Up to 1.43 million homes in England and Wales are at risk from shortening leasehold terms, threatening borrowers and lenders with negative equity, according to research from chartered surveyor e.surv.
“Most leases are very long and up to 900 years in some cases," said Richard Sexton, director of e.surv, "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 unmortgageable, 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.”
Flats are particularly at risk since most UK flats are leasehold rather than freehold. Of the 1.43 million leasehold properties in the UK, 817,000 are flats, while the rest are houses. The result is that inner city urban areas are disproportionately affected by the problem of shortening lease terms.
London and the North West - where 23 per cent of all residential property is leasehold - appear to most at risk.
“There are big variations in how leasehold property is spread throughout the country," explains Richard Sexton. "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.”