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Homes at risk of flooding: what next?

Opinion

Published: 28 January 2016 | Author: Bernard Clarke

Flooded homes have dominated the headlines this winter – and, for many affected home-owners, the mopping up continues. Around 16,000 homes have been flooded in the last three months or so, with the Association of British Insurers estimating that the cost of claims from home-owners and businesses will amount to £1.3 billion.

For those that have been flooded and think their mortgage may be affected, the advice is to talk to their lender from the outset.  Lenders will want to support borrowers through the immediate challenges of dealing with cost of repairs and replacing lost possessions.

The scale of the problem

Some five million properties in England are at risk of flooding and the government has estimated that, without action to improve protection, the annual cost of damage to properties from flooding in England and Wales could rise from £1.2 billion in 2012 to between £2.1 billion and £12 billion in 70 years’ time.

Many of the homes flooded recently have suffered similar problems before, so there has been a renewed debate about the need to reinforce flood defences. According to the House of Commons library, annual spending on flood defences in England by the Department for Environment, Food and Rural Affairs (DEFRA) had been growing in real terms up to 2010-11. But it declined by almost 15% in 2011-12, and since then it has remained at broadly the same level in real terms.

Table 1: Spending on flood defences in England by DEFRA, £ million

  Cash terms Real terms (2012-13 prices)
2007-08 500 564
2008-09 568 624
2009-10 633 676
2010-11 670 698
Total 2007-11 2,371 2,562
2011-12 573 583
2012-13 576 576
2013-14 577 566
2014-15 615 591
Total 2011-15 2,341 2,315

 

Source: Flood defence spending in England, House of Commons Library

In a House of Commons briefing on environmental protection published in 2014, the National Audit Office concluded that the Environment Agency was “on track” against its key performance indicators for flood management. The Agency had maintained 98% of assets for managing flood and coastal risk, and it had increased the proportion of high risk properties to which it could give direct flood warnings from 57% to 62% over a two-year period.

The briefing also said there were concerns about housing development in areas at risk of flooding. But it reported that the number of new homes built in areas of flood risk had declined from 13,700 in 2009 to 7,900 in 2011.

The launch of Flood Re

For those householders who face a continuing threat of flooding, there is some positive news, with the launch in April of a new flood insurance scheme, Flood Re. Its intention is to ensure that domestic property insurance is widely available and affordable for homes at risk of flooding, without placing excessive costs on other policyholders or taxpayers.

The scheme works by allowing the insurer to cede the flood risk part of a policy covering a home with a history of flooding on to Flood Re, a flood re-insurance vehicle, which will be funded by a levy on all insurers according to their market share. This levy has been set at £180 million per annum for the first five years – equivalent to around £10.50 for every household in the UK with both buildings and contents insurance.

We welcome the introduction of Flood Re. However, we continue to believe that, over and above any measures to improve flood insurance cover, the government should maintain a commitment to future spending on flood defences.  

Chart 1: How Flood Re works

Image of flood re chart

Gaps in cover

The ABI estimates that Flood Re will benefit an estimated 350,000 homes across the UK that are at significant risk of flooding and would otherwise struggle to get affordable insurance. So, many home-owners supported by Flood Re will welcome its introduction. But there are some significant gaps in the cover it provides.

We therefore believe it will be important for the government and the insurance industry to continue to monitor the scheme to make sure that it operates as intended – and that there are other options for households that we already know will be excluded. These include: 

  • All homes built since 2008.
  • Properties where freeholder insurance covers a block of four or more flats. Commonhold association buildings insurance taken out on behalf of, or by, residents in a block is also excluded.
  • Insurance taken out collectively on one or more unit in a tenement property.
  • Landlord insurance on any rented property.
  • Buildings insurance covering a block of mixed residential and commercial use, like a block of flats with shops on the ground floor or in which some individual flats are used as business addresses.
  • Social rented and housing association homes, corporately owned property, retirement homes and publicly owned buildings.
  • Homes registered as businesses, including charities and co-operatives, pubs and post offices, bed and breakfast premises where the owner pays business rates, and farm outbuildings that may be occupied by paying tenants.

The government has sought to give assurances by insisting that no eligible property at risk of flooding would be barred from the scheme. But will this really prove to be the case? Might there not be exceptions, for example, for properties that persistently flood but where no improvements are made to flood defences? For such properties, is it not at least possible that insurance policies might not be accepted into Flood Re at some stage in the future?

Careful monitoring will show the extent to which those who are excluded, including leaseholders and buy-to-let landlords, will be at a disadvantage. It will also help lenders understand whether there are other, unanticipated exclusions, and whether there will be a future need for an expansion of the scheme – Flood Re II, perhaps – to cover excluded households.

Effects on different tenures

All lenders require borrowers to have suitable buildings insurance, including flood cover, as a condition of their mortgage. So, anyone in an area at risk of flooding who wishes to buy a property with a mortgage – whether as an owner-occupier or as a private landlord – may find that their options are limited by the cost and availability of insurance. 

Expensive premiums may affect mortgage affordability, and large excesses may mean that lenders will only offer a mortgage at a conservative loan-to-value ratio. In those areas where flood cover is unavailable or unaffordable, cash buyers may become the most likely purchasers.

How effectively the market will continue to function in areas at risk of flooding will be partly determined by how much confidence there is in protection from flooding, both from insurance and investment in flood defences. 

The private rented sector

Because landlords are excluded from the Flood Re measures, they may be particularly wary about investing in areas at risk of flooding. The challenges are greater for buy-to-let landlords, whose businesses are already due to be affected by the introduction of a significant new tax burden. This could mean that there are knock-on effects for tenants, as well. 

Alongside a steady decline in owner-occupation, the number of homes in the social rented sector has been falling. For the foreseeable future, we will therefore continue to need a buoyant private rented sector – in all parts of the country, including areas that may periodically be at risk of flooding. 

Conclusion

We welcome the forthcoming introduction of Flood Re in April, which is intended to ensure that insurance remains available and affordable for homes where there is a flooding risk. But we are concerned about gaps in the proposed cover. 

A broad range of exclusions means that the scheme will potentially leave a significant number of homes without affordable flood cover. We believe that, over time, Flood Re needs to provide cover for a wider range of types of property. 

Newly built, leasehold and private rented homes are residential properties like any others. We believe they should be covered by the scheme to provide better protection for a wider range of occupiers, and to help the property market to operate more smoothly in areas that are prone to flooding.