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Chaos for leaseholders and retirement home owners as banks refuse to lend

service charge couple
service charge couple

Banks are refusing to lend on homes with “onerous” service charges over concerns that they can be difficult to sell, it has emerged.

Some lenders, including major banks and building societies, also said they have policies against mortgages on retirement homes which typically come with high annual maintenance fees.

A banking industry source told The Telegraph lenders have concerns about retirement homes having high service charges, being “notoriously difficult to sell” and dropping in value.

Lenders are also worried about restrictive covenants on ownership and residency that mean retirement homes cannot be sold on the open market which can further restrict their resale values, the source said.

The way in which banks determine whether service charges are a problem on leasehold properties varies as it is down to their appetite for risk.

Nationwide said it does not lend on retirement homes. The building society said it will decline a property where there is “no justification” for the size of the service charge.

If a fee is 1pc or more of the property value, the building society said it asks the conveyancer to investigate what is provided for the fee, which is then reflected in the valuation.

Yorkshire Building Society said the services covered by the charge were among the factors it takes into account when deciding whether to lend, as well as its marketability and “whether the property is likely to be in demand”.

Two large banks said they will deny a mortgage if its underwriters believe the charges levied in return for the services provided do not seem proportionate.

If a valuer determines that the service charges are high compared with other similar properties in the vicinity they might advise that it will not be as marketable, leading to a declined mortgage application, sources at both banks said.

One said it could also result in a lower mortgage size being granted. The other also said it did not lend on retirement homes, as did Skipton Building Society and Family Building Society.

A third large bank told The Telegraph that properties with a service charge that increases each year or is a “significant proportion” of the price could be deemed unsuitable depending on the conditions of the local market and the amenities included. It said it only issued mortgages for retirement homes on an “exceptions basis”.

Keith Barber, director of business development at Family Building Society, said its underwriting experts look at service charges on a case-by-case basis.

He said: “Where the service charge is high (more than £2,000 per annum) we will include it in the affordability calculation alongside the proposed mortgage payments and other commitments.

“We also seek the valuer’s view on whether the service charge will adversely affect the future saleability of the property. If it does, that should be reflected in the valuation and might reduce the amount we’re willing to lend.”

Mr Barber said the building society does not lend on retirement properties, which “typically have very high service charges due to the on-site services provided for residents”.

The building society said retirement homes or complexes with leisure and hospitality facilities often have “extremely punishing ground rents and service charges” which can exceed £10,000 a year.

It said other concerns are that the freeholder, who owns the land, determines the fees and charges and acts as an agent when residents or the next of kin wish to sell up, which often means the owner is not allowed to sell on the open market.

Harry Scoffin, founder of campaign group Free Leaseholders, said service charges are being used as “profit centres”, especially on newer homes sold to freehold investors “leeching off other people’s homes”.

He said: “Leaseholders have no control over those running costs. It’s good that banks are finally waking up to this scandal that has been a slow-moving car crash for a number of years, especially after the Grenfell tragedy, but better late than never.

“Hopefully they can join the chorus of calls on the Government to actually make sure that this leasehold and freehold reform bill isn’t another damp squib that doesn’t give rightful control to the paying leaseholders.”

Mr Scoffin said the upcoming bill to reform the leasehold system will not “touch the sides” without further changes. The bill will ban new leaseholds on houses in England and Wales – but not on flats.

Given a slowing property market, he said he expected growing numbers of leaseholders to have problems getting mortgages because of inflated service charges.

‘We’re stuck here’

Sheryl-Anne Glanville, 53, recently had her leasehold flat assessed by a large mortgage broker and was told that “onerous service charge arrangements”, as well as ground rents, meant it did not “comply with lenders’ guidelines to valuers” and was therefore not eligible for a loan.

She and her partner own the flat outright but had been hoping they could borrow against it to buy another home.

Ms Glanville, who lives in east London and works in pharmaceuticals, said they are now thinking of selling, but are worried that this will pose an issue for potential buyers.

Since she bought the flat in 2004, her service charges have doubled from around £8,000 to £16,000 a year. Her ground rent is £500 a year but it’s expected to double in the coming years.

She said: “I have no idea where the money’s gone, because it’s definitely not going towards making the property look good or run well”.

Apart from a 24-hour concierge service, the residents do not have any special facilities such as communal gyms or swimming pools.

She said they felt “stuck here” and had been hoping to live elsewhere because they no longer work in London, adding: “I feel really disappointed that our options have been taken from us, and worried for people where it’s a lot more critical for them.

“We didn’t have to renegotiate for a new mortgage, but what’s going to happen to those poor people whose mortgages are expiring in the next 12 months?”

Lewis Shaw, of broker Riverside Mortgages, said the issue of properties getting declined for loans because of service charges has started to emerge as flats built in the last decade – when some developers were “taking the mickey” – come on to the market with “excessive” service charges.

Adrian Anderson, of broker Anderson Harris, said: “It’s a trend we’re going to see more of.”

Has this happened to you? Get in touch: alexa.phillips@telegraph.co.uk