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How the mortgage industry can support government leasehold plans – Wareham

by: Paul Wareham, managing director at Countrywide Surveying Services
  • 25/07/2017
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How the mortgage industry can support government leasehold plans – Wareham
Leaseholds that contain problematic terms such as escalating ground rents above the retail price index (RPI) measure of inflation are a hot topic right now.

Today the government has published its plans for the tackling the issue in the new build sector, but this does not yet address existing leaseholders, although the question is being asked.

The subject has already prompted much debate among my colleagues working at the valuation coal face.

They are worried that this quirk of English land law is being exploited, often unfairly, to extract income from leaseholders.

It’s a problem that has come to attention of our post-valuation queries team more and more recently, although it’s an issue that has probably been around for much longer.

 

Estimating value

The process of gauging whether the terms of a property’s leasehold are going to affect its mortgage valuation is a straightforward one.

Once flagged up by the conveyancer, for example, the lender usually turns to the valuer to get their opinion on the leasehold in question.

This is because most lenders do not have set rules for how they deal with leasehold issues and, as the Council of Mortgage Lenders’ recent advice suggests, they turn to the experts for a view on a case-by-case basis.

 

Yardstick

A number of lenders are still considering their policies on leaseholds; however, one leading lender has introduced a valuation policy which could be adopted across the industry, one that many of my colleagues now use as their own yardstick when considering leaseholds.

This includes, a maximum starting ground rent of 0.1% of the property’s value and the banning of “unreasonable multipliers” including doubling the ground rent every five, ten or fifteen years.

If the whole industry took this approach then I believe it would help stamp out the problem of escalating ground rents.

If no one could get a loan on a property with a leasehold containing such terms, then the practice would die out rapidly.

 

Fair increases

I am not suggesting that escalating ground rents should be outlawed.

Many lenders are relaxed about leasehold terms that enable fair increases linked to the RPI via regular reviews.

But if the industry worked together to prevent the worst excesses, it would make mortgage approvals both less complicated and quicker, and property tenure fairer.

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