Lenders’ approach to ground rents could create a new class of mortgage prisoner.
Richard Silva is executive director at Long Harbour
The most recent report from the Law Commission into Leasehold Enfranchisement risks rendering thousands of homes unsellable, creating a new class of mortgage prisoner.
The report includes several considerations and proposals to simplify the qualifying criteria for enfranchisement rights and reduce costs for consumers.
Whilst a number of these suggestions are sensible, there is one that is clearly impractical and has alarming implications.
The mortgage prisoner was a term first used following the 2008 financial crisis. After the crash, regulators and banks cut back their lending, meaning consumers were faced with tougher affordability tests.
Those who were granted a mortgage before 2008 were unable to re-mortgage with any provider, trapping them with their current provider in unfeasibly high-interest arrangements.
Today, we risk seeing a new class of mortgage prisoner, following the publication of the Law Commission’s report.
The report explicitly states that it is “widely considered” that any ground rent which exceeds 0.1% of the underlying property value is “generally considered onerous”.
However, guidance from the Royal Institute of Chartered Surveyors (RICS) claims that ground rent only begins to even impact the value of the underlying property when it exceeds 0.25% of its value.
The figure of 0.1% is an assumption that appears to be based entirely on a lender declaration not to lend on new-build leasehold properties where the ground rent exceeds this rate.
This first derived from a statement by the Nationwide Building Society, but has now been adopted by other lenders, including Santander, Barclays and more recently TSB. Worryingly lenders now appear to be applying this criteria to existing as well as new-build properties.
Mortgage providers will assess several factors when it comes to lending, but what is unclear is why ground rents are such a big focus within their lending criteria. Lenders have provided no evidence to support a definition of ground rent above 0.1% of value as “onerous”.
However, this particular assertion means leaseholders with existing properties in this position are being led to believe that the problem lies within their existing leases.
However, the problem very much lies with mortgage providers using an arbitrary figure as an excuse for not lending rather than applying proper valuation principles.
There is no rationale as to why this figure has been selected and its adoption by other lenders very obviously counters valuation guidance provided by RICS.
Nationwide’s and other lenders’ policies around ground rents may be linked to the incorrect belief that ground rents are higher now than in the past, when in fact this is untrue.
Research shows that ground rents are now lower than ever, both as a percentage of property value and wages, which renders the suggestion that anything above 0.1% as “onerous” even more perplexing.
The only time at which the level of ground rent is measured against the value of the underlying property is when the leaseholder is either seeking to sell or re-mortgage.
If mortgage lenders insist on a ground rent of 0.1% or lower, a significant number of leaseholders will be denied mortgage finance to which they previously had access to – creating a new class of mortgage prisoner.
The Law Commission Report is supposed to protect and improve the selling process for consumers, but its reference to ground rents at and above 0.1% of the property value being onerous is miscalculated and could leave homeowners in a very vulnerable position.
There needs to be rational engagement with banks as to why they have adopted this figure, as well as conversations about what is defined as an onerous ground rent.
If lenders want to stop the creation of thousands more mortgage prisoners, then they need to reconsider their lending criteria with consumers at the forefront.
