Estate Rent Charges: A Guide For Financial Advisers

While many people think of criteria in terms of physical property characteristics when it comes to lifetime mortgage lending, more financial-admin based considerations such as estate rent charges are a similarly important consideration when it comes to property eligibility.

What is an estate rent charge?

Estate rent charges are created by property developers, in order to provide ongoing funds for an estate management company. Owners of freehold properties on the estate are charged a rent amount, with the funds being used for the maintenance of communal areas - these could include car parks, private roads, or playgrounds.

In the past, open spaces and other communal areas on housing estates were adopted and maintained by the council. However, this has become increasingly uncommon and has been replaced with a structure whereby the maintenance of shared spaces are charged to each new-build property, with ongoing maintenance costs being shared between homeowners.

How do these differ to freehold rent charges?

A freehold rent charge is defined by law as ‘an annual or other periodic sum charge on or issuing out of land except rent reserved by a lease or tenancy or any sum payable by way of interest’. These charges came about as a result of landowners agreeing to release part of their land for development at a reduced rate, subject to receiving regular income from the initial purchaser and successive title owners.

The Rent Charges Act of 1977 prevented the creation of any new rent charges, with the exception of estate rent charges. Existing freehold rent charges will be extinguished either by July 22nd 2037, or 60 years from the date of setting up, whichever is later.

Why do rent charges pose an issue for lifetime mortgage lenders?

The law surrounding estate/rent charges enables the management company to enforce payment (including any arrears) by either repossessing the freehold property or creating a 99-year lease, both of which would rank ahead of any charge by a lifetime mortgage lender.

Unless these charges are capped, in line with a recognised RPI or the management company is run by the residents of the development, these propose a significant risk for many lifetime lenders.

What conversations could you be having with your clients?

Asking about the current situation concerning the applicants' property early on in your initial fact finding can help manage expectations, and avoid a situation where an application is declined later down the track when the full details emerge. Similarly, it's important to keep clients aware of the sort of things that lenders may think twice about, as it helps them make an informed decision around porting the mortgage to another property, and finding a suitable home that meets lending criteria.

Hopefully this article has helped you better understand the issues of estate rent charges, and why lifetime mortgage lenders view them as a risky proposition. Additionally, we hope that by widening your understanding it enables you to feed these considerations into conversations with your clients as part of helping them reach their financial goals.