Flooding insurance changes could be 'booby trap' for buyers

Property owners could find themselves unable to insure their properties

A quarter of the properties in the UK at risk of flooding could be left uninsured leaving mortgage lenders exposed to £214 billion of possibly blighted property, suggests new research.

According to a report from property data experts xit2, lenders could be left at risk as mortgage borrowers find themselves unable to secure insurance against flooding when the ‘Statement of principles’  agreed between the government and the insurance industry expires in June next year.

It could mean property owners are unable to insure their properties as insurers become unwilling to offer policies which expire after the principles agreement. The end of the insurance cover leaves lenders’ mortgage book exposed to property at risk of floods where there is already a mortgage agreement in place.

“No insurance equals no mortgage," said Mark Blackwell, managing director of xit2. "This means the only people who’ll be able to buy property at risk of flooding will be cash buyers – the lack of competition means prices will plummet. It is vital lenders are able to identify properties at risk before they value it and grant a mortgage. Failure to do so exposes them to potentially terminally blighted property and will increase the risk in their mortgage book. As the value of uninsured property falls, owners will be left in negative equity. It’s a real booby trap for buyers, surveyors and lenders.”

Uninsured properties could leave owners in breach of their mortgage contract. The end of the insurance agreement also leaves surveyors exposed to a rise in over-valuation claims, where lenders feel the surveyor has been negligent and not taken flooding risk into account when valuing the property on their behalf.

The Association of British Insurers estimates the 2007 floods cost more than £3bn and that the average bill for the repair of a flooded property is over £30,000. Around £300 million is spent on flood defences every year but 43% of defences are in fair, poor or very poor condition.

“The top-line figure for government current spending on flood mitigation may seem hefty, but in reality much more needs to be done to reduce the risk flooding poses to property," said Blackwell.