Arranging mortgages with cladding on buildings
Ever since the Grenfell Tower fire in 2017, the subject of cladding on buildings has been a very difficult topic. From the failings that led to that fire, to the efforts made to remedy the situation, it has been a very painful experience for many, and some even find themselves stuck in a property they cannot sell or refinance.
There is some light at the end of the tunnel as mortgage lenders and regulators are keen to get this issues resolved, but sadly we could still some way off that, and there are tricky loopholes you need to be aware of.
If you own a property that has external cladding, or are looking to buy one, the below information may be helpful to enlighten you on what the issues are, and what can be done to help or mitigate them:
What is the issue?
Any building, most typically it will be flat blocks, that has an “External Wall System”, often referred to as Cladding, will be identified by a mortgage lenders surveyors when they assess the property for lending purposes. External Wall Systems (EWS) are external skins added to the property designed to make them look more attractive. These can be made out of anything but are most commonly – Aluminium, Wood or composite materials – There was a focus on “Aluminium Composite Materials” (ACM) as this was the type of cladding that was on the Grenfell Tower.
In December 2018 the Government issued Advice Note 14 containing guidance for building owners on the steps to take to tackle non-ACM materials on the external walls of high-rise buildings. Owners were advised to check “general fire precautions” and ensure that external wall systems were “safe”. This can require an intrusive inspection by a qualified individual to check the materials used and how they were installed.
In 2019 mortgage providers began to require assurances about the safety of external wall systems as a condition of approving mortgage applications. There was concern that flats in high-rise blocks wouldn’t represent good security and that owners could be liable for remediation costs. In some cases, surveyors acting for lenders took the view that flats in blocks without a certificate showing compliance with Advice Note 14 had a value of £0, or significantly less than the asking price. An increasing number of mortgage applications were rejected; sales started to fall through.
How was this issue tackled?
In December 2019 an “EWS1” (External Way System) form was introduced as an “industry-wide valuation process which will help people buy and sell homes and re-mortgage in buildings above 18 metres (59 feet, typically six storeys).” You can read the full guidance from RICS (Royal Institute of Chartered Surveyors) here. This offered relief for many, as this gave mortgage lenders the confidence to lend where it was safe to do so. It also provided clarity for many homeowners and tenants.
The downside however is that it is not a regulatory requirement and a lender still does not have to offer a mortgage as that is a commercial decision for them to do so. This also led to a great many people being ‘trapped’ in properties or being unable to refinance. The main issues were – even if the building was under 18m, many mortgage lenders still insisted upon this form being completed. As there was no requirement to do so, there was push back from surveyors and solicitors (and an overall lack of trained staff to carry out this assessment only exacerbated the issue). However, the main issue was that some buildings have been identified as high risk from a fire which the leads into a raft of issues – who is going to pay to fix it (as this often falls back on the current owners)? When was this going to be done? Who is ultimately liable? Sadly many of these issues are ongoing and it must be awful if you are in that situation.
What are the recent developments?
In the last few weeks, two main changes have come into effect designed to resolve the issues highlighted above:
- Ministers have announced a new £3.5B fund to help fix buildings identified as ‘high risk’. This is purely for buildings 18m or higher and will ensure any leaseholder will not have to pay to fix the situation. It relates purely to the cladding and does not cover other fire safety work that may be required such as sprinklers. It also will not cover any building under 18m.
- Greater clarity on when an EWS1 form is and isn’t needed. So if there is no cladding, and/or the building is under 18m, this is not required which will speed up the process for many. However mortgage lenders may still insist on this form as it is their prerogative to do so.
Will this fix the issues?
Sadly not. While this is good news for many people who were trapped in a Catch 22 of trying to prove there was no fire risk, this doesn’t fix the problem if issues have been identified with the building. This has still left many with unsellable properties (and may also be stuck when coming to refinance) for two issues:
- The possibility of the building being unsafe.
- The cost attached to fixing the issues.
So this issue will remain until all remedial work is done. Some estimates go as far as suggesting £15B will be required to fix all the buildings effected. So unless more money is put in by the Government, or owners pay for this work themselves, this will be an issue that will come up for a good many years to come yet. As perversely, lenders will not offer extra borrowing to people in this situation to fix the building, but if they don’t have the funds to do this (which will run into the thousands for some) they then can’t fix the issue. A horrible Catch 22.
That said, there is a real willingness for mortgage lenders and regulators to work together to get this finally resolved. We are now seeing mortgage lenders take a ‘case by case’ view, so where you may have been stuck previously, especially when dealing with your own bank, we have access to lenders who can take a more pragmatic view. There will still be those who are stuck, but what we can do is offer guidance and assistance where possible, and ideally, find the correct lender that can work with you to get out of this situation. If there is a way of helping, we will find it, so please do contact one of the team so we can talk over what options there are.
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