Some mortgage applications for leasehold properties are being declined as a result of inflation feeding into service charges, according to a mortgage broker.
Chris Sykes, a director at MSP Financial Solutions, says service charges have significantly increased for many clients over the past few years, with inflation affecting the cost of services such as electricity, cleaning and lift maintenance.
“I have seen more than one case where this has meant a valuer has suggested a property is not adequate security for a lender because of how much the service charge is,” Sykes says.
The average service charge in England and Wales exceeded £200 a month last year, according to Hamptons.
Analysis by the estate agency found that the average service charge has risen by a third (32.6 per cent) during the past five years, from £1,814 a year in 2020 to £2,405 a year in 2025.
One person familiar with mortgage underwriting at a large lender confirmed that the size of service charges was a significant issue for mortgage lending and valuations.
“We quite regularly see service charges of £5,000 to £8,000 per year,” they said, although low service charges are not necessarily the answer.
“Sometimes people see a small service charge and think that must be a really good thing. But I then look at that and go, ‘Well, potentially the building’s not being maintained properly’. You’re just storing up a much bigger cost for the future via a Section 20 notice.”
Under the Landlord and Tenant Act 1985, landlords must follow a process for consulting leaseholders if they want to undertake work, or arrange a contract, that will cost leaseholders more than a certain amount through their service charge.
“Generally, they’re chunky amounts of money that are going to come down the line,” the person said. “If you don’t have the right level of service charge coming in on a regular basis, you then end up with say, a £20,000 bill.
“There’s still an awful lot of people who go out when they are viewing a leasehold property and don’t know what the service charges are,” they added, with the number of properties where service charges are not being published in marketing materials “still quite high” despite the impact on affordability.
Law reforms
The Leasehold and Freehold Reform Act 2024 aims to improve the transparency of service changes, so that leaseholders can better scrutinise and challenge costs if they are considered unreasonable, according to the government.
Transparency on service charges and what they cover will also help mortgage lending and property valuations, the person at the lender said, although further secondary legislation is required to implement many of the measures.
Other changes in the Leasehold and Freehold Reform Act include removing the requirement to pay marriage value when extending a lease with 80 years or less remaining, and increasing the standard lease extension term to 990 years, with ground rent reduced to a peppercorn if a premium is paid.
Further leasehold reforms are expected after the government published a draft Commonhold and Leasehold Reform Bill that aims to, among other things, ban the use of leasehold for most new flats, to make commonhold the default tenure; and cap ground rents at £250 a year, reducing to a peppercorn after 40 years.
Lease terms can have a significant impact on the value, saleability and mortgageability of a property, says Andrew Peters, associate director of technical services at Countrywide Surveying Services.
“Lenders often impose minimum lease term requirements, and many will not lend on short leases at all,” he adds. “This reduces the pool of potential buyers and further depresses value.”
Minimum leasehold terms vary between lenders, but can range from 55 years at the time of application to 85 years. Some also stipulate a minimum duration after the mortgage term ends, such as 30 or 50 years.
Leasehold reforms will “definitely” make it easier for mortgage borrowers, the person at the large mortgage lender said, as well as “safer and easier” for lenders to get comfortable.
But, they added, there are not many leasehold properties on which borrowers cannot get a mortgage.
“The majority of leasehold properties are behaving and performing absolutely fine. It’s a small proportion that people can’t currently get a mortgage on. But some of these leasehold reforms will help regulate that situation, and mean that there are some today that aren’t but will become mortgageable.”
Stabilising leasehold prices
Improving mortgageability can push up property prices; but in this case, reforms will help stabilise the prices of leasehold properties, the person at the lender said.
“There are a greater proportion of leasehold properties that are being sold for less than what people bought them for. That’s because there’s elements in the leasehold market where there’s less confidence, and service charges have gone up.
“I’m not expecting the leasehold reforms to necessarily really push up the prices of flats significantly, but it’s not going to do anything to decrease them.”
Peters at Countrywide also says reforms should be positive for leaseholders in principle.
“However the wider implications, particularly for freeholders, investors and financial markets that rely on the income streams associated with ground rents, will need careful consideration to ensure that the benefits for consumers are balanced against the stability of the market as a whole,” he says.
Chloe Cheung is a senior features writer at FT Adviser
