What is ground lease (Erfpacht) and does it affect my mortgage?
Ground lease is one of those words that you have heard passed by once in a while and as long as you don’t have to deal with it, you quickly forget again. But what if your dream home does have ground lease? Then it’s helpful to know how that affects buying your home and closing your mortgage.
What is ground lease?
To make sense of this, we first need to know what ground lease actually means.
In simple terms, ground lease is the right to use a piece of land and the associated housing thereon.
The land containing the property remains the property of the ground leaseholder, or owner. These could include the municipality, a housing association or the Forestry Commission. For this right of use, you pay an annual fee to the owner. That fee is called a canon.
If a seller wants to sell a residential leasehold property, he must clearly state that it is leasehold. Therefore, homes for sale websites clearly state whether it is leasehold or not.
The deed that the notary will draw up when the sale is made (the “deed of transfer”) will also state whether the property is leasehold. And, of course, it will also be clearly stated in the purchase contract.
What should I look out for myself if I want to buy a property with a long lease?
If you want to buy a ground lease property, it’s helpful to check the following things carefully so there are no surprises.
- Is it leasehold for an indefinite or fixed term? In the latter case, when does the leasehold right expire and is there a right to renewal?
- Do the ground lease terms contain restrictive regulations, such as on the use or zoning of the property?
- Who is the owner: the municipality, a housing association or a private individual?
- What is the current canon, is it tax deductible and when will it be adjusted?
- Does transfer of the leasehold right require the owner’s consent?
- Do you need a leasehold opinion (review of leasehold financing) for financing?
Sometimes a building lease right is also attached to the leasehold right. Then you as the buyer own the property and the ground leaseholder owns the land.
But beware, at the end of the ground lease, the related building lease right also ends. As a result, the ground leaseholder also becomes the owner of the property. In principle, he must then compensate you for the value of the property.
As you can read, the rules surrounding ground leases are quite tricky and there can really be snags here. Therefore, make sure you get proper information from a good mortgage broker and notary to avoid problems during the transfer and in the future.
How does ground lease affect my mortgage?
Taking out a mortgage for a house with leasehold rights can be done simply at the bank, although a few things are different from taking out a regular mortgage.
With a regular mortgage, you take out a loan on a house including the land your house sits on.
With a mortgage with a ground lease right, you take a loan on the purchase price of the leasehold right (your right of use). The bank then requires a mortgage on your leasehold right as collateral for the loan.
An annual ground lease payment also affects your maximum borrowing options. The rule is that you can borrow about 20 times the annual canon less compared to a regular mortgage. If the leasehold canon per year is €1,500, your maximum borrowing capacity is thus reduced by €30,000.
Banks in general are a little less easy on mortgages on leasehold property.
But not to worry. Fortunately, Nobel Mortgages has specialized staff who can very well help you with this and make your dream (house) a reality.
Tip: Calculate how much you can borrow for a mortgage.
What about ground lease in Amsterdam?
Each municipality has its own rules relative to ground leases. In Amsterdam, for example, you can switch to perpetual ground lease.
It means that every 50 or 75 years you no longer face a steep price increase (canon) because the land has increased in value.
In Amsterdam, you can also buy off ground lease. You can do this in three ways:
- Buy off everything forever! You pay a redemption fee based on the WOZ value and neighborhood street ratio (a percentage of the WOZ value and reflects the value of the land).
- Redeeming everything forever, but only over time. The WOZ value of the year prior to the year you are going to redeem is then used. The surrender charge will still be adjusted for current inflation.
- You pay an annual fee (canon) based on the current WOZ value at the time of switching. An increase in land prices in this situation does not affect the annual amount (canon); it increases only due to inflation.
Finally
In some cases, it may be wise to buy out the ground lease or choose to fix the ground rent at a later date. And sometimes it’s better to just serve out your current ground lease. This choice depends on where you live (in Amsterdam), how long your current contract runs and, of course, whether you can afford the commutation fee.
Nobel Mortgages as your personal advisor
At
Nobel Mortgages
we are happy to help you with quality financial advice and think with you on all issues. We always go the extra mile for our clients, truly analyzing all options and always thinking outside the box when necessary.
In this way, you are sure to achieve what others cannot. That is, we do everything we can to help you get the best mortgage that suits you and, of course, fits your circumstances and desires perfectly.
Do you also want an advisor who looks outside the box and really analyzes all the possibilities for you?
Then contact our experienced and enthusiastic team soon. We are available to you 24 hours a day with the utmost commitment and sincere attention. An e-mail is a snap to info@nobelhypotheken.nl or call or app to 06-54770122.