Up to 1.43m leasehold owners could see the value of their property fall dramatically, leaving them exposed to negative equity, according to e.surv.
The chartered surveying giant points out that anyone with a lease on their home with less than 80 years to run needs to take steps to increase the term of the lease, as most lenders will not grant a mortgage against the property.
If a property is umortgageable, its value plummets, potentially leaving the owner owing more on their mortgage then the property is worth, and unable to move.
Leasehold owners should act as early as possible to extend their terms, as the shorter the lease term, the more expensive it becomes to lengthen.
Richard Sexton, director of e.surv chartered surveyors, said:
“90% of property in England and Wales is freehold, meaning the homeowner also owns the land. But the remaining 10% is leasehold, where the owner of the property effectively rents the land for a nominal sum. The length of the lease has a direct bearing on the value of the property, and most people aren’t aware that a shortening lease term can erode thousands of pounds off the value of the home.
“Most leases are very long – up to 900 years in some cases – but there are plenty which are much shorter. Once a lease has less than 80 years to run, the value of the property begins to fall and picks up speed the closer it gets to expiry. The potential consequences are nightmarish for the owner and the mortgage lender. Both the lender and the owner can fall into negative equity, the property becomes unmortgageble, and is therefore impossible to sell to anyone but a cash buyer. This traps the lender and the borrower with a toxic asset that is losing value by the day.
“In the worst case scenarios, the borrower is unable to move home, the lender is forced to repossess the property and is stuck with an asset that has plummeted in value. It is a big danger to a lenders’ leasehold back book.”
Of the 1.43 million leasehold properties in the UK, 817,000 are flats, while the remaining 612,000 are houses. Inner city urban areas are disproportionately affected by the problem of shortening lease terms, as they tend to have the highest concentration of flats.
London and the North West have the greatest exposure to shortening lease terms.
Across the UK, 10.1% of total residential housing stock is leasehold, but in the North West and London 23% of all residential property is leasehold.
Sexton explained: “There are big variations in how leasehold property is spread throughout the country. The Midlands has a low number, while in London and the North West almost a quarter of all residential property is leasehold. This will be of huge concern to lenders with a particularly heavy exposure in those regions. Most leasehold terms are on flats rather than houses, meaning urban areas are particularly exposed to the problem. Borrowers living in flats tend to be less affluent than those living in houses. This makes the threat of negative equity posed by short leaseholds an even bigger concern because it could hit people from poorer backgrounds the hardest.”
He concluded: “Shortening lease terms needn’t be a problem as long as the lender and the consumer are made aware of it in good time. A lease extension can cost as little as a few thousand pounds, and buying the freehold of your house costs even less. Applicants shouldn’t accept the first sum quoted by their landlords but you will be responsible for not only your costs but also those reasonable costs of the freeholder. The shorter the lease becomes, the more expensive it is to extend. It’s an issue that needs to be tackled early or else it can snowball into something much more heart breaking for the owner.”