable status. For a buyer who understands the lease extension process and has the financial position to support both the purchase and the extension costs, they represent genuine value. The obstacle is not the property. It is accessing the right finance to bridge the gap between purchase and a mortgageable lease.

The keys to making this type of case work are a credible exit strategy, a lender experienced with leasehold security in London, and a solicitor who knows the statutory lease extension process and can progress it efficiently within the bridge term. Most buyers in this situation lose the opportunity because they go to a standard mortgage broker who tells them the flat is unmortgageable, which is technically true but practically incomplete.

FD Commercial arranges regulated bridging loans for residential purchases in London and across the UK from £250,000. If you have found a flat with a short lease and want to understand whether the numbers work, call us on 03300 100315.

Read our guide to regulated vs unregulated bridging loans for a fuller picture of how lenders assess the exit before approving the bridge.