29-03-2025
The small print that turned one million flat owners into mortgage prisoners
Sky-high ground rent charges are turning flat owners into 'mortgage prisoners', experts have warned.
Nearly one million leases have escalating ground rents, according to the Competition and Markets Authority (CMA), meaning the annual charge increases over time.
Mortgage lenders often require certain conditions to be met before lending against these properties – for example, the annual ground rent cannot exceed 0.1pc of the property's value.
However, experts said 'toxic' increases led by high inflation in recent years had left some flat owners trapped in 'unsellable properties'.
Ground rent is an annual fee paid by leaseholders to the freeholder for the right to occupy the land their property is built on.
Earlier this month, the Government introduced a white paper replacing leasehold systems, where third-party landlords owning the building belonging to several flats will be replaced with 'commonhold' schemes, which will give all owners more control over the buildings they live in.
In addition, new buildings will no longer pay 'ground rent'. While the Leasehold and Freehold Reform Act 2024, passed under the previous government but not yet fully in force, includes some ground rent measures, neither a £0 or £250 cap have been legislated for.
Britain's consumer watchdog, the CMA, has separately banned freeholders and developers from ground rent clauses that double the payment every review period; however, they can still increase them by the retail price index (RPI). Over the past few years, the RPI rose rapidly and spiked at 14pc in November 2022.
Paula Higgins, of the Homeowners Alliance said: 'The CMA rightly stamped out doubling ground rents, but now some lenders are refusing mortgages on properties with RPI-linked increases or rent reviews every 10 years or less. What once seemed reasonable has become toxic under high inflation, trapping hard-working homeowners in unsellable properties.'
For example, if your ground rent was charged at £290 a year in January 2020, it would rise with the RPI to £391 this year, an increase of 35pc, and would require the property to be worth over £391,000 in value to be compliant with lenders' terms.
Nicholas Mendes, of brokerage John Charol, said ground rents were becoming 'more topical' with lenders.
Mr Mendes said: 'Lenders are more aware of it from their level, looking at it and giving brokers the right guidance.'
He added that many borrowers have opted to use product transfers in recent years that do not require their property to be revalued. However, he said that when the market settles in 'a year or two, more issues will come to light'.
Leaseholders in a 122-flat development in Illford, east London, are subject to ground rent charges that increase every five years by the retail price index (RPI). The charge, which is in breach of most banks' lending terms, means the homeowners can no longer sell or remortgage.
The freeholder, The Freehold Corporation, has Labour peer, Lord Carter of Coles, as a director. The company collects the payment through its operating company Emerald Ground Rent.
David Hollingworth, of brokerage L&C, said: 'Lenders will have general guidelines around what clauses are likely to be acceptable. That's put an end to the doubling of ground rent every five years that was so problematic for some.
'Being linked to RPI can be acceptable but anything that could be seen as enough to affect the 'marketability' of the property. The valuation could pick up on an onerous ground rent which would affect the lender's security and so could result in a decline by the mortgage lender.'
Harry Scoffin, the founder of the campaign group Free Leaseholders, added: 'Onerous ground rent is destroying people's homes, money and lives. It is also jamming up the flats market as a number of lenders refuse to mortgage them. Ground rent victims are the new mortgage prisoners.
'According to the latest Competition and Markets Authority data, around 940,000 leases have escalating ground rents. In its investigations, the CMA has also raised eyebrows at some RPI clauses.
'We know of increasingly desperate leaseholders trying to extend their leases or buy the freehold to remove onerous ground rents, but it's punitively expensive. Leaseholders who come to us just don't have a spare £20,000 lying around at the back of their sofa.'
An MHCLG spokesman said: 'Far too many leaseholders across the country struggle with punitive and escalating ground rents.
'We remain firmly committed to tackling unregulated and unaffordable ground rents, and we will deliver this in legislation, with further details set out in due course.'
