Cohousing mortgages

We look at how lenders view cohousing leases.

At Wrigleys, we are getting more and more queries from existing cohousing groups as to how to make their leases acceptable for high street lenders. Groups who have operated for years, sometimes decades, are finding that lenders are now refusing to lend on properties where the lease can only be passed on to people who become a member of the group. This is happening where groups have never found it to be a problem before.  

It has always been the case that lenders needed to be free to sell on the open market on an enforced sale.  Most cohousing leases, or freehold covenants,  permit a lender to do this after giving the group a short period (normally between 8 and 14 weeks) to find an appropriate buyer. However, even this safeguard no longer seems to be adequate for lenders.   

Although the covenants normally allow a lender to sell to anyone at all after a number of weeks of marketing, they are usually worded so that the next owner (i.e. the individual who acquired the property from the lender) must then sell to a member. This means that the lease could potentially be sold to a non-member on an enforced sale, but would be brought back into the cohousing fold once that non-member moved on . 

It is possible that the continuing obligation to be a member on that next sale may be the root cause of lenders' attitudes as they may consider it would limit their pool of buyers on an enforced sale. This is on the basis that the majority of buyers in the open market will not want to be subject to certain rules when they come to sell a property and are therefore more likely to purchase other properties that are not subject to, for example, an obligation to become a member. As a potential solution, we are currently exploring with one group whether a lender would accept a membership obligation that falls away completely after an enforced sale but the situation is not yet clear. 

There are some leases where the cohousing group may take a percentage of the uplift on value on any sale, to use towards the community. Lenders seem to be turning against this, too, even if they have dispensation to sell free of this obligation if they enforce.

We have also heard of a situation where lenders do not like even the short period given to the group of 8 weeks to find an appropriate buyer.  This is deemed to be too much of a fetter on their ability to sell. The word on the grapevine is that lenders' attitudes are hardening towards cohousing leases and that this is a shift in the marketplace.  

If this is true, then there are various options, including: 

1. The niche lenders still welcome cohousing groups and local building societies can often be more flexible than high street lenders. These mortgages can, however, be more expensive than those from high street lenders, but they are still out there and remain a viable funding option for many cohousing group members.
2. Another option would be to do without membership restrictions in the lease (i.e. completely remove them from the lease) and rely on the cohousing group's rules and application process to ensure only like-minded people joined.  However, this is far from ideal as it would not prevent a lender selling a house or flat to non-members and the house/flat falling forever out of the community and nor would it prevent a disgruntled member from doing the same.

This situation is something that all groups need to be aware of and they may need some innovative solutions to enable new members to obtain mortgages. Can the group provide a private mortage or loan instead? Can they subsidise new members in some other way, so that the members can afford the niche mortgage products that still exist? There is no easy answer to this if the lending market is shifting and we would welcome any stories or solutions you may have.