Each month we summarise the latest news and developments in retail mortgage lending and regulation.
This month in summary:
Focus on Scotland
Until recently the question of whether fixed charge receivers can bring court proceedings to recover possession of a property from individual mortgagors has been a grey area.
However, on 7 October 2019, the High Court provided clarification in its judgment in Menon and Menon v Pask and Goode (Menon and Menon).
Pask and Goode were appointed as joint fixed charge receivers over a property in West London pursuant to a Bank of Singapore Ltd legal charge. The charge contained usual provisions regarding the appointment of receivers, including that the receivers were deemed the agent of the mortgagor. The mortgagors, the Menons, were occupiers of the property as individual mortgagors. The receivers commenced possession proceedings in the County Court in the names of the Menons, acting by the receivers. The Menons sought to defend possession on the basis that the receivers were deemed to be their agent and, therefore, could not claim against their principal (the mortgagor) for possession of property where they were in possession.
The judgment clarified that receivers are, in principle, able to bring possession proceedings in their own names against an individual mortgagor in possession. Whilst this is welcome clarification for lenders and receivers, they should proceed carefully. After the 2008 Horsham Properties case (which found that a lender's right to appoint receivers to sell mortgaged property did not infringe upon the European Convention of Human Rights), the Council of Mortgage Lenders voluntarily agreed to not appoint receivers to sell residential owner-occupier property without (1) the lender first obtaining a possession order or (2) the mortgagor's consent to a sale of the property. Following this voluntary statement, no formal legislation was introduced. However, this guidance continued to shape lenders' policies for the appointment of receivers and should be considered. See our legal insight for further information.
A recent study by Landbay, a buy-to-let mortgage lender, shows that 58% of private tenants are not interested in buying their own homes. The leading reason for this loss of interest is the flexibility of renting which affords tenants the ability to move abroad, to different cities or to change jobs spontaneously.
The results of the study also appear to be gender and age driven. 47% of the women in the study revealed their intention to purchase their own homes in the future as opposed to 34% of the men. The majority of individuals interested in purchasing their first homes were also found to range between the ages of 25 – 34 with only 46% in the age group of 35 – 44 and 13% in the over 55 age group.
John Goodall, the CEO of Landbay argues that these findings should prompt the government to focus on encouraging purpose-built rental properties rather than creating harsher regulations against landlords.
The Department for Digital, Media, Culture and Sport has recently closed its consultation/call for evidence from citizens and businesses on government-led Digital Identity checks, which could bring the industry a step closer to tackling identity fraud
The consultation seeks "Insights and evidence into how the government can support improvements in identity verification and support the development and secure use of digital identities and ensure that the potential benefits of this approach are open to all. The evidence that is received will be used to inform policy making and government priorities".
The Conveyancing Association has been calling for the government to support endeavors in the market, which include the increased use of biometric data to confirm identity as well as published standards on what is acceptable through regulators and government departments. Currently there is no standard process to be followed by advisers, lenders and conveyancers, but a joined up service could ultimately lead to reductions in costs and time as current processes often remain difficult, time-consuming and repetitive.
The consultation comes at a time when other parts of the conveyancing process are moving into the digital sphere. HM Land Registry has reported that its new 'Sign your mortgage deed' service has reached 1,000 digitally signed and registered remortgage deeds. The service is part of the Land Registry's digital transformation and was launched to reduce paperwork and delays in the remortgage application process and may be extended to purchases in the future. The Land Registry said it would look to develop further innovations making it easier to buy, rent, sell, finance, build and manage property.
In practice the new service allows the lender to create a digital mortgage deed template with the Land Registry. The conveyancer uses this template to create deeds and the borrower signs the deed through a secure code after verifying their identity with Gov.uk Verify. Mortgage Solutions reports that some customers completed their remortgage in three days with help from the service. It appears the industry and government departments are working together to make the conveyancing process smoother and more secure.
Before the announcement of the upcoming election it was thought that SDLT reform would form part of the next Budget.
Many speculated that the chancellor might announce proposals based on a consultation launched in February on a proposed additional 1% increase in SDLT liability for non-UK buyers of residential property in England and Northern Ireland. The outcome of this consultation has not yet been published but the proposals aimed to curb house price inflation; increase home ownership; and reduce homelessness by half in three years (using the additional tax collected to relieve homelessness).
The proposed surcharge would apply to all "non-residents", including non-UK individuals (including joint purchasers if one party is non-resident), companies, trusts and partnerships, with a detailed residency test for each type of entity. This would also apply to UK resident companies that are directly or indirectly controlled by a non-resident. It would not apply to non-residential or mixed-use property. The purchase of such properties would be taxed at a lower non-residential rate of up to only 5%. This could encourage an increase in overseas investors in commercial property.
Another possible reform that has been speculated about in recent weeks was abolishing stamp duty for so-called 'last time buyers'. Research has highlighted that property owners aged 55 and over feel discouraged from moving houses due to the requirement to pay stamp duty. There is an increasing trend for this age group to use equity release to raise additional capital to buy their retirement home. Removing the requirement to pay SDLT mean that they will have one fewer obstacle to overcome and experts commented that this might encourage: more downsizing; larger properties to be freed up for families; and provide more flexibility in the market.
In the light of the upcoming election it remains to be seen whether there will be any substantive stamp duty reform in the next government but there is certainly an awareness that change is needed and a growing appetite for it.
Since the HS2 rail line project was approved by parliament in 2017, there have been a number of complaints surrounding the process of land acquisition from land owners whose properties are situated along the route of HS2's first phase of the project.
One particular land owner who used to own and run the Bree Louise pub in Central London, complained that he only received his compensation 14 months after handing over the keys to his property, despite the rules stating that owners should receive ninety percent of the estimated value within three months. He further alleges that the compensation given (£500k) is significantly lower than the value he attributes to the value of the property, £4.2m.
A report from the National Audit Office published last year said that HS2 completed only half of the legally required advance payments on time. Following this, a government review is taking place to assess whether the HS2 project should still go ahead in light of concerns over escalating costs potentially caused by mismanagement and a possible failure to accurately assess the costs of land that needed to be acquired.
At present no detailed breakdown of the HS2 project has been made available since 2013, although an annual report in March stated that £2bn has been spent on purchasing 1,274 properties on the route of the project's first phase which comprises 35% of the land required to build HS2.
In light of this, experts have voiced their criticism over the project. Michael Byng, a railway costs expert estimates the cost of the line will reach £100bn and the cost of purchasing properties has risen to double the £2.3bn figure that was originally put to parliament. Furthermore the original study that was carried out is said to not have been prepared in accordance with the RICS 'Red Book' valuation and the 'Compensation Code' rules for disruption and disturbance.
James Collier, a surveyor who represents thirty farming clients on Phases 1 & 2 of the scheme has labelled the land acquisition process a 'shambles' and accused HS2 of 'micromanaging' the qualified surveyors it appointed and not giving them 'the autonomy to get the deals done'.
Coupled with a recent discovery that twelve property owners have already appealed against the valuation of their property to the Lands Tribunal it would seem the future for the HS2 line is far from certain.
According to new Moneyfacts data, almost 60% of new mortgages now have a maximum mortgage term of up to 40 years.
The rise in longer term mortgages has been fuelled by demand from buyers who wish to benefit from the reduced monthly payments that arise from extending mortgage payments over a longer term. An increase in the value of property has resulted in many buyers being unable to finance monthly payments associated with a traditional mortgage term of 25 years.
The increase in demand for longer term mortgage is also thought to be indicative of first time buyers shunning flats and 'starter homes' in exchange for larger, more expensive properties which they can envisage living in for a longer period. As a result, the proportion of 30 to 35 year mortgage terms taken out by first-time buyers has grown from 16% in 2007 to 36% today, while the proportion of mortgages lasting between 20 and 25 years has dropped from nearly half of all deals taken to just one in five.
Critics have voiced concerns that such long mortgage terms will result in borrowers paying mortgages during their retirement when their income may be insufficient to service the monthly payments. Lenders must ensure that buyers are aware of the implications of taking out loans for longer terms, including the overall impact on the level of interest payable on the loan.
One way of circumventing this issue is offering borrowers the chance to make 'overpayments' on their mortgage, the impact of which may reduce the mortgage term and the level of interest payable.
4.8 million self-employed people across the UK make up 15% of the total workforce, with this number increasing by a million in the last decade alone. This quick rise of self-employment has seen cases which were traditionally viewed by brokers and lenders as "unusual" becoming much more commonplace.
Self-employed individuals can prove tricky for lenders to evaluate. This is largely due to their varying work patterns and hard to track income, with their base incomes often supplemented by additional income such as commission, bonuses and overtime. The flexibility of working and pay patterns can often be interpreted by lenders as instability.
However, recent research carried out by Kensington Mortgages suggests that self-employed individuals are more conservative borrowers in comparison to first-time buyers. It was found that the average self-employed mortgage customer in the UK could have taken out a mortgage 29% larger than the original loan borrowed, compared with 19% for the average first-time buyer.
This indicates that self-employed borrowers are perhaps not the risky customer they once were and, due to their cautious approach to borrowing, may be safer to lend to than first-time buyers. The industry needs to continue to adapt to understand the complexities of modern-day workers to ensure both customers and lenders do not lose out on potential business.
The number of first time buyers completing on property transactions continues to rise with the highest levels since before the financial crisis recently recorded.
In August 2019, mortgage completions for first time buyers reached 35,010 – the highest level since 2007 and an increase of 0.7% from last year. August was also a strong month for mortgage approvals with a total of 85,931 mortgages approved by the main high street banks and approvals for home purchases up by 3.2% from the previous year, despite Brexit uncertainty.
Andrew Montlake, managing director of mortgage broker Coreco, explained the decade high numbers: "First time buyers are absolutely flying. They are being driven on by a combination of reduced competition from landlords, once-in-a-lifetime mortgage rates, high employment and the buyer's market we're in …and this latest data shows that there is still a huge amount of momentum at this end of the market."
During the same period, the number of remortgages with additional lending has slumped since last year by 2.9 and by 2.3%for remortgages without additional lending.
According to Tomer Aboody, director of property lender MT Finance, this is not surprising news: "These [properties] are usually at the higher end of the pricing bracket, where people are more cautious in spending until either we have a resolution in the Brexit saga or the Labour party is nowhere to be seen in the running for government, given its potential disastrous policies in housing."
A survey of 2,000 home buyers conducted by Atom Bank has revealed almost a third would continue with a purchase even if the property suffered from damp or structural problems. Not only are buyers prepared to turn a blind eye to these issues many buyers are not even investigating the possibility of problems. The survey indicated that 54% of buyers would not investigate damp, 61% would not investigate structural concern and 82% would not look out for Japanese knotweed.
To prevent the value of their security from being comprised, lenders will want to ensure their own valuations are robust enough to identify any issues that their customer is either overlooking or not actually investigating.
In related news, the House of Commons Science and Technology Committee has recently examined the latest research on Japanese knotweed. The Committee indicated that lenders in other countries do not necessarily treat knotweed with the same degree of caution and the Committee was concerned that the UK approach was overly cautious. The Committee has recommended that Defra commission a study on international approaches to Japanese knotweed so that a further discussion and a report can take place later this year. We will report again once further news on this topic becomes available.
The Equity Release Council's Autumn Report, published on 24 September, revealed that 41,263 customers took out equity release mortgages in the first half of 2019. The total amount of equity release lending has stayed flat, with £1.85 billion being lent in the first half of 2019 compared to £1.86 billion in the same period last year. Although the rate of growth in this market has slowed, the number of consumers choosing to unlock housing wealth continues to grow year-on-year.
The average rate on equity release lending is now at an all-time low of 4.91%, with 21% of products having a rate of less than 4%. These rates are either fixed or are capped for the lifetime of the loan.
The range of equity release products on offer has also doubled since last year, with a total of 287 products available in August 2019.
Equity release lenders are offering more options for regular interest payments, with 81 products now on the market. There was a significant annual increase (269%) in products available for customers in sheltered or age restricted accommodation, and an 88% annual increase in the number of products offering inheritance guarantees. The number of equity release mortgages featuring downsizing protection, which allows customers to downsize without having to pay an early repayment charge, has also doubled since last year.
David Burrowes, chairman of the Equity Release Council, commented that the equity release market is continuing to evolve and grow in response to consumer demand, with lenders being more flexible and offering a range of products to meet differing financial and social needs.
Sainsbury’s joins Tesco as the latest supermarket bank to withdraw from new mortgage business. It started its personal finance offering in 1997 and in 2017 it started its own mortgage offering.
No announcement has been made yet as to whether Sainsbury’s intends to sell its mortgage portfolio. Existing mortgage customers will be able to continue with their agreements with Sainsbury’s for now, albeit with no remortgaging facilities. Sainsbury’s is the not the first of the smaller lenders to make this announcement this year - AA withdrew from the mortgage market in February and Tesco recently sold its portfolio of 23,000 mortgages to Lloyds. If Sainsbury’s decides to sell, there will no doubt be some interested potential investors.
The Duty Advisor Scheme provides free and independent advice at possession hearings. During 2018 the Government raised concerns about the sustainability of the Scheme as some providers had withdrawn from their contracts leaving some hearing centres without duty advisors. To make the scheme more sustainable the Government planned to consolidate the 100+ individual schemes into larger units, hoping that would mean that providers would gain from economies of scale.
The Government's proposal of consolidation was successfully challenged in legal action by the Law Centres Network which runs many of the schemes.
A new consultation was published on 4 October 2019. The Government is now looking at:
The Office of the Chief Statistician publishes an annual report highlighting recent trends in the housing market across various local authorities in Scotland.
This year's Housing Revenue Account found that rent arrears on all council properties stood at £74m. This was an increase of 14% on the figures from the previous year and follows the trend of a steady increase each year since 2013. Unsurprisingly, the number of council tenants in arrears also increased by approximately 3%, taking this year's total to 102,702.
The average rent per house was found to be £72 per week. Council rents have increased in general by around 16% above inflation since 2008-2009. Local authorities wrote off almost £10.8m of outstanding rent as unrecoverable - an increase of around £700k on the previous year.
The report found the number of council houses in Scotland to be 311,240. This represents an increase of around 1,100 on the previous year, with growth at a similar rate forecasted for next year. However, the number of council houses has fallen by around 50% in general since 1997. Approximately 150,000 of the 315,000 reduction was due to tenants exercising their right to buy, 115,000 was caused by 6 local authorities transferring their total housing stock to Housing Associations and the remaining 50,000 was due to demolition of unsuitable stock.
For Scotland as a whole, rents lost due to unlet properties amounted to around £15m. This is influenced by various factors such as demand levels for properties and the inclusion of properties awaiting demolition.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at November 2019. Specific advice should be sought for specific cases. For more information see our terms and conditions.