If your borrower has a long-term lease on a property, can they mortgage their leasehold interest?
The short answer is; oftentimes yes.
The longer answer is; it depends.
In simplest terms, a lease is basically the right to the beneficial interest (as opposed to the legal interest) in property. In other words it’s the right to use the property even though you’re not on title as the owner. If the term of the lease is long enough, the conditions of the lease properly drafted, and the lease is actually registered in a registry where a mortgage of that lease can also be registered, then that lease may be acceptable security for a mortgage.
As an example, there are long-term leases in the False Creek area of Vancouver. To look at the buildings, you wouldn’t know that they’re leasehold properties – you’d think they were strata titled properties. Those leases fit all of the above conditions and can be mortgaged.
Mortgages of properties in developments on First Nations’ lands are also done by way of a mortgage of lease. The band, either on its own or through the federal government registers a lease in favour of a developer who then sells homes by way of sub-lease. If the terms of the head lease are satisfactory to the lender, they are often accepted as security for a mortgage.
Mortgages of a lease aren’t as common as freehold mortgages, so when one does cross your desk, ask around as there are often lenders for these deals.