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Lenders are keeping an eye on escalating leasehold costs, brokers say – analysis

  • 05/06/2024
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Lenders are keeping an eye on escalating leasehold costs, brokers say – analysis
Lenders are closely observing rising service charges and other costs associated with leasehold, brokers have said.

When asked by Mortgage Solutions if increases in service charge and rent on the unowned portion of the property were impacting shared owners specifically, brokers said all leaseholders were affected by rising costs associated with the tenure type. 

Last week, the Leasehold and Reform Act passed without the original promise to cap ground rents. 

Before it was pushed through Parliament ahead of the dissolution of the government, the House of Lords tabled amendments to make shared ownership fairer and link service charge to equity.

Scott Taylor-Barr, principal adviser at Barnsdale Financial Management, said: “Service charges for any leaseholder owners, not just those via shared ownership, have been an issue lenders have been watching for a little while now.

“Many lenders are taking issue with service charges, or ground rents, [that] are above a certain percentage of the property value or have automatic increases built into them, making the property unacceptable to some lenders.” 

Taylor-Barr added: “This causes issues for those homeowners and limits the pool of properties that potential buyers can access, due to a reduced number of lenders willing to help.

“The rules and laws around leasehold property are in the spotlight at the moment, so it’s possible that we could see changes in the area over the coming months. It will be interesting to see how and when lenders respond to these changes and whether they help, or hinder, those looking to mortgage a leasehold property.” 

Ellis Shepherd, business owner and senior broker at All About Mortgages, also said service charge was an “industry-wide” problem. 

He added that shared ownership often got an “unfair blasting” because it provided a more affordable route to homeownership, and just a few years back it was again “unfairly tarnished” because of concerns around rising ground rent. 

Shepherd said that, in recent months, remortgaging shared owners were “feeling the pinch”, but this was not down to service charge alone, and he had not seen any cases like those in the mainstream media. 

He added: “For many, it is probably not an issue in singularity, but is the word we are missing out here ‘yet’?

“Could service charge become more of an issue in the coming years? Is this just the start? What will lenders think, as they were quick to refuse to lend on those scaling ground rents every five, 10 or 25 years, but service charge is seemingly changing every year.” 


Issues when remortgaging

Although most of the brokers Mortgage Solutions spoke to did not have examples of service charge being the main cause of remortgage difficulties, Austyn Johnson, founder of Mortgages for Actors, had come across such a case. 

He said: “I had a client who went from about £100 per month to around £400 per month in two years as it was in need of a new roof suddenly. They are looking at keeping the charge at this level for two years before they review, in which case it could go up again.

“This shouldn’t be allowed, as it’s now the highest service charge in the area and has pretty much made it unsellable. The client is now forced to pay this service charge on her one-bed apartment or hope for a sale, [and] then the new buyers would also be at the freeholder’s mercy.” 

A delay in obtaining information from housing associations can also disrupt the remortgage process, other brokers pointed out. 

Michelle Lawson, director at Lawson Financial, said this could make shared ownership remortgages “quite costly”, as the housing association needed to approve the transaction along with lawyers and the broker, but they were not always quick to respond. 

She said problems also arose from the uncertainty of the associated costs such as ground rent on the unowned share and mortgage payments. 

“If the borrowers increase their share, this is another complexity. There are limited lending options for shared ownership borrowers as it isn’t accepted by every lender, so this can really narrow down choice,” she added. 

Robert Timm, managing director at Sunland Mortgages, reiterated this point, saying: “I’ve helped a number of clients remortgage their shared ownership properties over the years, both like-for-like as well as staircasing. The process is definitely not easy.

“It’s sometimes very difficult to get information quickly from the housing association, and many comment [on] how much the service charge or rent has increased by.” 


Preparing and being aware

Rupi Hunjan, managing director of Censeo Financial, said 90% of the applications handled by his firm had been for a product transfer due to the small rate differentials, so he had not come across remortgage struggles or issues linked to higher service charge. 

Hunjan said increased rent could impact affordability, but typically did not stop a shared owner from taking a product transfer.

He said cladding was more likely to be a hindrance. 

Hunjan added: “The impact is similar to outright owners who have been hit by increased remortgage rates, repayments have significantly increased for many. 

“Based on information from housing associations and developers, the driving factor given for increased service charges is inflation and building safety. The costs of carrying out the services have increased and, in some cases, building safety measures have added to the cost due to additional safety measures such as fire wardens.” 

He continued on to say that, where borrowers did benefit more from a remortgage than a product transfer, the rise in service charge costs was not as severe on shared owners as it seemed to be on open market leasehold properties. 

Hunjan attributed this to the affordability calculations done before a purchase, adding: “When purchasing a shared ownership property via a registered provider, an initial affordability assessment is carried out by an experienced shared ownership adviser using guidelines to assess affordability at the time of purchase and also the long-term sustainability. 

“This affordability assessment model – we believe – has minimised the impact increased service charges has had; however, we are aware that there are shared owners who have been adversely affected.”

David Hollingworth, associate director of communications at L&C Mortgages, said interest in shared ownership was growing as it could ease affordability constraints with becoming a homeowner, but the circumstances of an individual always needed to be considered. 

He also said building safety could be behind rising costs, saying: “It’s hard to pin down what may drive those increases, and [it’s] likely to vary by association and property, but building safety will be a big issue for some.” 

Hollingworth said: “The fact that these can in some cases be substantial could limit the ability of some to remortgage and to be able to afford higher borrowing that could help push toward a higher level of ownership.

“As with any leasehold property, there may be reasons for higher service charges to be able to carry out essential maintenance. Borrowers will need to be aware of what the charges will be and how those could escalate over time.” 


Some views in this article were sourced from Newspage.

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