Commonhold reform: The impact on valuations and mortgage lending
Andrew Peters of Countrywide Surveying Services discusses the valuation and mortgage lending considerations surrounding commonhold reform.
Plans to make commonhold the standard tenure for new flats are often presented as a way to give owners more control and bring greater fairness to property ownership. Yet changing the legal structure is only one part of the task facing the mortgage market.
Lenders, brokers and valuers will need to understand how commonhold properties should be assessed, how converted developments will work and whether buyers respond differently to the new tenure.
Commonhold has been available for more than two decades, but very few developments have adopted it. As a result, there is limited transaction evidence showing how these properties perform across different locations, building types and market conditions.
This lack of evidence presents an early valuation issue. A valuer assessing a commonhold flat may find few, if any, directly comparable sales nearby. Leasehold flats could provide useful evidence, but differences in ownership, management and buyer demand may affect value and saleability.
That does not mean commonhold properties will be unsuitable for mortgage lending, but it does mean their wider introduction will require clear guidance and a consistent approach from lenders and valuation firms.
Buyers will also need time to understand what commonhold ownership involves. Lease length, ground rent and service charges are familiar terms, even if their implications are not always fully understood. Commonhold introduces different rights and duties that may need to be explained during the mortgage advice and purchase process.
Some buyers may favour a permanent interest in their home and a direct say in how the building is run. Others may be less comfortable with shared responsibility for management, maintenance and future costs.
Demand may therefore vary while the market becomes more familiar with commonhold. Well-managed developments with clear budgets and healthy reserve funds could prove attractive. Poorly run schemes may struggle, regardless of the rights that commonhold gives their owners.
The conversion of existing blocks could prove more complex. Any system that allows a development to convert must account for leaseholders who do not take part, and this raises the prospect of buildings containing both commonhold and leasehold homes.
Mixed tenure would create questions across the mortgage process. A lender may need to establish how repair costs and responsibility for shared areas are divided. A broker may need to check whether the ownership structure restricts the range of available products. Valuers would also have to consider whether the status of an individual flat affects buyer demand.
Governance will form an important part of mortgage risk. Greater control over budgets, appointments and maintenance may benefit owners, but it also gives them greater responsibility for decisions that affect the whole building.
If residents postpone repairs to limit short-term spending, the property’s condition may decline. This can reduce buyer demand, affect values and weaken the lender’s security. Disagreements could also delay safety work or prevent the association from building sufficient reserves.
Mortgage providers are likely to want clear evidence that the commonhold association is properly run. This could include its accounts, reserve fund, maintenance plan, insurance arrangements and record of collecting contributions. Arrears, disputes and weak financial controls may all affect the lending decision.
Standard documents and reporting requirements would help reduce uncertainty by providing lenders and valuers with a consistent set of information while helping brokers identify issues earlier in the application process.
The mortgage market has adapted to many forms of ownership and complex property types over the years and there is no reason commonhold cannot become an accepted part of that market if the right legal, financial and management controls are in place.
Confidence will still take time to build. Early commonhold developments must show that they can be managed well, maintain buyer demand and support resale values across changing market conditions.
Property knowledge will therefore become even more important for intermediaries and understanding the financial health and management of a development will matter just as much as identifying its tenure.
Commonhold may change the legal basis of flat ownership, but the central mortgage question remains unchanged: will the property provide sound and saleable security throughout the mortgage term?
Ensuring the answer is yes will require clear rules, strong governance and consistent information from the outset.
Andrew Peters MSc FRICS is associate director of technical services at Countrywide Surveying Services
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