What are the consequences of ground lease for the financing of your home?
There are a number of aspects that lenders consider for the financing of a house on leased land. The most important are:
1. Has the ground lease been bought out?The ground lease may have been bought out (for a particular period of time). If this is the case, new agreements will have to be made upon the expiry of the ground lease canon. Afterwards, the canon will be revised on the basis of the land value. If the land value has increased, a higher canon may be requested. This can negatively affect your financial position and the value of the property. For this reason, lenders do not want to run the risk that, after half the duration of the mortgage term (when the debt is still high relative to the value of the property), a much higher canon is introduced for a new period. It is therefore important to have a good understanding of the ground lease conditions in advance
If the time frame of the ground lease expires within half of the mortgage term (e.g. 15 years for a mortgage term of 30 years), this may make it difficult to apply for a mortgage.
In the event of a perpetual buyout, this has no further consequences for acquiring a mortgage. After all, you will have the perpetual right to use the land without any additional expenses required. However, you will be required to adhere to the agreements made in the ground lease contract, such as the agreed upon appropriation.
2. Is an annual payment of ground lease canon required?If an annual payment of ground lease canon is required, then this will have consequences for your maximum borrowing capacity. It is important to remember that you will be able to borrow less than twenty times the annual canon.ExampleAn income of €40,000 allows for a maximum borrowing capacity of €177,000 at an interest rate of 2.5% (2015). An annual ground lease canon of €1,000 has such consequences for your financial burden that lenders will adjust the maximum lending capacity downward to €156,000.
Does a home you have in mind have a canon obligation? Please feel free to contact us to discuss the financial implications in more detail.
3. Is there a private ground lease?
The purchase of a house with a private ground lease is generally difficult to finance. Always first ask for a ‘ground lease opinion’. A ‘green’ opinion means that there are financing possibilities. ‘Orange’ means that financing will be difficult and ‘red’ means that it is not possible at all. Please contact your consultant to discuss the possibilities and limitations.