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High street banks refusing mortgages on new builds with escalating estate fees

Christina Hoghton
Written By:
Christina Hoghton

If a developer applies uncapped fees to freehold contracts, it’s difficult for lenders to asssess a borrower’s ongoing affordability

High street banks are making a stand against unscrupulous developers who are charging freehold new-build homeowners unpredictable and uncapped fees for the upkeep of their housing estate.

Santander has refused to lend on new-build homes if the developer has included uncapped management charges in the freehold contract, Your Mortgage’s sister title Mortgage Solutions exclusively revealed, while Barclays and Nationwide are also taking action in this area.

Estate management fees are costs paid by homeowners on a private housing estate to maintain, renew and repair the shared amenities and spaces that their local council has not adopted.

Some developers, however, are applying uncapped, escalating fees to freehold contracts, which are often sold on to a management company once the estate is finished.

Santander said if the homeowner is subject to uncapped management fees it cannot establish whether the borrower will be able to afford the house over the long-term and therefore could not lend on the property.

If the bank can establish the ongoing cost of the charge it will factor it into the affordability assessment when deciding whether or not to offer a mortgage.

Barclays said it was currently reviewing this area of its lending policy.

Nationwide said it has declined a “small number of cases” because it was uncomfortable with the draft clauses relating to estate fees included in the sale contract.

The building society said on any application for a mortgage on a new-build home that has estate management fees, it will insist that the solicitor draws up documents to protect the borrower and the lender from excessive fees and difficulties selling the house in the future.

Service and estate charges rising

One high street bank told Mortgage Solutions that it was increasingly finding that builders were complying with ground rent policies, but service charges and estate charges were attracting higher rates and onerous escalating mechanisms.

These were sometimes out of proportion to the services being provided.

According to the Labour MP for Bishop Auckland Helen Goodman, who has been campaigning for an end to the charges, an estimated 1.3 million households are affected be freehold estate fees.

According to Goodman, the fees often rise every year beyond the rate of inflation and it is not clear how they are spent.

Treated like leasehold fees

Helen Pierson, head of business development at Mortgage Bureau, said: “Estate management fees should be subject to the same stipulations as leasehold management fees. Excessive charges could result in an inability to pay or act as a deterrent to ongoing prospective purchasers.

“If estate charges become a more regular feature then I can’t see why lenders wouldn’t want to consider them in the same way that they regard leasehold costs.”

Pierson said there was a limit to what lenders will deem as an acceptable level of charges for the privilege of owning a home.

“We already have management and service charges. Estate charges are a relatively new phenomenon and while they may be valid they do appear to be somewhat under the radar for now,” she added.

Paula Higgins, chief executive of HomeOwners Alliance, said: “By not lending on these homes, banks are protecting future customers but what will happen to those who have bought and are stuck on these estates?

“That is what has happened with homeowners who have bought leasehold houses and flats with Grenfell-style cladding. This is yet another reason why it is risky to buy a new-build because lending regulations are changing. We need to try and avoid these unintended consequences and urge developers to give people the power to own their own estates.”

Mortgage Solutions contacted, Barratt Homes, Bellway, Bovis, Persimmon and Taylor Wimpey and asked if they charged homeowners uncapped estate fees and if they were concerned about the impact these costs would have on household budgets and the resale value of the property. However, none responded.

Consumer rights

The government set about reforming the leasehold sector after developers’ use of doubling ground rents and the sale of freehold contracts to investors was brought to light after lenders such as Nationwide refused to lend on homes with onerous leasehold contracts.

Since then, the government has announced plans to ban the sale of leaseholds on new build homes.
The government has also committed to giving leaseholders on a housing estate the right to join together to acquire the freehold of the whole estate.

Higgins wants to see those rights extended to people on freehold estates who are subject to the management charges.

She added: “The problem is that new-build owners don’t even think to ask about this because they are unaware of such fees.

“They are still paying the same amount of council tax but they have to pay extra money for the upkeep of parks, for example, that can be used by anyone. Consumers have to be made aware of these charges.”