Buying a home on leasehold land presents some unique challenges and opportunities, especially when it comes to taking out a mortgage. In this article, we cover the most important aspects of leasehold land in relation to mortgages so that you are well informed if you are buying a home that is on leasehold land.
Acceptance criteria of banks
Not all banks are as eager to provide a mortgage for a property on leasehold land. Most mortgage lenders have stricter underwriting criteria for such cases. For example, they may offer a lower maximum mortgage, or have higher requirements for your financial situation. A well-drafted leasehold contract with clear conditions can help overcome these hurdles.
Calculation of mortgage amount
The ground rent - the periodic payment for the use of the leasehold land - is usually included in the calculation of your maximum mortgage amount. This means that the higher the canon, the lower the amount you can borrow. Some banks offer the option of co-financing the canon in the mortgage, but this depends on various factors such as your income and the value of the property.
Risk of canon review
In the case of perpetual ground leases, there may be periodic revisions to the canon, which poses a risk to both the mortgage lender and the homeowner. With a large increase in the canon, your monthly expenses may increase, potentially putting you in trouble with your mortgage payments. Some mortgage lenders therefore require a clause stating that the canon is fixed for a specific period of time.
Leasehold and mortgage interest deduction
The good news is that in many cases the canon paid is tax deductible. This means that you have to pay less income tax, which can somewhat offset the higher monthly costs. Note that the rules can change, so it is advisable to always check carefully.
Possibility of redemption
Some municipalities offer the option of buying out the ground lease canon for a specified period or even in perpetuity. This can be attractive because a bought-off ground rent can increase the property value and make it easier to get a mortgage. Keep in mind, however, that the redemption price can often be hefty.
Leasehold and mortgages are complexly intertwined. Good preparation and extensive knowledge of both the ground lease and mortgage terms can help you make the best decisions. Consult with a mortgage advisor and read the ground lease contract thoroughly to avoid unpleasant surprises.
