Flat buyers are increasingly encountering significant hurdles in securing mortgages due to rapidly escalating service charges, a situation that some lenders deem a tipping point for property insurability. The disconnect between rising service fees and stagnant or falling flat values has led to a surge in mortgage application rejections.
Some financial institutions have tightened their lending criteria, now refusing mortgages on flats where the annual service charge surpasses 1% of the property's valuation. This policy stems from concerns about a lender's ability to resell a repossessed property if the service charge makes it difficult for future buyers to obtain financing.
According to property firm Hamptons, the proportion of flats with annual service charges exceeding 1% of their value rose to 37% in 2025, an increase from 28% a decade prior. This trend means a flat valued at £300,000 with an annual service charge of £4,000 could be deemed unmortgageable by certain lenders.
William Coe, a mortgage broker at Cleerly, noted a significant rise in mortgage applications being stalled or declined specifically because of increasing service charges. He explained that when a service charge approaches or reaches the 1% threshold, many mainstream lenders rely on surveyor assessments. If a surveyor determines the fee is unreasonable or out of step with local market rates, the property can be flagged as unsuitable security, leading to an outright mortgage decline.
The combination of rising service charges and stable or declining property values creates a challenging market for flat owners and prospective buyers. While average flat values across England and Wales have seen a modest increase over the past decade, the market in London, where flats represent a significant portion of housing stock, has seen little to no price growth in the same period.
Concurrently, average service charges have risen substantially, with Hamptons reporting a 55.6% increase over the last ten years. Some homeowners have reported increases of 50% or more in just the last five years. The Property Institute's research indicates that average annual service charge bills range from £1,525 for the lowest 10% of buildings to £8,680 for the top 10%. Last year, the average service charge represented 0.9% of a flat's value, placing many properties precariously close to the 1% limit imposed by some lenders.
Areas with a significant disparity between property prices and service charges have also been identified. In Bradford's BD1 postcode, average service charges were £2,023 on properties with an average asking price of £68,050, equating to 3.13% of the asking price. A similar situation exists in Liverpool's L2 postcode, where service charges of £2,910 represented 2.58% of the average asking price of £122,374.
Valuation Challenges
When a mortgage is involved, lenders commission independent property valuations. While often seen as a formality, these valuations can become a significant obstacle. Surveyors may value a property below the agreed purchase price, requiring the buyer to cover the difference. With falling flat prices in many regions, surveyors are becoming more cautious, aware that they can be held liable by lenders for inaccurate valuations.
Coe reported an increase in surveyors down-valuing flats, a hurdle that has become more frequent, with reductions typically ranging from 5% to 10% of the agreed purchase price.
Lender Flexibility
Not all lenders adhere to a strict 1% cap. Some, like Santander and Barclays, evaluate service charges as a monthly financial commitment rather than applying a fixed percentage limit. These lenders may investigate the reasons behind high service charges. For instance, charges related to major works or necessary building maintenance might be acceptable, whereas excessive management fees or indications of poor property management could lead to a decline.
Lenders prioritize predictability in financial commitments. Unlike fixed loan repayments, service charges are subject to increases by managing agents or freeholders with limited recourse for leaseholders. This lack of control over future costs represents a significant risk for lenders, particularly concerning their ability to quickly resell a repossessed property.
Furthermore, high service charges can reduce a buyer's borrowing capacity. These costs are factored into affordability calculations, potentially turning a previously achievable mortgage offer into a decline. Factors such as rising building insurance premiums, maintenance costs, and expenses related to cladding have driven service charges upwards, making it common for two-bedroom flats to have annual fees exceeding £3,500.