Leasehold ground rent scaring off lender?
Discussion
Has anybody ever encountered this?
We are in the process of buying a leasehold flat, however our potential lender has now decided "it is not suitable security for them due to the level of ground rent and local market conditions" which sounds rather ambiguous.
The ground rent is £150 PA, on a 999 year lease. This doesn't strike me as an excessive amount. My concerns now lie within the actual valuation itself, could it simply just be a case of "we don't think this flat is worth xxxx"?
There may be another potential lender, but could this end up being a pattern?
We are in the process of buying a leasehold flat, however our potential lender has now decided "it is not suitable security for them due to the level of ground rent and local market conditions" which sounds rather ambiguous.
The ground rent is £150 PA, on a 999 year lease. This doesn't strike me as an excessive amount. My concerns now lie within the actual valuation itself, could it simply just be a case of "we don't think this flat is worth xxxx"?
There may be another potential lender, but could this end up being a pattern?
Jimmy No Hands said:
I'm assuming this will be detailed in the lease, I will check.
It will be. Either the ground rent or service charges may be escalating at a rate that scares your lender, and if they are it should scare you too...There are various news stories around this, and the impact it has on affordability, as well as your ability to sell on later.
DanL said:
It will be. Either the ground rent or service charges may be escalating at a rate that scares your lender, and if they are it should scare you too...
There are various news stories around this, and the impact it has on affordability, as well as your ability to sell on later.
That is my concern long term, really. It is still very early stages, so obviously I'd rather know now. There are various news stories around this, and the impact it has on affordability, as well as your ability to sell on later.
Jimmy No Hands said:
So have not yet got a copy of the lease, but it was due to ground rent being 0.13% and their cap being 0.1%. Is this pretty typical?
This sounds like an unfortunate edge case. If I am understanding the numbers right, the ground rent is £150 pa on a c. £115k flat. The policy is probably set with reference to higher valued properties, particularly new builds, where 0.1% might be a more appropriate threshold.NickCQ said:
This sounds like an unfortunate edge case. If I am understanding the numbers right, the ground rent is £150 pa on a c. £115k flat. The policy is probably set with reference to higher valued properties, particularly new builds, where 0.1% might be a more appropriate threshold.
You're absolutely correct in your assumptions Nick. The broker even said it's due to the value being fairly low. I am awaiting back on more details regarding the ground rent. We have an alternative lender, it does leave a bit of a bad taste in your mouth come selling time. Although maybe I'm being overly cautious.I have a £120k ish flat and my ground rent is £250/year with the doubling clause every 10 years (Persimmon). Been here 5 years and no problems with getting the initial mortgage or 2 remortgages since. A few people in the block have sold without much trouble IIRC. Could be a problem with the clause coming up though. Hopefully, Persimmon sorts themselves out and offers the 999 extensions with £0 ground rent.
I have first hand experience with this issue and my advice is simple - Do not buy that property.
Our flat worth approximately 200k just took 2.5 years to sell because of ground rent. Ours was £480 pa so admittedly higher, lease was 93 years which is admittedly lower - the number of years on the lease however was never an issue.
It took us several failed sales (never had any feedback from buyers that dropped out) to realise what the issues were:
Issue 1:
The ground rent was over £250pa (£1,000pa if in London). In short, this is an issue for lenders because of a legal clause which can enable the freeholder to repossess the property/extinguish the lease if you don't pay the rent. Normally, the mortgage charge would get the first sum of money but my understanding is that the freeholder can potentially repossess the property and the mortgage company is left with nothing. I.e. the loan is not secured with 100% safety against the property.
https://www.ts-p.co.uk/news/the-gbp250-ground-rent...
Issue 2:
The ground rent rose every 10 years in line with RPI. I never calculated how much this would be but any rises in ground rent could further devalue the property OR, push you over the £250/£1,000pa limit in issue 1.
Some ground rents stay the same, some rise with inflation, some rise every 10 years, some double every x years (the worst offenders).
Our estate agent(s) were all shocked by this, ours was the first property they had an issue with but the feedback I got from our long term estate agent who is a family friend, was that ours was the first of many - All of the properties in our area (lots of leasehold) suffered with the same issue suddenly. The properties were typical first time buyer or investor purchases so unlikely to be a cash buyer, which was our only real option without resolving the issue.
Nothing has changed in law but my understanding was that recent cases with rising service charges on mobile park home type properties among others have caused media coverage and subsequent knee jerk reaction. For this reason be careful assuming this one will be ok, because others have sold in the same block. This has literally become an issue in the last 2-3 years.
How to resolve it:
We were advised by online conveyancer that we can get an indemnity policy, that didn't work - the lenders wouldn't have it. I then sought advice from a leasehold specialist and the resolution was a statutory lease extension.
Statutory lease extensions add 90 years to the total and extinguish ground rent to peppercorn (£1) - this cost us a fortune but meant that the flat had 180 years plus and no ground rent, which raised the value and got us most of our money back versus the very low sale price we agreed as a last attempt to get rid.
Our flat worth approximately 200k just took 2.5 years to sell because of ground rent. Ours was £480 pa so admittedly higher, lease was 93 years which is admittedly lower - the number of years on the lease however was never an issue.
It took us several failed sales (never had any feedback from buyers that dropped out) to realise what the issues were:
Issue 1:
The ground rent was over £250pa (£1,000pa if in London). In short, this is an issue for lenders because of a legal clause which can enable the freeholder to repossess the property/extinguish the lease if you don't pay the rent. Normally, the mortgage charge would get the first sum of money but my understanding is that the freeholder can potentially repossess the property and the mortgage company is left with nothing. I.e. the loan is not secured with 100% safety against the property.
https://www.ts-p.co.uk/news/the-gbp250-ground-rent...
Issue 2:
The ground rent rose every 10 years in line with RPI. I never calculated how much this would be but any rises in ground rent could further devalue the property OR, push you over the £250/£1,000pa limit in issue 1.
Some ground rents stay the same, some rise with inflation, some rise every 10 years, some double every x years (the worst offenders).
Our estate agent(s) were all shocked by this, ours was the first property they had an issue with but the feedback I got from our long term estate agent who is a family friend, was that ours was the first of many - All of the properties in our area (lots of leasehold) suffered with the same issue suddenly. The properties were typical first time buyer or investor purchases so unlikely to be a cash buyer, which was our only real option without resolving the issue.
Nothing has changed in law but my understanding was that recent cases with rising service charges on mobile park home type properties among others have caused media coverage and subsequent knee jerk reaction. For this reason be careful assuming this one will be ok, because others have sold in the same block. This has literally become an issue in the last 2-3 years.
How to resolve it:
We were advised by online conveyancer that we can get an indemnity policy, that didn't work - the lenders wouldn't have it. I then sought advice from a leasehold specialist and the resolution was a statutory lease extension.
Statutory lease extensions add 90 years to the total and extinguish ground rent to peppercorn (£1) - this cost us a fortune but meant that the flat had 180 years plus and no ground rent, which raised the value and got us most of our money back versus the very low sale price we agreed as a last attempt to get rid.
Edited by joropug on Wednesday 31st March 11:40
Thank you joropug.
I'm still yet to receive more details but to say it has put us off having a lender refuse (even if it does appear relatively tedious) has somewhat muddied the waters for us. We're effectively building up again from scratch and budget is tight this time around. We were never overly keen on a leasehold flat in the first instance but the area is more than ideal.
The agent made no mention of any issue, which as a buyer, doesn't surprise me. It's pretty counter-productive. Even the advisor had never really encountered this before and had it explained to her by a colleague (also not very reassuring)
If we do come to sell in a few years time I don't want to a) have our equity swallowed due to a decreased valuation and b) being in a position to sell to a first time buyer but them finding themselves with their primary lender not wanting to play ball. (as we have found here)
Hmmph.
I'm still yet to receive more details but to say it has put us off having a lender refuse (even if it does appear relatively tedious) has somewhat muddied the waters for us. We're effectively building up again from scratch and budget is tight this time around. We were never overly keen on a leasehold flat in the first instance but the area is more than ideal.
The agent made no mention of any issue, which as a buyer, doesn't surprise me. It's pretty counter-productive. Even the advisor had never really encountered this before and had it explained to her by a colleague (also not very reassuring)
If we do come to sell in a few years time I don't want to a) have our equity swallowed due to a decreased valuation and b) being in a position to sell to a first time buyer but them finding themselves with their primary lender not wanting to play ball. (as we have found here)
Hmmph.
Jimmy No Hands said:
Thank you joropug.
I'm still yet to receive more details but to say it has put us off having a lender refuse (even if it does appear relatively tedious) has somewhat muddied the waters for us. We're effectively building up again from scratch and budget is tight this time around. We were never overly keen on a leasehold flat in the first instance but the area is more than ideal.
The agent made no mention of any issue, which as a buyer, doesn't surprise me. It's pretty counter-productive. Even the advisor had never really encountered this before and had it explained to her by a colleague (also not very reassuring)
If we do come to sell in a few years time I don't want to a) have our equity swallowed due to a decreased valuation and b) being in a position to sell to a first time buyer but them finding themselves with their primary lender not wanting to play ball. (as we have found here)
Hmmph.
No problem, the way I look at it the problem will still be there when you come to sell and a lot of solicitors will advise against it - We had:I'm still yet to receive more details but to say it has put us off having a lender refuse (even if it does appear relatively tedious) has somewhat muddied the waters for us. We're effectively building up again from scratch and budget is tight this time around. We were never overly keen on a leasehold flat in the first instance but the area is more than ideal.
The agent made no mention of any issue, which as a buyer, doesn't surprise me. It's pretty counter-productive. Even the advisor had never really encountered this before and had it explained to her by a colleague (also not very reassuring)
If we do come to sell in a few years time I don't want to a) have our equity swallowed due to a decreased valuation and b) being in a position to sell to a first time buyer but them finding themselves with their primary lender not wanting to play ball. (as we have found here)
Hmmph.
-First time buyer solo - They didn't refuse to lend at the valuation stage but they massively under valued the flat to the tune of about 20k, he rage quit so to speak so we never got to talk about it more.
-Mature couple relocating - Pulled out after a few days for no reason
-First time buyers - Agent implied they could only go to one lender for some reason (I'm guessing bad credit) and they refused based on ground rent, but we thought that was because of their finances/weird lender.
-First time buyer solo - We massively dropped the price and the ground rent went unmentioned for 2 months, estate agents dropped the ball and didn't pursue the mortgage position so we didn't know - When it did come to it being an issue, I ended up speaking directly the buyer's mortgage broker which probably wasn't right....
He told me that he took his client's case to a mortgage broker forum and discussed it at length. He said that nobody in the forum had successfully negotiated the issue and basically told us that he had been to every lender directly and spoken to them with no joy.
It was a frank conversation, he had no angle as his client wasn't proceeding anyway - it was really useful though as we got to find out the scale of the issue and we weren't going to just get lucky with a different buyer/lender.
The lease extension is quite easy to calculate online, plus 4-5k for valuations and solicitors fees if i recall correctly.
https://www.lease-extension-solicitors.co.uk/lease...
You are only entitled to do so once you have lived there 2 years, the calculator doesn't let you enter 999 I assume this isn't an issue more a limitation with the calculator.
You can contact the freeholder directly and ask them for a quote to extinguish the ground rent, it will again come with loads of costs and when we asked them they wanted almost as much as the statutory lease extension.
Edited by joropug on Wednesday 31st March 13:56
Following this with interest. I’m in the same boat as the poster above. Ground rent is £300p/a doubling every 25 years on a 125 year lease. I’ve been in the flat for five years now and tbh I’d like to be gone in another 12-24months as i need a bloody garage - well this is PH after all!.
Main thing that’s a kick in the nuts is the increase in service charges +30% in the past four years alone.
We are unable to buy the freehold now as it was sold off to an offshore company somewhere in Gurnsey circa 6months after I moved in.
I’m seriously considering opting for the statutory extension route just so I can sell the bloody thing in future. It’s something that’ll be warning my young son of come the time he tries to get on the housing ladder.
Main thing that’s a kick in the nuts is the increase in service charges +30% in the past four years alone.
We are unable to buy the freehold now as it was sold off to an offshore company somewhere in Gurnsey circa 6months after I moved in.
I’m seriously considering opting for the statutory extension route just so I can sell the bloody thing in future. It’s something that’ll be warning my young son of come the time he tries to get on the housing ladder.
Matt p said:
Following this with interest. I’m in the same boat as the poster above. Ground rent is £300p/a doubling every 25 years on a 125 year lease. I’ve been in the flat for five years now and tbh I’d like to be gone in another 12-24months as i need a bloody garage - well this is PH after all!.
Main thing that’s a kick in the nuts is the increase in service charges +30% in the past four years alone.
We are unable to buy the freehold now as it was sold off to an offshore company somewhere in Gurnsey circa 6months after I moved in.
I’m seriously considering opting for the statutory extension route just so I can sell the bloody thing in future. It’s something that’ll be warning my young son of come the time he tries to get on the housing ladder.
Yeah you will more than likely have the same issue as us. My advice is, if you want to try and get around it try for a sale with no onward chain - don't spend any money until you know it's definitely through the mortgage, valuation passed, mortgage offer formalised etc. Main thing that’s a kick in the nuts is the increase in service charges +30% in the past four years alone.
We are unable to buy the freehold now as it was sold off to an offshore company somewhere in Gurnsey circa 6months after I moved in.
I’m seriously considering opting for the statutory extension route just so I can sell the bloody thing in future. It’s something that’ll be warning my young son of come the time he tries to get on the housing ladder.
If you have issues and want to get out, start the process ASAP - it takes around 6-9 months on average. It was 6 for us. You can start advertising the property when the lease is being finalised and hope that it syncs up to shave a bit of time off but we found our advert with "LEASE EXTENSION COMPLETED - 180 YEARS, PEPPERCORN GROUND RENT" trumped the others in the area with stuff like "Lease to be completed upon sale" aka if you want to buy this property it will take 6 to 9 months.
joropug said:
Yeah you will more than likely have the same issue as us. My advice is, if you want to try and get around it try for a sale with no onward chain - don't spend any money until you know it's definitely through the mortgage, valuation passed, mortgage offer formalised etc.
Isn’t the issue going to be that few buyers are going to proceed if they realise they are taking on a time-bomb and/or buying at a discount?I’m surprised the builders got away with some of the ground rent terms they seem to have done, but not sure what a good long-term fix looks like for those already caught by these terms.
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