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Lenders may imprison borrowers with hard line leasehold rules – Procter

by: Bill Procter, CBG Residential
  • 13/09/2019
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One of the lesser known consequences of the financial crisis was the creation of mortgage prisoners.


In the aftermath of the crash, regulators and banks tightened their lending criteria, requiring those seeking a mortgage to pass tougher affordability tests in order to be granted a home loan.

An unintended outcome was that hundreds of thousands of homeowners, granted a mortgage before 2008 at a time when lending rules were more relaxed, were unable to remortgage with any provider, trapping them with their current lender on a high interest standard variable rate (SVR).

Today, a less rational change in lending criteria risks creating a whole new class of mortgage prisoner if widely adopted, with ground rents wrongly cast as the shackles.

As chief executive of Consensus Business Group, an institutionally-backed freeholder that regularly interacts with thousands of leaseholders, I have noted an emerging argument that mortgage providers should no longer lend where ground rent exceeds a certain level — in most cases 0.1 per cent of the property’s value.

Discourse on this subject has been influenced by the issue of short-term doubling ground rents, which have affected a small proportion of leaseholders, are indeed onerous, and have rightly been addressed by the industry.


Ground rents not onerous

The emerging narrative, which has led to at least one mortgage lender taking a hard-line approach to the 0.1 per cent rule, also appears to be the product of inaccurate claims that current levels of ground rent are excessive.

The evidence from our own portfolio shows that ground rents are at their lowest for some time, relative to wages and house prices.

The select committee’s recently published view has influenced sentiment also, by supporting the unfounded idea that any ground rent over 0.1 per cent of market value is onerous and going further by proposing a cap of £250.

The worry is that an arbitrary benchmark of 0.1 per cent, despite never previously being considered onerous, will become a self-fulfilling prophecy if widely accepted by lenders.


Unsellable properties created

Should this occur, tens of thousands of properties may quickly be rendered unsellable, as potential purchasers will be unable to obtain mortgage finance – creating a whole new class of mortgage prisoner.

By way of example, in a recent case drawn from our portfolio, a mortgage application to a leading provider on a property worth £185,000 with a ground rent of £250 was declined because at 0.13 per cent, it was above 0.1 per cent.

In the event, the purchaser obtained a mortgage from another provider and the transaction proceeded, but if lenders increasingly adopt this criterion, property values will inevitably fall.

Given it is unlikely that £65, being in this case the difference between what was deemed acceptable and the actual ground rent, would affect a borrower’s ability to service their loan, then the provider’s decision must have been be driven by a concern that the narrative will drive market values down thereby eroding their collateral.

There needs to be a pragmatic conversation across the industry about what is truly onerous, because if the current trend sweeps across the industry we risk creating thousands of new mortgage prisoners.


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