Refused mortgage due to escalating ground rent

karen100

Hi all - just wanted to get some views on the situation I am in. We have been involved in a long painful flat purchase (offer accepted in July, but still not exchanged!). A new development yesterday - despite having the mortgage agreed months ago, the lender decided to pull out yesterday, citing unsustainable ground rent increases.

The ground rent deal is that it is £350 now, and increases by £17.50 every year, to the end that it has doubled to £700 in 20 years/. Thereafter it will double every 20 years. While not exactly great, that doesn't sound insane... but i'm a first time buyer and don't really know! The mortgage broker said its not that usual for it to go up like this.

Anyway, i wondered if people thought that was a 'normal' increase (for London)? Or whether this is something I should be negotiating with the freeholder to get changed?

I have looked on a few other forums and they suggest that when you get the lease extended then the ground rent can be reduced, but the leasehold is 97 years so we wouldn't be doing that just yet, and i don't really understand why the freeholder would reduce it anyway? The lease was only extended last year anyway.

Any advice very gratefully received. We were meant to be exchanging this week so the loss of the mortgage might well have stuffed everything up anyway.

Thanks
Karen

eddddy

karen100 wrote: »

I have looked on a few other forums and they suggest that when you get the lease extended then the ground rent can be reduced,

Actually, that's exactly the problem with this flat.

When you get a statutory lease extension, the ground rent goes to zero, but you have to pay the freeholder compensation for all the future ground rent they will lose.

In this case, that compensation for lost ground rent would be massive.

karen100 wrote: »

and i don't really understand why the freeholder would reduce it anyway? The lease was only extended last year anyway.

My guess - the Freeholder has suckered the current leaseholder big time.

The freeholder probably offered the leaseholder a 'cheap' lease extension, with appalling ground rent terms. The leaseholder probably signed up without taking professional advice.

The value of the lease has dropped dramatically (and it's practically unmortgageable), whilst the value of the freehold has increased dramatically.

Guest101

karen100 wrote: »

Hi all - just wanted to get some views on the situation I am in. We have been involved in a long painful flat purchase (offer accepted in July, but still not exchanged!). A new development yesterday - despite having the mortgage agreed months ago, the lender decided to pull out yesterday, citing unsustainable ground rent increases.

The ground rent deal is that it is £350 now, and increases by £17.50 every year, to the end that it has doubled to £700 in 20 years/. Thereafter it will double every 20 years. While not exactly great, that doesn't sound insane... but i'm a first time buyer and don't really know! The mortgage broker said its not that usual for it to go up like this.

Anyway, i wondered if people thought that was a 'normal' increase (for London)? Or whether this is something I should be negotiating with the freeholder to get changed?

I have looked on a few other forums and they suggest that when you get the lease extended then the ground rent can be reduced, but the leasehold is 97 years so we wouldn't be doing that just yet, and i don't really understand why the freeholder would reduce it anyway? The lease was only extended last year anyway.

Any advice very gratefully received. We were meant to be exchanging this week so the loss of the mortgage might well have stuffed everything up anyway.

Thanks
Karen

Maths clearly isn't a strong point.


It wont double every 20 years, it will go up by £350 every 20 years.


So year 1-20 it increases 100%
21-40 the increase is only 50%
etc.
etc.

ThePants999

Even if it were actually doubling every 20 years, that doesn't sound too bad to me? With historical inflation rates, that's pretty much in line with inflation, though admittedly above current rates.

HouseBuyer77

Guest101 - I thought that too initially but after the first 20 years it then starts doubling every 20 years. Or possibly after 20 years it becomes a £15 a year increase for the next 20 years, achieving the doubling that way.

I know lenders don't like these doubling term. However over a 20 year timescale it's not so bad. Mathematically it's very similar to a 3.5% increase every year. So potentially quite similar to a CPI linked increase (CPI will have ups and downs though). It may be your lender doesn't bother with this subtleties and simply says no doubling ground rents.

karen100

Hi - just to be clear - it is due to go up by £17.50 every year for the first 20 years. Then after that first 20 years, the total ground rent (then £700) will double every 20 years (instead of going up in yearly increments), so £700 for years 20-39, and £1400 at year 40.

K

Guest101 wrote: »

Maths clearly isn't a strong point.


It wont double every 20 years, it will go up by £350 every 20 years.


So year 1-20 it increases 100%
21-40 the increase is only 50%
etc.
etc.

Guest101

karen100 wrote: »

Hi - just to be clear - it is due to go up by £17.50 every year for the first 20 years. Then after that first 20 years, the total ground rent (then £700) will double every 20 years (instead of going up in yearly increments), so £700 for years 20-39, and £1400 at year 40.

K

I see, thanks.


That's quite economical really.


No increase at all for 19 years.

AdrianC

Guest101 wrote: »

I see, thanks.

That's quite economical really.

No increase at all for 19 years.

<sigh> No...

Today - £350.
2017 - £350 + £17.50
2018 - £350 + (2 x £17.50)
2019 - £350 + (3 x £17.50)
...
2035 - £350 + (19 x £17.50)
2036 - £700
2037 - £700
...
2056 - £1400

karen100

Right.. thanks. I'll check these things with my solicitor. The lender did say the resale value was the concern - i suppose i thought that the lease could renegotiated at extension, but if there is this compensation for exponential ground rent rises then that could be crazy!

eddddy wrote: »

Actually, that's exactly the problem with this flat.

When you get a statutory lease extension, the ground rent goes to zero, but you have to pay the freeholder compensation for all the future ground rent they will lose.

In this case, that compensation for lost ground rent would be massive.



My guess - the Freeholder has suckered the current leaseholder big time.

The freeholder probably offered the leaseholder a 'cheap' lease extension, with appalling ground rent terms. The leaseholder probably signed up without taking professional advice.

The value of the lease has dropped dramatically (and it's practically unmortgageable), whilst the value of the freehold has increased dramatically.

Guest101

AdrianC wrote: »

<sigh> No...

Today - £350.
2017 - £350 + £17.50
2018 - £350 + (2 x £17.50)
2019 - £350 + (3 x £17.50)
...
2035 - £350 + (19 x £17.50)
2036 - £700
2037 - £700
...
2056 - £1400

Yes so no increase between 2035 - 2056 ?

karen100

I think that that may be the case - which gives me hope that someone else will give us a mortgage! I am not concerned about the implications of this exponential ground rent rise though. I just assumed it was normal as my conveyancer didn't highlight it to me. If i do get to a stage where i have to pay the freeholder compensation for lost earnings, then they might be able to really fleece me. The other flat owners and myself have already chatted about possibly buying the freehold and i guess this loss ground rent issue might come into play then as well.

HouseBuyer77 wrote: »

Guest101 - I thought that too initially but after the first 20 years it then starts doubling every 20 years. Or possibly after 20 years it becomes a £15 a year increase for the next 20 years, achieving the doubling that way.

I know lenders don't like these doubling term. However over a 20 year timescale it's not so bad. Mathematically it's very similar to a 3.5% increase every year. So potentially quite similar to a CPI linked increase (CPI will have ups and downs though). It may be your lender doesn't bother with this subtleties and simply says no doubling ground rents.