Each month we summarise the latest news and developments in retail mortgage lending and regulation.
This month in summary:
Focus on Scotland
Focus on Northern Ireland
Thousands of buy to let investors may be due stamp duty rebates and should seek advice on rebates for 'uninhabitable' second properties, following the landmark tribunal decision involving PN Bewley Ltd and HMRC. This decision suggests that for the purposes of a "dwelling" under the Finance Act 2003, properties that are not immediately habitable from completion do not constitute a dwelling and therefore purchasers are not liable to pay the additional 3% stamp duty surcharge attracted to second properties.
The decision could have major implications for the UK housing market because many investors, developers and landlords may have paid the surcharge and now seek to reclaim the charges. Parties to a transaction and their representatives and agents have been urged to fully consider the potential benefit if a property is classed as uninhabitable and to fully consider the condition of the property, especially where the 3% surcharge is significant.
The Courts and Tribunal (Online Procedure) Bill is currently making its way through Parliament. The Bill is intended to be the framework enabling courts to establish online portals to manage and process claims and for rules on online hearings.
Technology that allows hearings to be conducted by video link is currently being piloted. The hope is that for some court users this will reduce travel time and costs and therefore will promote access to justice.
As part of the online project the Justice Committee has met with representatives from Shelter and the Housing Law Practitioners Association (HLPA) about how online courts would impact on possession claims. HLPA and Shelter suggested possession claims are not suitable for online determination as they often involve vulnerable customers who benefit from face-to-face support from a duty advisor. In addition, the hearing may be the first time the customer actively engages with the lender and it is possible that a solution can be reached with the lender's advocate before the hearing commences.
The Court Service is keen to stress that no one will be forced online. It recognises that many people will prefer the paper based and face-to-face system and that this will continue to be offered. Online processes and hearings are simply going to provide an alternative channel for dealing with the court.
The Court Service is continuing to talk to stakeholders about how the online process might work. We will report further as this topic progresses.
Following a consultation, it was announced in July 2018 that a requirement on private sector landlords to undertake safety checks of electrical installations in rental properties every five years would be introduced. It was proposed that the checks would be phased in, starting with new tenancies. The Government indicated that it planned to introduce legislation as soon as Parliamentary time allowed.
Given the time that has elapsed, a question was raised in Parliament asking what the current position on this topic was in June of this year. The Government has indicated it is still working with the industry to produce guidance for landlords and is working with Local Authorities to develop sanctions for non-compliance.
Any rules relating to electrical safety requirements are likely to be of interest to receivers who will, on appointment, need to ensure that electrical safety checks are to up-to-date. We will provide further details once the draft legislation becomes available.
In the 2018 budget the Government announced that the help to buy scheme would come to an end in 2023.
In a spotlight report Savills have compared help to buy against shared ownership in order to predict the outcome of ending the scheme. Savills have indicated that help to buy and shared ownership often overlap in their target markets. This has suppressed demand for shared ownership over the last five years.
In 2018 there were 13,400 shared ownership purchases, whereas each year around 40,000 first time buyers use the help to buy scheme. Of these, 15,300 could not have brought their home without the help to buy scheme.
Savills predict that when help to buy ends, assuming it is not replaced by a comparable scheme, the result may be a surge in demand for shared ownership. Savills predict this is likely to be around 15,000 per year, being the people who could not have purchased without the help to buy scheme.
There are two main risks to factor into lending on shared ownership properties. Firstly, lenders' security will only be over the percentage share owned by the customer; however, shared ownership leases generally contain provisions to allow the lender to recover the principal debt and 18 months interest in the event of negative equity. The second risk is that if the customer doesn`t pay the market rent, lenders would need to pay this to protect their security and there is automatic relief for lenders if the lease is terminated by reason of the customer's breach.
Recent figures reported to Cifas, the UK's fraud prevention service, show that there was a significant drop of 18% in mortgage fraud in 2018. Application fraud is the most reported mortgage fraud with the main reason being the use of false or stolen documents.
Whilst this is good news to mortgage lenders, overall the instances of fraud reporting have increased, with card fraud increasing by a worrying 41% in 2018. When the demographics are looked at, it is those under 21 years old and those over 60 years old who were hit with the biggest rise in identify fraud. This may be explained by the increase in online banking and the active targeting of these age groups, with those over 60 being considered to be more credit worthy.
Cifas has set out some helpful guidelines to help people protect themselves online, such as reviewing privacy settings on social media accounts and being cautious of invitations to connect. Lenders could also consider issuing specific guidance tailored to those who may not be internet savvy so they can learn to protect themselves online and overall stop these figures increasing in 2019.
In 2017, concerns were raised by consumer groups that customers were being sold leasehold properties by developers which included onerous clauses such as the doubling of ground rent every ten years (which were previously stable), and excessive charges for items such as homebuyers reports. It was also reported that some lenders were refusing to grant mortgages over properties that contained onerous ground rent clauses. This resulted in some properties becoming unsaleable.
As a consequence, Taylor Wimpey set aside £130 million as part of a compensation scheme for customers. The Government has also proposed to cap ground rent to £10 a year.
The Leasehold Knowledge Partnership, a campaigner on the issue, has suggested that potentially 100,000 homeowners have been locked into leasehold agreements containing such terms. Furthermore, developers have often recommended their own solicitors to assist with the transaction, suggesting this may have impeded on the provision of independent legal advice.
Unsurprisingly, the Competition Markets Authority (CMA) has launched an investigation as to whether some of these leasehold agreements are fair, whether they were mis-sold and if buyers were provided with sufficient information about the new leases or forced to agree to unfair terms. George Lusty, Senior Director at the CMA, is keen to ensure that buyers have fully understood the terms of their agreements and know what they will be paying.
Although it is not known when the investigation is expected to complete, the findings of the CMA will no doubt leave a lasting impact on existing lenders as well shape future lending policy on leasehold properties.
Lenders are being criticised for extending their minimum unexpired lease requirements in the UK Finance Handbook.
Historically many lenders required minimum terms of 70 years for an acceptable security. However the Society of Licenced Conveyancers has reported some lenders now requiring 80 or 90 year unexpired lease terms.
Part 2 replies to the UK Finance Handbook show there are around 20 lenders which require a minimum lease term of 85 years. In addition, other lenders express their minimum period to be the mortgage term plus 60 years or more.
The increased requirement has caused some RICS valuers to down-value properties with shorter leases. This is a particular concern as many residential leases were only granted with a 99-year lease to start with.
The Society of Licenced Conveyancers has highlighted that this is causing delays in conveyancing and that some lenders now have securities over lease terms which they would now not lend upon. In view of this the Society has asked UK Finance to engage with its members on standardisation of policies.
Meanwhile, mortgage brokers have praised lenders for increasing the validity period of mortgage offers, most notably Nationwide which has increased its offer period to 180 days. This helps borrowers who start the re-mortgage process before the expiry of the fixed rate of their existing product, allowing them to set a completion date which avoids early redemption fees. It also helps buyers of new-build properties whose offers might otherwise expire before the developer finishes building the property.
In April 2018 the Government revised the Support for Mortgage Interest scheme (SMI) so that it ceased to be a benefit and became a loan which was secured against the property. Due to the nature of this change, when customers wanted to move they were required to repay the first mortgage and the SMI charge from the sale proceeds. If the borrower obtained a new mortgage they would also have to re-apply for SMI.
In June the minister for Family Support, Housing and Child Maintenance announced that borrowers would now be able to apply to port their SMI loan to their new property when they move. This will help borrowers who want to move to secure better employment and links into a Government policy aimed at helping people move in higher skilled roles. The policy change will affect people who will still be entitled to SMI support and those that have since exited the scheme but haven't yet repaid the SMI loan.
This change to the SMI loan will not affect a borrower's existing mortgage product. If the existing mortgage doesn't also contain a porting option then the borrower would have to apply for a new mortgage. The borrower's circumstances would then need to be assessed carefully and the new lender would need to evaluate whether they were prepared to lend on the basis of instalments being met wholly or partially by SMI payments.
The difference in charges, with existing customers often charged more than new customers, has been a thorny issue in recent years. The Government has announced that it now wants to address this "loyalty penalty" by giving the Competition and Markets Authority (CMA) powers to issue fines to firms which overcharge or mislead customers.
This is as a response to the super complaint filed by Citizens Advice to the CMA last year which stated that consumers were losing £4.1 billion a year to the loyalty penalty across the mortgage, mobiles phone, broadband, home insurance and savings markets.
The Government also announced it would legislate to give regulators such as Ofcom and the Financial Conduct Authority (FCA) power to prevent loyal customers being taken advantage of. The FCA is currently investigating how it can assist the "mortgage prisoners" who are unable to switch to a better deal which is reported to impact 2 million mortgage holders.
The FCA has made the treatment of longstanding and vulnerable customers a priority in its Business Plan for 2019/2020 and we are likely to see more pressure to ensure mortgage costs and terms and conditions are fair to all.
You may recall from our March issue that the Scottish Law Commission has been reviewing the current legislation governing standard securities in Scotland. Although work began in 2018, the first discussion paper entitled 'Discussion Paper on Heritable Securities: Pre- Default' was only published on 18 June 2019 and referenced their initial findings.
So what can we expect at this stage of the review? The discussion paper delves into the big business of standard securities in Scotland. The major piece of legislation, the Conveyancing and Feudal Reform (Scotland) Act 1970 ("the Act"), which currently governs this area of law hasn't been reviewed in over 50 years so one of the major points of this discussion paper is to address whether this piece of legislation remains fit for purpose; if it is in need of an update or whether it should be replaced entirely.
The discussion paper also considers the creation, variation, transfer and discharge of standard securities and looks at which types of obligations can be secured. Some major proposals that the paper raises includes abolishing the standard conditions in their current form set out in the Schedule to the Act and consolidating the law on security over land.
The overarching findings are summed up by the lead commissioner, Dr Andrew Steven, who commented, "Too much of the law is old or unduly complex, leading to uncertainty. This discussion paper is an important step towards ensuring that the law is fit for the needs of today’s Scotland". We can look forward to the second discussion paper which is due to come out in 2020 and which will deal with enforcement of standard securities.
According to research carried out by Creditsafe, Northern Ireland has seen the highest increase in corporate insolvencies within the UK since the Brexit referendum.
Creditsafe's UK insolvency index provides a comparison of the number of businesses which have closed down in different regions of the UK. The number of UK wide insolvencies has been increasing generally over the past three years. Northern Ireland tops the list with an increase of 114.3% on an annual basis and having had the most business insolvencies since 2016 when compared to the rest of the UK.
Cato Syversen, the CEO of Creditsafe has stated that "In the past few years we have seen many big name brands suffer on the high street and take financial blows and the industries we are seeing hit the hardest are retail, food and construction."
A recent example of high profile insolvency is Jamie Oliver's Restaurant Group going into administration at a loss of circa 1000 jobs. This is likely to have a knock on effect to smaller restaurant suppliers as well as the owners of the commercial properties leased to the restaurants which have closed down.
It is not all bad news for Northern Ireland as, despite the above, business restructuring body R3 has reported that hotels, bars and restaurants as a whole in Northern Ireland have seen their levels of elevated risk of insolvency fall slightly or remain stagnant in what has been described by R3 as a "notable level of resilience" over the winter (off season) period with the busy summer period still to come.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at July 2019. Specific advice should be sought for specific cases. For more information see our terms and conditions.