Residential leaseholders may face negative equity
When property with a leasehold tenure, which accounts for 10.1% of residential housing stock in England and Wales, has less than 80 years remaining on the lease the value of the property begins to fall as lenders won’t grant a residential mortgage on it.
And the value of the property plummets rapidly once the lease runs down to below 60 years.
Richard Sexton, director of e.surv, 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.”
Unless the lease is renewed, which costs more the shorter the lease is, the value of the home can drop rapidly enough for the owner to fall into negative equity and become trapped in the home because it becomes impossible to get a mortgage on.
Most leases are very long , up to 900 years in some cases, but there are plenty which are much shorter.
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.
Sexton added: “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.”
Flats are particularly at risk because most UK flats are leasehold rather than freehold. Of the 1.43 million leasehold properties in the UK, 817,000 are flats while the remaining 612,000 are houses. This means inner city urban areas are disproportionately affected by the problem of shortening lease terms.
As well as the threat of negative equity, failing to help mortgage borrowers renew the lease on their property and failing to identify customers with short lease terms and alerting them to the problem leaves lenders open to accusations that they have treated their customers unfairly.
Sexton said: “To get a grip of the problem and to protect their lease back book lenders need to securitise and measure the value of the home because it may be worth much less than they expected. Some lenders could have a big block of borrowers on their books that are affected by the problem. Gone unnoticed, this block would be a ticking time bomb.
“The consequences of not acting are potentially very serious and lenders will come under intense TCF scrutiny. They may be forced to repossess homes which are nigh on impossible to shift on.”
And he added: “That’s not to mention the hit their balance sheets will take. It’s important lenders notify their customers if they spot there may be a problem. They then need to offer them advice on how to go about extending the lease.”
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 a few thousand pounds and buying the freehold of the house costs even less.