RegulationFeb 23 2021

Mortgage market suffering under cladding crisis

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Mortgage market suffering under cladding crisis
Credit: Hannah McKay/Reuters via Fotoware

Although the market has been experiencing something of a boom recently, there are concerns over how house prices will react if and when the stamp duty holiday extension comes to an end on March 31.

And with the cladding crisis, the housing sector has been dealt another blow as hundreds of thousands of leaseholders have been left unable to sell, mortgage or remortgage their properties.

Carl Shave, director at Just Mortgage Brokers, says: “The position for many of our clients has been very similar, if not identical, to those across the country; situations of chains collapsing or simple non-starters where cladding has been raised as an issue, either at the outset or further down the line once surveyors have frequented the property.

“Other than offering advice, there has been little we have been able to do. Lenders' criteria and regulation have stifled our ability to assist in any great way those who have been affected by this matter.”   

Bulent Kandemir, managing director at Intra Private Finance, comments: “We have a client in west London [who has been] looking to sell a property [for the past 12 months].

The position for many of our clients has been very similar to those across the country; situations of chains collapsing where cladding has been raised as an issue Carl Shave, Just Mortgage brokers

“However, between the managing agents [and building owners who manage the repairs], changes in government regulations – unprepared and rushed through changes – and the lack of qualified surveyors/sub-contractors able to do [studies required by lenders to approve mortgages], it has meant that the sale/purchase has not gone through.”

One of the big issues brokers have encountered has been the blanket approach from lenders.

Shave says education across the sector, not only for brokers but also lenders, has been an issue, with many simply not fully understanding the implications and requirements of the cladding situation. 

He adds: “Lenders are seemingly taking the hard route of simply deeming any flat at risk of cladding issues as non-mortgageable and owners are having to consider selling for lower prices to cash buyers.”

Gathering data

The scale of the crisis is huge, but how big is unclear.

The government does not have the complete data on how many of the circa 80,000 building blocks in England between 11 and 18 metres in height have unsafe cladding.

But it has begun a pilot data collection project for 11-18 metre residential buildings to identify materials in use to feed into a wider national 11-18 metre data collection exercise. 

Number of buildings identified with ACM cladding systems unlikely to meet building regulations by tenure, at 31 January 2021
TenureNumber of buildings this monthNumber of buildings last monthMonthly Change
Social sector residential1561560
Private sector residential213214-1
Student accommodation54540
Hotels29290
Publicly owned buildings990
Total461462-1

Source: Ministry of Housing, Communities and Local Government

The demand for EWS1 forms – an industry-formulated building assessment lenders require to approve a mortgage – has also significantly increased after the government lowered the threshold for the ban on combustible cladding in buildings to 11 metres from 18 and above, creating a serious backlog.

Campaign group End our Cladding Scandal estimates the total number of affected buildings above 11 metres to be at least 31,000.

Meanwhile, fact-checking charity Full Fact estimates the total number of residents affected to be around 760,000, while landlords of another 600,000 properties will also be affected. 

Government funding

Following the Grenfell Tower fire in June 2017, the Ministry of Housing, Communities and Local Government said in May 2018 it would meet the reasonable cost of replacing unsafe aluminium composite material cladding by councils and housing associations – the material blamed for spreading the fire so quickly.

In the March 2020 Budget, a Building Safety Fund was launched to provide £1bn in 2020 to 2021 to also replace unsafe non-ACM cladding systems on residential buildings 18 metres and over in both the private and social housing sectors in England.

Then earlier this month on February 10, housing secretary Robert Jenrick announced additional funding of £3.5bn.

So far 2,820 building schemes have registered for the fund. Of these, 532 are proceeding with an application for funding, 354 are ineligible, 291 have been withdrawn, 297 are being checked with the information provided, while the remainder have submitted incomplete information.

Where cladding needs to be removed from lower and medium-rise blocks (set at between 11-18 metres), the government is planning a long-term low interest loan scheme where leaseholders will pay no more than £50 a month towards the removal of unsafe cladding.

But critics say the government fund does not go far enough as the problem also extends beyond unsafe cladding.

Giles Grover, a spokesperson for EOCS, says: “I would hope that if there’s combustible cladding [on an 18 metre-plus building] and there is dangerous insulation and cavity barrier issues behind it, you would receive funding, but that still isn't clear and there are going to be a wide range of unfunded safety defects that will still require remediation.

There are timber balconies and walkways, and serious internal compartmentation issues – none of which are going to be funded Giles Grover, EOCS

"For example, what's behind the non-combustible cladding? There are timber balconies and walkways, and serious internal compartmentation issues – none of which are going to be funded [by the government or loan scheme] in buildings under or over 18 metres, so the work will not happen. Even if the unsafe cladding is replaced, this still does not tackle the other issues.”

More concerns than just cladding

A government briefing paper covering the progress of the remediation work, published earlier this month, said the additional £3.5bn in funding had been welcomed but noted leaseholders and commentators' point that it will not address all outstanding issues.

For example, there is no funding for non-cladding related remedial works although a myriad of building safety issues has been revealed following inspections. 

The MHCLG committee said that addressing all fire safety defects in every high-rise or high-risk residential building could cost up to £15bn – dwarfing the total government funding for cladding remediation (including ACM) to date of £5.1bn.

As of January 31 2021, of the 461 high-rise residential and publicly owned buildings identified with unsafe ACM cladding, remediation has either completed or started on 419 – 91 per cent of all identified buildings.

The Welsh, Scottish and Northern Irish governments are still trying to finalise their funding solutions for unsafe cladding.

Dominik Lipnicki, director at Your Mortgage Decisions, says: “Cladding is only one of the issues. [Government measures do not] cover concerns over sprinklers, breakout doors and timber balconies.

“I realise far more people die in properties over 18 metres, but we are not just doing this for that. We are doing this so people can sell and remortgage, and surely that is affected whether the property is 17 metres or 90 metres.”

Footing the bill

Russell Quirk, co-founder and property expert at Moving Home Advice, says: “[The £3.5bn headline] hides the reality that unsuspecting leaseholders are still on the hook for the mistakes of developers, contractors, local authorities and government-led building regulations that have proven woefully inadequate.

“The typical cost of remediating unsafe cladding across the country is a catastrophic £45,000 per flat when you include peripheral costs. Robert Jenrick’s £3.5bn is not enough. [The loan will take] up to 60 years to pay off and... will hang around leasehold ownership like a noose around their innocent necks.”

The government says it is prioritising unsafe cladding, which is a higher risk and can act as a fire accelerant, and is a greater risk in higher-rise blocks, adding that building safety is the responsibility of the building owner and they should meet the costs of remediation without passing them on to leaseholders wherever possible.

A report by the BBC in January found a clause in the Building Safety Fund contract, indicating the applicants – managing agents and building owners – would be financially liable for any repair work not covered by the fund, but some were refusing to sign the document.

What is also unclear is how long property owners will have to wait for the before the remediation works are completed and when the EWS1 studies can be carried out, particularly when there are not enough qualified engineers to do the surveys.

Intra Private Finance's Kandemir says: “The struggle has been not having sufficient support from the managing agents of the property, coupled with the lack of direction from the relevant regulations. 

“The government seems to have enacted a regulation the market is not prepared for. One would have hoped that a type of government guarantee would have been sufficient, to ensure that the regulations are more thought-through and a sufficient number of qualified surveyors/sub-contractors conducting the studies can be appointed.”

An MHCLG spokesperson says: “Our multi-billion-pound interventions will protect leaseholders in the highest-risk buildings from the unaffordable costs of replacing unsafe cladding, and will ensure no leaseholder will ever pay more than £50 a month.

“This will reassure lenders that where cladding removal is needed, costs will not be a barrier or mean that mortgage payments become unmanageable.

“We’re also establishing new regulators to ensure homes are made and kept safer in future – and we continue to work with the industry to make sure these measures help get the housing market back on track.”

Some mortgage brokers have been able to refinance those in affected properties by extending their existing mortgage terms or negotiating a new product with the existing lenders, however transferring to a new mortgage lender has been impossible.

Looking ahead

So, how damaging will this debacle be for the mortgage market in the long term?

Steven Truman, director of cladding remediation specialists Cladding Consulting, said: “While there is of course no guarantee that lenders will not look to another safety issue, so far this has not been mentioned and we expect that valuers will be able to value apartments correctly once cladding is removed, enabling lenders to lend. 

“We do not believe that internal fire safety works, many of which are in place now, will stop valuers from undertaking their work and valuing properties at current market values."

Just Mortgage Brokers' Shave says: “Undoubtedly the cladding issue has had a major impact on the mortgage market. The new government plans are welcome. But until a full and acceptable solution for all is arrived at, the mortgage market will continue to suffer. Cladding has been an issue for far too long and the losers are the homeowners who are caught up in it all, through no fault of their own.”

Ima Jackson-Obot is deputy features editor of FTAdviser