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Biocaution

Should I Buy A Leasehold Flat, I Am A First Time Buyer?

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Hi guys, I am in the process of buying an ex council flat, based in London zone 3 for £200,000 on a leasehold basis for 125 years.

It is nice area, with good neighbors in East Ham, Newham where the Manor Park Crossrail line is going open in 2018 which is not too far from this flat. The flat is fully refurbished.

I am currently 20 years old, working in London with a salary of £28,312 with £25k in savings. I live at home, with no bills or rent to pay and I am a very strict saver. If I do stay at home I could say 100k in 5 years through my salary, potentially more if I get promoted.

My question is should I continue to stay home, save my money and look for a freehold house in 5 years, where I can join forces with my sister to buy one of my Mom freehold home which is also in Newham London, or should I get on the property ladder now and buy this leasehold flat with the hope that the value of the flat will increase in 5 years from 200k to more than 300k, were I potentially can make a good profit compared to just staying home and saving my monthly wages in 5 years?

Will the flat value increase by more than 100k in a period of 5 years within London, or am I missing out something?

I am buying the leasehold flat through the shared equity scheme, where I will purchase 50 - 75% share of the property through a mortgage and deposit and the rest will be paid via a loan from the government, therefore I will legally have 100% full ownership of the property on a leasehold basis. This is different from a shared ownership scheme. The loan has an interest rate of 1.75% the first year which rises every year with RPI I believe.

Also the loan value must be paid back in full within 25 years or can be bought out in stages, which will be charged at the property value at the time, so any increase in the value will mean more to pay back at the percentage of the equity loan I have been given. For instance, I buy the property at £200k and get an equity loan for 50% of the value to buy it, which is 100k. However, if the property increase in value in 5 years to 300k and I decide to sell, I have to pay back 50% of this to the council, which is 150k.

Expenditure

The flat I have been offered from the council is very big and is a 1 bed ground floor flat, the flat block is very small with only 2 levels above the ground flat. There is no lifts and the flat area and gardens is well maintained, hence the service charge is quite cheap at £78 a month. Ground rent - £100 per year

Monthly Costs

I estimate my monthly charges including bills, mortgage, equality loan interest repayment, council tax to be around £800 per month, maybe less. Also the flat is done up in a way where the lounge is separated from the main bedroom, where both have different separate entrances.

Therefore I plan on having a lodger stay with me where they will pay me £400 a month towards bills etc., therefore my monthly costs could be as little as £400 per month.

There is no major works planned in the next 5 years, hence I will not be expected to receive a massive invoice. Also if I do buy out the equity loan from the council, I will be free to sell the leasehold flat on the open market.

To conclude, I have 2 options, stay home and save my wages where I will have around more than 100k in 5 years’ time or move out buy this leasehold flat hoping that the value will increase so much that I would be able to walk away with more than 100k from selling my share?

I am really not sure what to do and really need some expert advice or any past experiences with doing something like this.

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No one can give you the confidence to execute your plan but you. Leasehold isn't a particular issue in of it self. If you can afford it on sensible salary multiples you should buy it - but first and foremost be comfortable you are happy to live there for 5 years, not just to "make money" through house price appreciation. You will learn other skills through having your own place, managing neighbor disputes, insurance, socializing/the dreaded dinner parties, buying furniture dealing with repairs etc...these are all good transferable skills to have.

We are all well aware of the price increases in London, but generally over the long run houses are just another asset class and prices may not be where they are now. Equally, "making money" and using that extra capital to purchase another house is not necessarily a gain if all prices have risen in that time and you need to borrow more to upgrade.

Hope that is of use to you.

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This loan from the government sounds strange, what are the interest charges on it? 1.75% but linked to RPI seems strange.

Also what happens to that loan if the property value goes down > do they share the downside risk?

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