I’m considering buying a beautiful city centre apartment. Although it is being sold leasehold, it has a long time left on the lease so I’m not worried about that.
What is worrying me is that it comes with a £5,000 per year service charge. Could this cause a problem with my mortgage application, as I already need to borrow 4.5 times my annual income in order to fund the purchase?
The service charge does include things like a communal gym, 24-hour concierge and security, lifts and bike storage, but it still seems a bit steep and I am worried about costs escalating in the future.
Although I think I can just about manage to pay the service charge, I am worried about it also potentially causing me problems when I come to sell in the future as well – particularly if the costs rise over time. Should I avoid buying this flat?
Leasehold worries: Our reader is worried about a high service charge and whether it might impact both their ability to get a mortgage and their ability to sell in the future
Ed Magnus of This is Money replies: While £5,000 may be a lot to stump up every year, a service charge isn’t necessarily a red flag – provided you can afford to pay it, that is.
If you’re buying in an expensive part of the country, such as London, you’ll find plenty of high-specification new-build apartments that come with similarly high service charges.
It can also be the case with older leasehold flats as well. Sometimes there is an annual sinking fund contribution to build up cash for any repairs or redecorating in the future. They may also have temporary high service charges to fund major works.
According to analysis by the estate agent Hamptons, 20 per cent of leaseholders in London pay more than £4,000 annually, compared to 11 per cent across England and Wales.
However, it’s fair to say the typical leaseholder will pay much less than £4,000 each year.
The average annual service charge for a flat in England and Wales is currently £1,431, according to Hamptons, equating to £119 per month.
London prices: 20 per cent of leaseholders in London pay more than £4,000 on service charges annually
Service charges are typically much higher in London than anywhere else in the country at an average of £1,792 per year.
You are right to worry about escalating costs in the future and the risk that this might put off potential buyers when you yourself eventually come to sell.
Service charges have increased 51.7 per cent since 2018, according to Hamptons, when they averaged £943.
However, much of this increase came between 2018 and 2019, which predominantly reflected the large number of fire safety measures which were put in place in the wake of the Grenfell Tower disaster.
On the rise: Service charges have increased 51.7% since 2018, according to Hamptons when they averaged £943
Why is a service charge required?
Whilst maintaining the flat itself is typically the leaseholder’s responsibility, the building and any communal areas often fall on the freeholder, who will in turn often appoint a managing agent to do so on their behalf.
Most leaseholders, particularly those in purpose-built apartment blocks, will have a service charge to pay, which goes towards the upkeep of the building and any communal areas.
The lease should always set out the way the service charge is organised and what fees can be charged.
It often includes the costs of buildings insurance, cleaning, gardening, repairs of communal areas, surveyors’ fees, fire risk assessments and managing agents fees, among others.
The average one-bed service charge stands at £1,287 per year, the average two-bed pays £1,326 and the average three-bed pays £1,876
The annual costs often begin to mount up when it includes additional facilities such as a gym, swimming pool, cinema room, and 24-hour concierge among other things.
The price you pay isn’t just determined by the location and facilities on offer. It will often depend on how large the apartment is you are buying, as many blocks will operate a tiered system based on the number of bedrooms a flat has.
For example, Hamptons says the average one-bed service charge stands at £1,287 per year, the average two-bed pays £1,326 and the average three-bed pays £1,876.
To help provide some expert advice to our reader, we spoke to Chris Sykes, mortgage technical manager at broker, Private Finance and Nicholas Mendes, mortgage technical manager at broker, John Charcol.
Could it cause issues with their mortgage application?
Chris Sykes replies: Lenders will need to take into account any costs involved with a property, be that council taxes, insurance costs or in the case of a flat, ground rent and service charges.
Mortgage expert: Chris Sykes says there are two main avenues to consider, mortgage affordability and saleability
Mortgage affordability is much more nuanced than 4.5 times income these days.
Whether or not you will still be approved for the mortgage depends on whether the person who assessed your affordability for the loan – whether this was your bank or a mortgage broker – took service charges into account in their calculations.
If the calculations were not taking into account service charges, and the amount you were told you could borrow was the maximum possible, then you may find you are not able to borrow quite as much as you thought you could.
It’s worth using a mortgage broker to check whether there are any lenders who might allow you to borrow the same amount with the service charge costs included.
I have seen service charges significantly affect the level of borrowing clients had available to them, in some instances by £50,000.
Nicholas Mendes adds: Typically, when purchasing a leasehold, the two costs which mortgage lenders require information about are ground rent and service charges.
Mortgage providers will factor these figures into their affordability assessment, as this will be treated as committed expenditure by a lender.
While 4.5 times income is a widely accepted rule of thumb when calculating affordability, there are several lenders which can offer a higher multiple.
Could a high service charge impact the flat’s saleability in the future?
Chris Sykes replies: You are right to consider this, but a lender and the mortgage valuer will take this into account too.
I have had plenty of clients living in high-end flats with high service charges who were able to sell those flats easily when needed.
But I have seen others where it has been trickier to find potential purchasers for the property.
Mortgage expert: Nicholas Mendes, says while 4.5 times income is a widely accepted rule of thumb when calculating affordability, there are several lenders which can offer a higher income multiple
You will want to consider whether £5,000 is just covering costs, or is a cash pot being built up for major works within that.
This is often referred to as a sinking fund and is kept in place to cover costs such as roof repairs, new gym equipment and air conditioning issues, and these costs will likely increase over time.
Valuers will consider whether this level of service charge is in keeping with the property, for example if this is a £250,000 flat in Liverpool then £5,000 could well be seen as excessive but £5,000 on a £650,000 flat in Canary Wharf when surrounded by other similar properties would be a lot more justifiable.
Nicholas Mendes adds: You’re right to have concerns about the prospect of ever-increasing service charge costs.
You do need to consider that future buyers will likely harbour the same doubts about the property as you, so it’s worth factoring this into your decision making.
Service charge costs will depend on the location, and the type of property, but a rule of thumb is the more impressive the building and facilities on offer, the higher service charges tend to be.
Developers build with a typical client in mind and want to ensure they offer the best facilities on offer, such as gyms, concierge services, landscaped gardens. But with this, you’ll find higher costs compared with a more modest building.
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