To this end, an estimated seven million homes remain excluded from the Flood Re insurance obligation, including 1.1 million leasehold homes and three million homes in urban areas. Propertymark has long held the view that Flood Re should be extended to the leasehold sector and the private rented sector. Flat owners, private rented sector landlords and renters are householders and should get the same guarantee as those who own houses.
Summary of our response
Leasehold
The exclusion of leasehold properties a concern and the UK Government should look specifically at leaseholders’ access to cover under Flood Re where private residents in flats are treated differently to commonholders and freeholders because of their tenure. There are two main areas that need addressing:
1. Definition of leasehold by the insurance industry
Building cover on leasehold flats is arranged on a block basis to ensure that the whole building is covered. However, the insurance industry views such cover as ‘commercial’, even though the premiums are entirely paid for leaseholders via their service charge. The service charge will cover a leaseholder’s own unit and common parts, but to qualify for Flood Re they must be insured on an individual basis or have an individual premium.
Therefore these leaseholders cannot access cheaper buildings insurance for flood via Flood Re. This is not a case of subsidy for commercial freeholders since the tenant leaseholder pays for the premium.
As a result, leasehold blocks have been excluded, effectively discriminating against homeowners who live in a flat and not a house.
2. The impact on mortgages
It is a requirement of all mortgages that the borrower insures the building, including for flood. Data produced by the Leasehold Knowledge Partnership estimates that at the very least 840,000 leasehold properties are at risk of flooding and 70,000 leasehold properties are deemed at high risk of flooding.
For many of these, it will be impossible for the leaseholders to obtain reasonably priced insurance through the free market due to the high premiums. We know that mortgage lenders are concerned by the potential impact on customers if affordable insurance is not available. Furthermore, more expensive insurance (excesses and premiums) could impact a customer’s ability to afford the mortgage.
Not only will these increases directly impact those seeking to insure their properties, but they could also affect the wider operation of housing and mortgage markets. For instance, higher premiums may mean a reduction in a homeowner’s ability to afford their mortgage, while high excesses might restrict loan to value rates, thus limiting the amount a customer is able to borrow. If a property cannot be insured affordably, then buyers will not be able to purchase it with a mortgage.
Private rented sector
Buy-to-Let property are not covered by Flood Re insurance subsidy and therefore insurance is expensive for thousands of landlords. If landlords in high flood risk areas cannot afford the premiums, this could lead to abandonment of property, a reduction in housing stock and added pressure on local housing markets. According to figures from the Residential Landlords Association, between 50,000 and 100,000 rental properties are in flood risk zones. Around 400,000 private homes are also in the zones and are likely to come under Flood Re. To address the issue, the UK Government should do two things.
- Private rented sector premiums should be classed as residential rather than commercial, and therefore benefit from Floor Re by contributing to it.
- The UK Government should review the taxes currently relating to private landlords to determine what classification they deem landlords investing in property to be. This would help to determine the status of private rented sector property for Flood Re as well as help to provide consistency on tax for landlords.
For instance, the UK Government must be consistent on whether buy-to-let is an investment or a business. If private rented sector premiums are to be classed as investment (residential) purchase rather than a commercial (business) investment, the sector would benefit from Floor Re by contributing to it.