Wow. That's quite an interesting situation.
According to the
UK Immigration Law and Policy (
www.ind.homeoffice.gov.uk):
Indefinite leave to remain on the grounds of United Kingdom ancestry
192. Indefinite leave to remain may be granted, on application, to a Commonwealth citizen with a United Kingdom born grandparent provided:
(i) he meets the requirements of paragraph 186 (i)-(v); and
(ii) he has spent a continuous period of 5 years in the United Kingdom in this capacity.
I'm not a lawyer, but assuming that you can (i) prove your ancestry and (ii) prove that you've been living in the UK for the last 5 years, I'm pretty sure you qualify for Indefinite Leave to Remain, unless there is a deadline for your application and you've missed it, or if not having a current UK residence is a problem. Call them up and ask.
I think you should definitely submit your application immediately, and perhaps use a UK address if possible. Just a suggestion.
I really hope everything works out for you.