SPECIAL FEATURE: Flooding and mortgages
Flooding and being prepared for flooding is a key challenge facing homeowners across the UK. Earlier this summer, extensive flash flooding affected many parts of England and Wales and during a three-week period alone, an estimated £30-£40 million in insurance claims were made.
Add to this the latest deluge of rain, which resulted in wide-scale flooding and was reported to have damaged 5,000 properties. A spokesperson from the Association of British Insurers has been quoted as saying that they anticipate insurance claims to cost in the region of £400m as a result of this particular flooding event that occurred during September.
When you put into the context the number of potential properties at risk, with the Environment Agency stating that over five million people in England and Wales live and work in properties considered at risk of sea or river flooding, it opens up the question as to how and when flood risk is – or should be – identified, as part of the mortgage lending and property purchasing process.
Currently, it is not a mandatory requirement to commission a flood search in advance of the completing a purchase. In fact, a survey from Landmark Information Group has identified that while 80% of UK homeowners said they would not buy a property that was at risk of flood, only 42% of people actually investigated their flood risk before buying their home. Crucially, the survey also discovered that 55% of property owners in the UK expect solicitors to automatically investigate a property’s flood risk as part of the conveyancing process.
The Council of Mortgage Lenders states that in order to protect both the borrower and the lender, it is a standard requirement of all mortgages for the property to be covered by standard buildings insurance, including flood cover, for the full term of the contract. If insurance is not available, then it is highly likely that a purchaser will not be able to obtain a mortgage.
It is therefore vital that buyers are made aware of any potential flood risks as early as possible and have appropriate insurance in place before contracts are exchanged and they become fully responsible for the home. If not, they may find themselves owning a property for which they cannot obtain a mortgage.
From the lending perspective, with the mortgage community now more risk-averse than ever, it begs the question as to whether it would be appropriate to automatically incorporate environmental due-diligence into the process to identify properties that are considered to be at some form of environmental risk? After all, if a home is at risk of potential flood, it could ultimately have a negative future impact on the overall value or saleability of that home.
With this in mind, we believe that such due-diligence could be incorporated into the current mortgage valuation process.
Environmental data could automatically be fed into the process prior to a valuation, providing the surveyor with access to flood, land contamination or other relevant information dependent on the location. By doing this, it would help build a picture regarding any potential risks and the surveyor could include the data in their site notes for the lender or intermediaries to take into consideration much earlier in the process.
By enabling surveyors to receive localised, intelligence reports that provide historic and current information on a property and its immediate area, a clearer picture of its related risks could be incorporated into the decision-making process.
And, with unseasonal and often extreme weather conditions hitting the headlines more often, flooding has become a greater concern for residential property owners across the UK – both current and prospective future purchasers.
By incorporating environmental due-diligence into the valuation process, it would also provide the lending community with more detailed knowledge regarding a property’s risk profile far earlier in the process.