Banks are increasingly rejecting mortgage applications for flats where annual service charges exceed 1% of the property’s value, according to industry experts.
The threshold represents a tightening of lending criteria, down from a previous benchmark of 2%, as lenders grow concerned about the resale value of repossessed properties with high ongoing costs.
Mark Harris, chief executive of mortgage broker SPF Private Clients, said: “While the level does vary between lenders, the 1% red line seems to be a good rule of thumb and if service charges breach this proportion of the property’s value, the lender may decide not to lend.”
He added that lenders consider review periods and ground rent when assessing applications, though recent legislative changes may reduce the impact of the latter. “Lenders will be concerned about unknown costs and how this will impact future affordability if service charges are hiked further,” Harris said.
Rising service charges affect market
Data from Hamptons shows that 37% of flats carried a service charge above 1% of value in 2025, up from 28% a decade earlier. The trend raises concerns about mortgage accessibility for flat buyers, particularly those requiring high loan-to-value mortgages.
Research published this week by Propertymark found that 86% of leaseholders experienced service charge increases in the past 24 months. Of those, 62% reported increases exceeding 21%, while more than a quarter saw rises above 60%.
Katie Kendrick OBE, founder of the National Leasehold Campaign, said: “Leasehold remains a life sentence. Despite nearly a decade of commitments, progress has been too slow, too limited, and too easily diluted. As a result, too many leaseholders remain trapped – unable to sell, unable to move, and facing costs they cannot afford.”
Government intervention planned
The government announced this week that new measures to protect leaseholders would come into force “as soon as possible from 2027”, though specific details were not provided.
The tightening of mortgage criteria comes as property buyers face challenges entering the market, with service charge concerns adding another layer of complexity for those considering flat purchases.
Harris advised that borrowers seek professional guidance if service charges appear excessive, particularly when seeking higher loan-to-value mortgages. The issue may affect property values and marketability, with potential implications for both the rental and sales markets in areas with high concentrations of leasehold flats.
