Mortgage declined on basis of ground rent

katemonkey

Hi all,

Looking for some advice on my current situation. I am a first-time buyer and on my second attempt at a property purchase. The process has been unbelievably nightmarish. I was looking to exchange on 23 November, and we are now on 27 December. This delay is largely down to huge incompetencies from both my conveyancers and the vendor’s conveyancers.

However, the news I have received today has really been the last straw. Apparently Santander have now declined the mortgage on the property due to the ground rent increase. In the Lease document, it states that ground rent doubles every 25 years or increases by 0.3% of the market value. There are 93 years left on the lease and the next increase will be in about 2035.

Santander have said they will reconsider the application if the lease is amended to state that ground rent will increase in line with RPI. My question is now... what is my next step? I really want this property and I have been through what feels like hell in order to get to this final hurdle, I don’t want to give up. With everyone being on leave over Christmas this couldn’t have come at a worse time either, as I can’t get hold of my conveyancer until 6 Jan - not that she has been in the slightest bit helpful on any other issues :sad:

I’d really appreciate any advice and sorry if I’ve missed out any important information... thank you :A

- kate

Accountant_Kerry

This sort of ground rent clause tends to be very frowned upon. Do you have a feel for if the freeholder would change the lease? its likely to cost a couple of thousand in legal costs alone.

katemonkey

Accountant_Kerry wrote: »

This sort of ground rent clause tends to be very frowned upon. Do you have a feel for if the freeholder would change the lease? its likely to cost a couple of thousand in legal costs alone.

Thank you for your reply! I can see how this ground rent clause is very unfavourable, and I understand it is in my best interest to get it sorted before I become the Leaseholder of the property. I don’t know how the freeholder would feel about it, but I have to try. I would be willing to share the legal costs of drawing up a deed of variation with the vendor. Surely something has to give here, as even a cash buyer would be put off by the ground rent clause.

Would I have any other options? What if the vendor extended the lease and we shared the cost of that, in order to reduce the ground rent to nil?

Thank you again,
kate

[Deleted User]

If the Ground Rent is changed to meet the Lender's policy (as you say, through a Deed of Variation) then it will be fine. Not necessarily to Nil, just to meet policy and make sure it's not onerous for future lenders (I'd say no more than 0.1% of current value, raising every 25 years in line with RPI to be safe).

The issue will be who pays for it and when. I can imagine the freeholder not being keen to pay for it as you could still pull out, and there's no certainty they'd get those fees back.

Likewise I'd be wary about paying it yourself, as that's potentially wasted money for you if they sell to someone else.

I'm surprised they cost so much, over the last year or so I've seen so many of them - lenders are sadly really clamping down on excessive/onerous clauses & charges.

Ultimately it does also protect you, but imagine it has been a nightmare.

Only other alternative is to find a lender that would be happy to lend - give them the information upfront around the terms and then submit an app to them. You could then look to get the lease adjusted afterwards, but you have to be aware of the issues you'll face when selling and the costs of getting the lease changed.

Pressing the freeholder on the unsaleable property front ("If I've been declined, everyone else will be too...") may be enough for them to pay the costs and/or discount the purchase price enough for you to make it worthwhile you paying them (although still a risk).

93 years is a relatively short lease term too, presume you're looking at extending that at the same time? Otherwise in approx 8/9 years you'd have trouble re-mortgaging away from Santander or selling (presuming you're still in the property then).

davidmcn

katemonkey wrote: »

With everyone being on leave over Christmas this couldn’t have come at a worse time either, as I can’t get hold of my conveyancer until 6 Jan

Not sure what you mean by not at a worse time - nothing is going to happen with your transaction until everybody is back from their hols. And nothing is going to happen quickly if you now want the vendor to negotiate something with the freeholder. So you may as well enjoy the time off and deal with it once people are back at work.

katemonkey

Thank you very much for your reply and your perspective!

Somerset_La_La_La wrote: »

If the Ground Rent is changed to meet the Lender's policy (as you say, through a Deed of Variation) then it will be fine. Not necessarily to Nil, just to meet policy and make sure it's not onerous for future lenders (I'd say no more than 0.1% of current value, raising every 25 years in line with RPI to be safe).

Would my solicitor be the one to find out the exact criteria from the lender and then report back to the vendor in order to draw up the deed of variation?

Somerset_La_La_La wrote: »

93 years is a relatively short lease term too, presume you're looking at extending that at the same time?

I would probably be looking at extending the lease after 2 years of owning the property. But I’m also open to having it extended now through the current owner and shouldering the cost.

In your opinion, is this GR issue something I should be pursuing and working on getting resolved? Is it worth it? Or is it such a big red flag that am I better walking away from it?

Thank you again for your insight.
- kate

katemonkey

davidmcn wrote: »

Not sure what you mean by not at a worse time - nothing is going to happen with your transaction until everybody is back from their hols. And nothing is going to happen quickly if you now want the vendor to negotiate something with the freeholder. So you may as well enjoy the time off and deal with it once people are back at work.

Haha, thank you for your voice of reason! :beer:
I suppose what I meant by it being a bad time is more the emotional and personal impact it is having on me at this time of year and the frustration of it not being able to move it forward while everyone is off. I’ve been without a home for over a month now, and particularly difficult over the Christmas period while trying to juggle various responsibilities, not knowing where I might be from week to week.

[Deleted User]

Your Solicitor would be aware of Santander's criteria - that's why they reported it as being outside of criteria.

If you meet Santander's criteria then I'd imagine that'll be fairly similar to other lenders, as they're a mainstream lender.

Your Solicitor should be able to advise you in terms of what to push for to make sure it's universally acceptable. Nil with no review would be best, but you might have trouble negotiating that!

Regarding the extension, I'd have thought it would be cheaper to do both together - you could ask your Solicitor for a quote for just the deed of variation and to quote for both.

The shorter the lease gets, generally the more expensive it is, so although 2 years doesn't seem like much but if that slips to say 5 years then you're below 90 years which isn't ideal (and not far above the 85 minimum for most mortgages, which then really affects you).

I guess you've already spent considerable time and money on this purchase, so it's whether you want to start all over again or not. It's certainly something that can be overcome (subject to willing freeholder) but as you say it's just more time and uncertainty.

Good luck with it all! I'm in a similar situation and can't get any response as everyone's off work for Christmas (but I'm not! :rotfl: ) so can see where you're coming from.

katemonkey

Somerset La La La, you have been so helpful, I really appreciate it and it helps to know I’m not alone in this!

I have invested a lot of time and money in this purchase, as you said, and it feels like I am 90% of the way there, I don’t want to abandon it yet. I am going to try and work with my solicitor to get the deed of variation and explore the lease extension option ... I’ll have to hang tight until 6th Jan though :wall:

Fletchasketch

Hey, how did you get on? I'm in the process of trying to sell my leasehold property for the third time, and the process has been horrific. I'm now terrified that this ground rent clause is going to come back and bite me on the bum when my buyer's mortgage is turned down. Crossing everything for you that you can get that dead of variation turned around quickly!

katemonkey

Hi Fletchasketch!

We're in the process of now getting a deed of variation which has been approved in principle by the freeholder and vendor and my solicitor says that the new criteria will now be acceptable to my lender.

Basically the variation is going to reduce the ground rent from a 0.3% increase every 25 years, to a 0.1% increase every 25 years. However, the leaseholder is going to have to pay a premium for this which is the difference in ground rent from old to new. This is amounting to about £11,000.

Because we already have approval from the freeholder, I'm told the process to get this officially drawn up and signed off will be a few weeks.

I hope this helps. What I've learnt from this process is that the doubling ground rent clauses are rectifiable but it's best to get a deed of variation proposal as soon as you can from the freeholder. Ultimately, no lenders are offering mortgages on leaseholds with what they call 'onerous' ground rent increases and cash buyers don't want to inherit this issue either. I also found a lot of information on the CML website, particularly this page which lists all the lenders' criteria on ground rent conditions.