What Happens If My Mortgage Is Rejected Due To Ground Rent?

Buying a leasehold property means that there will be ground rent conditions as part of the lease. Issues surrounding ground rent and getting a mortgage come into play when the lease features onerous levels of ground rent that already exceed £250 per year (outside of London) or the annual ground rent payments could increase by hundreds over pounds annually over the years because of the ground rent doubling clauses in the lease.

A clause relating to ground rent is generally deemed important if ground rent doubles every 10 years, and indeed in recent years if it increases with the rate of RPI. These clauses are more common in leases around 2006 onwards. Many major developers, including Taylor Wimpey, used them to increase profits without compromising leaseholders.

The same thing happened to the buyer of my leasehold flat, so I know how you can get around this issue. If you’re currently in the process of buying a leasehold property and your mortgage is rejected due to ground rent, in this article we look further into why it might have been rejected due to ground rent and how this issue can be resolved.

Why Has My Mortgage Been Rejected Due To Ground Rent?

The reason a mortgage is rejected on the basis of ground rent will be because the levels of ground rent are onerous, or will be onerous in the near future due to doubling ground rent clauses in the lease.

Mortgage rejections are happening more and more frequently surrounding ground rent. The main issue is when the ground rent already exceeds £250 outside of London, this is because it becomes an assured tenancy agreement. If ground rent levels fall within certain levels prescribed by the Housing Act 1987 (‘the 1987 Act’) could mean that a long lease is deemed to become an assured shorthold tenancy (‘AST’), this figure is currently £250 and £1,000 if inside London.

Why does an AST affect whether a lender will, well lend? Once an AST kicks in, if the leasehold owner was to default on their ground rent payments after the demand dates passed then it becomes easier for the landlord to take possession of the property, leaving the mortgage lender with nothing. An AST opens up a huge risk for lenders, as how do they know that the new owner will indeed pay their ground rent on time and not fall into arrears?

This may also become an issue if the leasehold you are purchasing or selling is currently less than £250 ground rent per yer, but there are doubling ground rent terms in the lease in the not so distant future.

From my own experience, my flat was at £250 ground rent and was going to raise at the rate of RPI in 4 years time. Whilst arguably it didn’t already exceed this £250 mark, it was already being classed as an AST and was considered an onerous ground rent level. I have also seen similar people in this position when the ground rent is far lower, but the doubling ground rent clause is causing a huge issue with mortgage lenders.

Whilst the above is the common issue with a mortgage being declined due to ground rent and will usually come into play first, once the ground rent goes above 0.1% of the value of the property, some lenders start refusing according to the latest financial lenders handbook.

Now, we know why a mortgage is rejected due to ground rent, how do we get around this? And should we?

What Happens If My Mortgage Is Rejected Due To Ground Rent?

Many sellers are only discovering this is an issue when they come to selling which is why ground rent issues have been rearing their ugly head. As we continue to wait for an update on the leasehold reform, existing leases are still governed by onerous ground rent charges so unfortunately it is something we are going to see more of.

When your mortgage is rejected due to ground rent this does not mean game over. There are a few different options;

Indemnity Policy

An indemnity policy is likely to be the first port of call from the sellers side to see whether your mortgage lender will accept it. If this works it is the quickest solution to the problem as it satisfies the mortgage lender, and minimal legal work is involved.

However, this does NOT protect you as the prospective owner. You will also encounter this issue when it comes to selling in the future (unless the lease reform changes things) and you will be subject to rising levels of ground rent. This is not an ideal outcome, apart for for the seller. Also, less and less mortgage lenders are accepting indemnity policies now. Although, not impossible. When I sold my flat, the mortgage lender of the purchase was very satisfied with this solution.

Letter From The Freeholder

I heard this solution mentioned by Matt Lewis, solicitor from Commonhold and Leasehold Experts Limited, he said that a freeholder can write a letter stating that they would not enforce an AST if ground rent fell into arrears.

Of course, you would have to pay for this enquiry to be done through the freeholder. This is the first time I have heard of this solution, but it’s something worth exploring if an indemnity policy doesn’t do the trick.

Deed of Variation

Solicitors are not the best versed on issues surrounding ground rent on leasehold properties (in my experience), and what’s in the best interests of the seller and buyer. A deed of variation seems to be the impulsive thing that is requested from the seller. A deed of variation means making an amendment to the lease that stops the ground rent from increasing, for the rest of the lease term. The seller will need to approach their landlord/freeholder to enquire and start the proceedings for this.

A deed of variation can cost thousands of pounds, and take weeks or months to complete. The outcome is not as enviable as a lease extension as with a deed of variation you still continue to pay ground rent over the years.

Lease Extension

From my extensive research and experience, a lease extension is the BEST option for both seller, and especially the buyer. A formal lease extension can only be started if the owner has owned the property for a minimum of 2 years. It involves adding an extra 90 years to the lease, as well as reducing the ground rent to a peppercorn, or £0.

This makes the property highly saleable and attractive, but it is not cheap. This route is also likely to be in the region of thousands of pounds for the seller and can take between weeks and months to be completed as there is legal work involved between a number of different parties which can slow the process down.

A lease extension can also be started by the seller, and completed by the purchaser if you want to incur those costs. Both a deed of variation and lease extension will allow your mortgage lender to release the funds.

In Summary

If your mortgage is rejected due to ground rent the good news is that there are ways around this. It can be an anxiety inducing time, but the ball really is in the court of the seller and whether they want to incur the costs of a deed of variation or lease extension. However, if they want to sell the leasehold property, it’s going to be an issue they keep encountering.

If you are in this process now, use your solicitor for guidance and step away if the seller is not willing to meet on any of the above. Whilst an indemnity policy could help to release those mortgage funds and get you your dream property, think about the future saleability and an expensive problem that you would knowingly inherit.

If you have any questions or are looking for advice surround leasehold please do leave a comment below or drop an email and I’ll get back to you.

Before You Go…

If you’re in the process of purchasing a leasehold property and have come stuck with the issue, I’d highly recommend jumping over to read the following post about whether to buy a flat with ground rent over £250 and what other issues you should consider before committing…

Should I buy a flat with ground rent over £250