There could be up to 1.43 million homes in England and Wales at risk from shortening leasehold terms – threatening borrowers and lenders with negative equity – according to research from e.surv.
Once property with a leasehold tenure – which accounts for 10.1% of residential housing stock in England and Wales – has less than 80 years until it expires, the value of the property begins to fall as lenders won’t grant a residential mortgage on it. The value of the property plummets rapidly once the lease runs down to below 60 years.
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.
Richard Sexton, director of e.surv chartered surveyors, 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.
“Most leases are very long – up to 900 years in some cases – but there are plenty which are much shorter. Once a lease has less than 80 years to run, the value of the property begins to fall and picks up speed the closer it gets to expiry. 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.
“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.”
Sexton explained that 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. The total value of all leasehold property in the UK is approximately £2.2 billion – but this figure could be dragged down by shortening leases.
He said that interest-only mortgage borrowers are most at risk. If the borrower is just servicing the mortgage on a leasehold property, once the unexpired lease runs below 80 years the value of the property falls close to the outstanding balance off the mortgage and shortly afterwards can fall into negative equity
There are a large block of interest-only borrowers potentially at risk. Since 2002, there have been 1.28 million interest-only loans granted for house purchase loans which have no repayment plan. This represents 14% of total house purchases over the last decade.
Sexton said: “There are big variations in how leasehold property is spread throughout the country. The Midlands has a low number, while in London and the North West almost a quarter of all residential property is leasehold. This will be of huge concern to lenders with a particularly heavy exposure in those regions. Most leasehold terms are on flats rather than houses, meaning urban areas are particularly exposed to the problem.
“Borrowers living in flats tend to be less affluent than those living in houses. This makes the threat of negative equity posed by short leaseholds an even bigger concern because it could hit people from poorer backgrounds the hardest.”