The housing market has seen a resurgence in the practice of selling new-build homes on a leasehold basis, rather than freehold, and with it the inclusion of clauses which are harmful to the personal finances of the homeowner and to the value of the property.
Terms written into some leasehold contracts allow for ground rents, paid by the leaseholder to the person who owns the freehold, to double every 10 years. Developers have also been known to sell the freehold to a third party, which can materially affect the value of the property.
To combat these practices Nationwide, from 11 May, will impose a minimum lease term of 125 years for new-build flats and 250 years for new-build houses. It will also place a ban on unfair ground rent hikes.
Onerous leasehold terms
Robert Stevens, Nationwide’s head of property risk, data and strategy, said: “We are doing this to address the practice of using leasehold tenure where this is unnecessary, particularly for new-build houses, and to ensure that onerous leasehold terms, including ground rents, are properly considered and controlled in order to safeguard our mortgage members.”
The maximum acceptable starting ground rent on all new-build leasehold properties, accepted by Nationwide, will be limited to 0.1% of the property’s value with unreasonable multipliers such as doubling rents every five, 10 or 15 years not allowed.
Escalation should instead be linked to a verified index, such as the Retail Price Index. If the valuer believes the marketability of the property will be severely affected by unreasonable lease terms, they may decline the property, or reflect those terms in the valuation figure they provide to the lender.
Leasehold popularity rises among developers
A report released by Home Owners Alliance last month highlighted the tenure’s growth. In 1996 some 22% of of new builds were sold as leasehold, which rose to 43% by 2015. In London, 89% of all new housing stock is sold as leasehold. While the increase in leasehold can be attributed partly to the rise in the popularity of purpose-built flats, commonly sold as leasehold, new-build homes are now been sold on this basis, a practice unheard of 20 years ago.
Taylor Wimpey has become the first major developer to announce it would set aside £130m to address the issue of homeowners with escalating leasehold arrangements; the term used for multiplying ground rent payments over fixed periods.
‘poor practice in the new-build market’
Stevens added: “Nationwide is taking a proactive, leading position on this issue to address a significant risk facing our members and to challenge what we believe to be poor practice in the new build market.”
Communities secretary Sajid Javid is also working to stamp out the unnecessary and poor use of leaseholds by housebuilders. Addressing attendees of the Home Builders Federation, Javid said it was no longer possible to look the other way. He plans to ensure that new-build homes bought using the government’s Help to Buy equity loan scheme can only be done so under acceptable term. The terms have yet to be announced.