Lenders could be left at risk as mortgage borrowers find themselves unable to secure insurance against flooding when the ‘Statement of Principles’ agreed between the Government and the insurance industry expires on 30th June 2013. This could mean property owners are unable to insure their properties from summer 2012 as insurers become unwilling to offer policies which expire after the principles agreement. The end of the insurance cover leaves lenders’ mortgage book exposed to property at risk of floods where there is already a mortgage agreement in place.
Mark Blackwell, managing director of xit2, said:
"No insurance equals no mortgage. This means the only people who’ll be able to buy property at risk of flooding will be cash buyers – the lack of competition means prices will plummet. It is vital lenders are able to identify properties at risk before they value it and grant a mortgage. Failure to do so exposes them to potentially terminally blighted property and will increase the risk in their mortgage book. As the value of uninsured property falls, owners will be left in negative equity. It’s a real booby trap for buyers, surveyors and lenders."
Uninsured properties could leave owners in breach of their mortgage contract. Many UK insurers are already trying to rid themselves of properties at significant risk of flooding and some property owners have been unable to secure policies with excesses below £20,000. The end of the insurance agreement also leaves surveyors exposed to a rise in over-valuation claims, where lenders feel the surveyor has been negligent and not taken flooding risk into account when valuing the property on their behalf.
Mark Blackwell explained:
"Property blighted by flood is already a real headache for surveyors. Unless a solution is found, when government insurance of at risk properties ends next summer those headaches will become more serious migraines. Surveyors will need to make sure property at risk of flooding is identified so they can value it accordingly and protect themselves against over-valuation accusations. They should be encouraging the lender and the borrower to make sure the conveyancer doesn’t cut any corners when searching to establish whether or not the property is at risk of flooding."
Widespread flooding is also a danger for buyers. The Association of British Insurers estimates the floods of 2007 cost more than £3bn and that the average bill for the repair of a flooded property is over £30,000. Although, £300 million is spent on flood defences per year on flood defences, 43% of defences are in fair, poor or very poor condition. The lack of protection leaves lenders’ mortgage books exposed in areas where the risk of flooding is high.
Mark Blackwell said:
"The top-line figure for government current spending on flood mitigation may seem hefty, but in reality much more needs to be done to reduce the risk flooding poses to property. It’s a big danger to lenders’ balance sheets and to surveyors’ valuation work. The potential costs of flood damage dwarf the annual spend on defences and this is the main reason why insurers are so reluctant to expose themselves to flood risk.
"One of the main principles in the ABI’s agreement was that the government improve flood defences in high-risk areas. The fact this has not been done means an extension to the agreement is unlikely. This is worrying news for lending to borrowers in areas with high flood risk. Given that £214 billion worth of property in the UK faces a significant risk of flooding, lenders must take notice of the potentially huge dangers a dearth of flooding insurance may pose in the future."
