Lenders are increasingly unwilling to grant a mortgage on properties with short leases and the value of homes starts to decline when a lease terms begins to near the 80 year mark. Once a borrower or lender falls into negative equity “ the property becomes much more difficult to sell. As 1.43 million properties could be affected -“ this related to 10% of the UK residential housing stock which is leasehold. The research by e.surv also points out that this phenomena could affect approximately £.2.2 billion worth of property, with London and the North West being the most exposed area “ given that they have the highest percentage of leasehold property in the UK -“ with 23% of all residential property being leashold.
If the lease runs down to below 60 years the value of the property can drop dramatically putting the owner into negative equity and effectively becoming tied to the home as It becomes impossible to get a mortgage on.
According to the director of e.surv chartered surveyors, Richard Sexton, 90% of properties in the UK are freehold which means that the homeowner owns the land. However the remaining 10% are leasehold meaning that the owner of the property rents to land for a sum. In such cases, the length of the lease has a direct relationship to the value of the property and most homeowners are unaware that a lease term with decreasing years left can devalue the property by thousands of pounds.
Richard goes on to explain that the majority of leases are up to 900 years long -“ but of course there are many which are shorter. Once a lease nears the 80 year mark the property begins to lose value exponentially as it decreases further. The consequences of this are bad for both the lender and the homeowner as they fal into negative equity rendering the property unmortgageable, making the property unsellable to anyone but a cash buyer. In extreme cases the borrower is unable to move home and the lender is forced to begin the repossession process- however the lender is then threatening their leasehold back book due to being stuck with an asset which has depreciated greatly in value.
In the UK, flats are mostly at risk as they are mainly leasehold rather than freehold. Of the 1.43 million properties under leasehold in the UK – approximately 817, 000 are flats (with the other 612, 000 being houses). This of course means that inner city urbanised areas are affected more by the shortening lease terms problem.
In addition, those with interest-only mortgages are mainly as risk. Since 2002, there have been around 1.3million interest-only loans granted for property purchase loans which do not have in place a repayment plan. This figure pertains to 14% of all house purchases in the UK over the last decade.
Example
If in 2000, a property was bought for £150, 000 with a 90 year lease using an 80 per cent LTV interest-only mortgage, after s decade the value of the property begins to fall. When the property has 65 years left on the lease term in 2025, the value of the property could decrease by 20% – bringing the value of the home equal to the outstanding mortgage balance. However, once the lease term is below 65 years the value of the property continues to fall exponentially therefore being worth less than the outstanding value of the mortgage -“ placing both the borrower and lender in negative equity.
Richard Sexton comments that there is an unequal spread of leasehold properties throughout the UK. In London and the North West around 23% of all property is leasehold however in the Midlands the percentage is very low. This poses problems to such lenders who have a large exposure to particular regions. Again, given that many flats are on leasehold terms, urban areas are overly exposed to the problem of shortening lease terms. Given that the general trend is that those who live in flats are less affluent than those who reside in houses -“ the threat of negative equity will essentially affect those with lower incomes much more than those who are financially comfortable.
Richard goes on the explain that the problem shortening lease terms causes can be avoided as long as both the lenders and borrowers are made aware of it in enough time. A lease extension could cost only a few thousand pounds and buying the freehold of your house could potentially cost even less than this. This is an issue which needs to be seen to as early as possible since the shorter the lease term becomes, the more it will cost to extend.