Paul Broadhead gave evidence.

Q We will now hear oral evidence from Paul Broadhead, the head of mortgage policy at the Building Societies Association. We have until 1 pm for this session. Could the witness introduce himself for the record, please?

Paul Broadhead:

Good afternoon. I am Paul Broadhead, the head of mortgages and housing at the Building Societies Association, which represents all UK building societies and seven of the larger credit unions.

Q Thank you, Mr Broadhead, for coming to give us evidence. I have a very specific question about something that was briefly raised on Tuesday but that has not been explored in real depth. I have seen, as other Members may have, a noticeable rise in RPI-linked ground rent provisions in the wake of the implementation of the Leasehold Reform (Ground Rent) Act 2022—although they may not be connected. You will be aware that such terms could be considered onerous in certain circumstances. They would appear to be the result of specific mortgage lender policies, and somewhat at odds with the UK Finance position. What is your view on that trend and its causes and consequences? Specifically, how will the ground rent provisions in the Bill, namely the peppercorn 990-year lease extensions under clauses 7 and 8, the peppercorn variation under clause 21 and, potentially, complete abolition of ground rents on existing leases, impact on that trend? Will they mean that RPI-linked ground rent provisions are a thing of the past if this Bill is implemented?

Paul Broadhead:

Yes, on the RPI, we have seen an increasing trend. I think that started when mortgage lenders changed their policies in terms of the escalating of ground rents—the doubling every five, 10 or 20 years, or whatever it might be. Mortgage lenders have started looking much more closely at the trends in ground rents to make sure that you can predict the affordability and fairness of those rents. You are absolutely right: the RPI change has followed on from many mortgage lenders moving to prevent the doubling of ground rents. We need to make sure we keep an eye on that and to make sure that they are fair and just.

They can be far more punitive.

Paul Broadhead:

They can be, absolutely, with where RPI is. It is really difficult to predict. Some ground rents can grow very rapidly, which puts people in financial difficulty. From the lenders’ perspective, when underwriting a mortgage, they need to consider whether the mortgage is affordable on the face of it not only today, but in the future, and to take account of any foreseeable increases in expenditure. That is one of the areas they will take into account.

In terms of the peppercorn ground rent, yes, I do believe that that will resolve this going forward. The important thing to consider is that there is still a separate consultation, which just closed yesterday, on capping ground rent for existing leaseholders. It is really important that that is brought forward to prevent this two-tier system from developing.

Q Mr Broadhead, I do not know how long you have been working in your present capacity, but I suspect it is since 1984. In 1984, your organisation’s report “Leaseholds—Time for a change?” said that the “leasehold system is incompatible with home ownership” and that an Englishman’s leasehold home “is his landlord’s castle”. I thought that was a very elegant way of expressing what many of us think. Is that still your organisation’s view?

Paul Broadhead:

You are absolutely right. We have been advocating for the reform of leasehold since 1984. As you kindly point out, it was not me that made that comment at the time.

That elegant comment.

Paul Broadhead:

Absolutely—I wish I could be as elegant, and I will try to be throughout this questioning. Our position is that leasehold does require reform. If you were going to design the property tenure today, it is not what you would come up with. However, there are 4 million-plus leasehold properties in this country. Undoing that and replacing it overnight with a new, perhaps more just, system will take time.

The first thing we need to concentrate on is reform, to make the system fair, predictable and equitable, so that people have the security of owner-occupation. In a sense, yes, they do not own the land on which their home sits, but they have the security of tenure that they would not have in other sectors. But it is important that we ensure that that is fair.

Q Let me ask you perhaps a more difficult question: how many of the mortgages that are lent to shared equity owners default compared with normal freehold owners?

Paul Broadhead:

Are you talking particularly about shared equity or shared ownership?

Sorry, shared ownership—where you have shared ownership in the property.

Paul Broadhead:

I have not got those figures to hand, but we can certainly send those through to the Committee. From speaking to our membership, I think it is fairly comparable. Our sector punches above its weight in shared ownership because it is very keen on affordable housing, and we have some big shared-ownership lenders. One thing I would say about shared ownership is that underwriting and managing those cases are slightly different from managing a traditional mortgage, because you have the housing association interest and some potential staircasing—although, of course, many do not. The arrears levels tend to be higher, but the default levels, I think, are comparable. We can confirm that in writing.

Q Interesting. Why do you think the arrears levels tend to be higher?

Paul Broadhead:

There are two things. One is the housing association rent aspect. Affordability tends to be more stretched by people owning shared ownership properties in any event, as most people land in shared ownership as an intermediate tenure because they are not able to buy their whole home. That, therefore, means their incomes are often less predictable. They do not necessarily always understand—

Or that property prices are too high, of course.

Paul Broadhead:

Well, property prices are too high irrespective of tenure, even if you are buying as a freeholder.

Their income may be stable and reasonable—being in shared ownership does not mean that your income is unstable in any way.

Paul Broadhead:

No, not at all.

Q I want to pick up on some of the comments we heard on Tuesday around mis-selling. You mentioned the work the building societies—your members—would do to understand the affordability and the ability of a purchaser. What steps do your members go through to ensure that the person taking out the mortgage fully understands what they are buying? I am conscious that you will not necessarily always know all the things that they know. Could you just talk us through that area?

Paul Broadhead:

Certainly. The first thing to remember is that mortgage lenders are experts in mortgage lending, not in property law—it is down to the conveyancer to advise the borrower of the requirements of the lease and the purchase of the property they are buying. The way I would describe it is that the conveyancer and the surveyor, to an extent, are the lender’s eyes and ears on the ground to ensure all of that is clear to the borrower, and that they are entering into that transaction with their eyes open.

What we have seen from a mortgage lender’s perspective, particularly when the escalating ground rent issue started to come to a head, was lenders taking a much more proactive approach on new developments to understand the terms of some of those leases, and actually refusing to lend on those new developments. Of course, there are a whole range of mortgage lenders that will lend on a new development, but the fact is that a new development without some of those large lenders—because they will not lend against that leasehold—drives change. That is what we have seen. We have seen the effect of that with the escalating ground rent—with the reduction of that.

Q I just want to be clear: from a consumer perspective, if somebody is buying a leasehold property, are your members telling them, “This is a mortgage for a leasehold property,” or do they not have that conversation?

Paul Broadhead:

They will tell them that it is a leasehold property. It may not be known when the customer comes in to apply for the mortgage, because that will come out through the conveyancing process, and often when the property is advertised it does not make clear whether it is a leasehold or a freehold property. But that will be dealt with and it will be made very clear in the terms and conditions of the mortgage what that tenure is.

What we have seen is that some of our members have turned down mortgages because they have come across onerous lease conditions, and the consumer, the prospective purchaser, has then complained to say, “I can afford this mortgage. Why have you turned me down?” When the lender has explained to them what they know—there is this asymmetry of information—the consumer, with what they then know about the terms of the lease, has pulled out of the transaction because they did not realise that before. I think the most important thing with leasehold is not necessarily more information, because you need experts to look at that information, and too much information is often as bad as too little information; it is more about making sure that the right information is given to the right person at the right time.

Q That leads me on to the regulation of managing agents and the property sector. Is that an area that your members have any views on? Is it something that you would welcome?

Paul Broadhead:

Yes, we believe that managing agents should be regulated. We think the fees—where the service charges money is spent—should be made clear to the borrower. I think that, at the very minimum, short of regulation, they should be forced to be a member of an alternative dispute resolution scheme.

Q That point is very interrelated to this. A considerable number of leaseholders are excluded from provisions to remediate the buildings. An example is people in buildings that are below 11 metres, or it might be people who have more than three flats. How has the market been responding to that?

Paul Broadhead:

There have been well-documented issues about building safety post the Grenfell tragedy. We did see some real difficulty about people being able to get mortgages where there was cladding on the building. Progress has been made there. I think that now, in most cases—particularly above 11 metres, as you suggest—the market is open, because it is clear that there is recourse to either the developer or the Government scheme to fund the work. Our starting position, when this came out with the amended Government guidance note in 2020, was that no leaseholders should be responsible for making good the combustible cladding, if it was now inappropriate, because they have gone into this, they have been advised by their legal advisers, and they should not be forced to put their hand in their pocket.

We are not there yet on properties below 11 metres, because the Government have chosen to exclude them from the support scheme. I have had a number of meetings with consumer groups, looking at cladding and at leasehold, and I think we are on the same page here. We are trying to find a solution from a mortgage-lending perspective, because we want that market to open up, but what seems to be more and more frequently coming out is that the cladding issues and other building safety issues are being conflated. It is really difficult then from a mortgage lender’s perspective, because if the cladding itself does not need replacing because it is safe, but there are other defects in there, there may still be some comeback that leaves leaseholders with quite a large unexpected bill that is at the moment unquantified and would affect the affordability of that borrower, going forward. We continue to meet with these groups and with Government to seek a solution, but it certainly is not operating perfectly.

Q Would you welcome amendments to the Bill to try to capture that by regulation, by legislation?

Paul Broadhead:

Yes. Anything that makes it clearer and gives lenders confidence and consumers confidence that their building is safe and they are not going to face an unexpected bill has to be welcome.

I am slightly confused. I thought it was now the case that properties did have to be advertised as leasehold or freehold. Has that changedQ ?

Paul Broadhead:

Well, often the advert will say that a property is leasehold but that that will be confirmed by the conveyancer, so you do not know 100% whether it is leasehold or what the terms of the lease are.

Q So there is not an obligation currently for estate agents to market properties in a way identifying whether they are leasehold.

Paul Broadhead:

Not to my knowledge, no. I do not think there is.

Q Maybe I made a mistake. You said that it would take some time to unwind the fact that we have—currently—4 million leasehold properties in the country. Can you give us an idea of how long you think it will take, depending on the outcome of the Government’s recent consultation? Were they to move to peppercorn rates, how long would this take to unwind? And give us a flavour of what would be the complexities.

Paul Broadhead:

In terms of the peppercorn rate, it is a really difficult question, because it is almost, “How long is a piece of string?”

Q But you are a man who knows, so even if you just give us your thoughts, that will be helpful.

Paul Broadhead:

I still think it would take decades to unwind everything to a peppercorn rate, because you need the group of leaseholders together to agree to enfranchise, which is quite difficult. I will give you one example we have come across, which was following the escalating ground rents. Housebuilders had written out to leaseholders and said, “We will convert your property to leasehold for free. We are going back on what we’ve done; we think we did the wrong thing.” The number of people coming forward and taking that up was negligible. You need to engage consumers. It is not just about putting the building blocks in place to make this better; it is enabling—

Q Or to make it possible. Just because it is possible, does not mean it will actually happen.

Paul Broadhead:

Absolutely, and you still need to engage the public and the legal profession that is taking people through, to make sure they understand what the benefits are and the cost of that. That individual value equation will change from leaseholder to leaseholder.

That is very helpful, thank you.

We have five minutes left. I will turn to Lee Rowley but please bear in mind that I want to bring in Barry as well.

Q I do not want to divert the Committee away from the core discussion, but I will just pick up on something that yourself and Mike discussed a moment ago. On sub-11 metre buildings and potential challenges with fire safety, would you accept that our standards are life-critical safety standards, and that the likelihood of an issue in a sub-11 metre building is substantially lower than one in a building above 11 metres? Fundamentally, it is unlikely that those buildings would need remediation to the extent that would be needed in higher buildings. That is an accepted position of your members, I presume.

Paul Broadhead:

That is absolutely an accepted position. The point I think you are getting to is that sometimes there is still an EWS1 form requested on sub-11 metre buildings. As I mentioned earlier, the lender is the expert in mortgage lending, not in building safety, and the surveyor on the ground will have their own gangs from the Royal Institution of Chartered Surveyors that they follow. If they come back and report that it needs further investigation, the lender has to take that at face value, because that is their expert.

I am not sure that I would accept that, but I will take that up with you and your members separately.

Q I will pick up briefly on what you said to Mr Carter about the way in which sometimes your members were advising people, “Actually, this is leasehold, and there are these additional costs, and service charges are so expensive that we are not prepared to lend to you.” Are there any particular freeholders who have a reputation in the industry for doing that? I am thinking of people such as the Freshwater or Persimmon Homes, or any who seem to be known for their excessive service charges. Is there an automatic flag for them in the industry? Sitting where you are, you would have parliamentary privilege to name them.

Paul Broadhead:

Parliamentary privilege notwithstanding, no, we do not have individual organisations I could point to. I certainly do not get reports from my members.

Q In that case, my question to you is: why not? You know very well that there are “fleeceholders” out there: freeholders who fleece their leaseholders. They have a reputation for doing it over many, many years. Should your industry not be advising somebody who approaches you for a mortgage about that, when you know full well that if they have a mortgage with that particular freeholder, the likelihood is that over the years those services charges will rack up and be abused in precisely the way that we have talked about with previous witnesses, about the inequity of power in this relationship? Indeed, these are the very issues that we are seeking to amend in this Bill. Why does your association not have those flags so that when it sees names such as Freshwater, it says to the person, “Look, we need to tell you a thing or two here”?

Paul Broadhead:

In terms of coming back to me as an association, that is a level of detail that is about individual organisations. It is not really part of my role to represent that. That does not mean they ignore that, just to be clear.

Q But you rightly said, Mr Broadhead, that your members would advise a prospective purchaser not to engage in a mortgage where it was leasehold, if they felt that the service charges would rack up and they would then be put into financial penury. Why do you not do it when you know that it will be the case?

Paul Broadhead:

Our members will not advise; they will refuse that mortgage, because it does not meet with their policy. In terms of other service charges, they all have a panel of conveyancers that they approve to act for them, and that is for the consumer purchasing that property. The terms of those panels change as some of these practices have come to light, and they will be nipped in the bud at that point.

Order. I am afraid that brings us to the end of the time allotted for the Committee to ask questions and, indeed, for this morning’s sitting. I thank all our witnesses on behalf of the Committee for their evidence. The Committee will meet again at 2 pm this afternoon here in the Boothroyd Room to continue taking oral evidence.

The Chair adjourned the Committee without Question put (Standing Order No. 88).

Adjourned till this day at Two o’clock.