Mortgaging a lease option

THE QUESTION

We have agreed a purchase price for a lease option at £295k.  We have had the lease for two years and have one year left.

The property is now worth estimated £400-450k and we are looking to finance at this price.

Option 1. Try to find a lender who will go straight to mortgage at higher valuation 

Option 2. Find bridge to let lender who will provide bridge at £295k and move to mortgage at higher valuation

Option 3. Are there other options?

THE ANSWER

Number 1 is not an option because your relationship with the current owner breaches mortgage lenders’ requirement for any purchase to be an arm’s length transaction i.e. there is no pre-existing relationship between buyer and seller.  The option agreement is evidence of a pre-existing relationship.

Number 2 will be a struggle because bridge-to-let lenders (not that there are many) are predominately mortgage lenders who dabble in bridging. There will be a reluctance here to lend more than 75% of the purchase on the bridge or the mortgage, but if you are content with that, it may work. You may still come up against the arm’s length issue here too.

Number 3 - yes there is a 3! Use a market value bridge product (not many bridgers do this either – but I know a few) who will consider lending on the current £400-£450k value and disregard to a large extent the purchase price you are paying. This will have the effect of minimising the deposit you need to put down.

To repay the bridger, you can choose to wait until you have owned it 6 months and then mortgage it to get the widest choice of lender, which usually equates to the keenest rates. Equally you can choose not to wait 6 months, have a smaller choice of lenders and pay higher rates.

To get a mortgage lenders’ valuer to agree to the £400-£450k valuation when they know you bought it recently for £295k you will need to evidence improvements you have made to the property, this can be since the option agreement began, rather than since you bought it. They are unlikely to agree to a mortgage based on current £400k+ value purely on the fact you bought it cheap, nor on the fact that you had an option agreement - tangible improvements that uplifted the value are the currency at this juncture.

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