ResidentialSep 28 2017

Warning to mortgage brokers over micro-home advice

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Warning to mortgage brokers over micro-home advice

Brokers have been urged to tread carefully when giving advice on micro-homes amid record growth in construction of the properties, over fears clients could be buying properties with limited re-sale potential and leaving advisers open to complaints.

Micro-homes – properties with a floor space smaller than national standard of 37 sqm for studio dwellings – have been growing in popularity as the UK’s housing shortage continues to push up costs in urban areas such as central London.

Spurred on by more flexible planning laws, developers built 8,000 such homes in 2016, according to an analysis of Land Registry figures by consumer group Which?

But the unique nature of these dwellings means advising a potential borrower comes with additional risks for brokers.

Oliver Marley, mortgage adviser and head of research at London-based Independent James, said: “Purchasing a property like this will be highly restrictive and will not be suitable for those looking to start a family anytime soon. 

“Of course, as mortgage advisers we are not qualified to give full advice on how the property may or may not appreciate, but we would always let a client know that it is widely reported that these properties do not appreciate as quickly. 

“It is, however, our responsibility to advise that the re-sale of the property in future will likely be difficult as many others seeking a mortgage on the property will find it difficult. A cash buyer may be needed.”

David Hollingworth, associate director, communications at London and Country Mortgages, said: “[In terms of price], it is hard to talk about what may or may not happen, but from the borrower’s point of view, the main thing to consider is how easy it will be to sell. 

“Like flats above food outlets, people will think they have got a bargain, but that will stem from the fact that some people will be put off by the outlet beneath it - and that may be something the lenders may decline to lend on because the saleability is limited.”

Adrian Kidd, IFA at London-based Radcliffe and Newlands, added: “It's very hard, if not impossible, to get loans on less than 37 sq m homes. I've been in studios that are around 40 sq m, and they are tiny. These things are less marketable for sure, and already square footage in UK is not as generous as other EU countries.”

According to criteria database Criteria Hub, the minimum floor space accepted by most lenders is 30 sq m, although some will consider going below that threshold, depending on the nature of the property.

Many smaller lenders and building societies will not lend on studio flats.

A Nationwide spokesperson said: “We have a 30 sq m strict minimum size for studio flats for buy to let mortgages, which comes under The Mortgage Works. 

“However, for Nationwide residential mortgages we may allow borrowing on a studio property that comes below that square footage, and therefore have a degree of valuer discretion, if there is an existing strong local market for such properties, for example in areas of Central London where properties and demand are good.”

A Santander spokesperson added: “Santander does not have a specific size limit and will lend on the basis of a professional valuation taking place. All properties will be viewed on their individual merits and value based on the property itself.”

Packaging firm Crystal Specialist Finance (CSF) has seen micro-home applications coming through for the first time in 2017, and one Knightsbridge property with a floor space of 270 sq ft (25.1 sq m) sold for £810,000.

CSF managing director Jo Breeden pointed out that micro-homes could serve a purpose for people who need somewhere to stay in London during the week before travelling home at weekends.

But concerns about their suitability mean they have drawn criticism from some quarters, such as housing charity Shelter.

Polly Neate, Shelter chief executive, said: “Our housing crisis desperately needs fixing but this isn’t the way to do it. These tiny rabbit hutch homes are hardly any cheaper to buy and only developers benefit. 

“Instead of focusing on second rate solutions we need to start looking at more important issues like reducing the enormous cost of land to deliver the genuinely affordable homes families urgently need."