Why Mortgages Are Being Declined Due to Flood Risk

With reports that well-known mortgage lenders are pulling offers due to flood risk, we’re outlining in this article why there is an increased focus on climate-related risks for financial institutions and what this means for homebuyers and property developers.

According to statistics, you are more likely to have your house flooded than burgled. With increasing amounts of flooding occurring across the UK, banks are looking more closely at how flood risk could affect their mortgage portfolio. They can’t do much about the mortgages they have already approved, but they can be more in control of any future mortgages they take on. This means they may become more picky.

Less than a third of prospective homebuyers consider the risk of flooding, and in this article, we’re highlighting the risk of not having a flood risk assessment. Nationwide Building Society is already declining mortgage offers where there is a high risk. A property is categorised as high risk by the UK government if there is more than 1% annual probability of river flooding and more than 0.5% probability of sea flooding. A quick way to check where a property falls on the scale is to type in the postcode on the Gov.UK website.

Why is there an increasing focus on flood risk for mortgage lenders?

In recent years, the Bank of England has been pushing for greater transparency and accountability from financial institutions regarding their exposure to climate-related risks, including flood risk. As a result, mortgage lenders are now undertaking individual portfolio stress tests to demonstrate their financial impact and resilience to flood risk or damage to property.

The reasoning behind this new requirement includes the following:

• Increased home insurance payouts: Annual flood damage costs are in the region of £1.1 billion across England, and in 2023, £269 million worth of insurance claims were made in the UK specifically for flood damage.
• Increased flood risk: It’s predicted that around 1 in 6 properties are at risk of flooding, which could affect around 5.5 million homes and businesses across England. The biggest concern for lenders is that a property will become uninsurable and potentially unsellable if it’s at risk of flooding.
• Systemic risk mitigation: Climate change poses systemic risks to the financial system. Floods, storms, and other climate-related events can lead to property damage, business interruptions, and disruptions in economic activities, impacting the stability of financial institutions.
• Long-term sustainability: By assessing and disclosing their exposure to climate risks, banks and lenders can better incorporate these factors into their risk management strategies. This can contribute to the long-term sustainability of their operations and investments.
• Investor and stakeholder expectations: Investors, regulators, and other stakeholders are increasingly demanding greater transparency on climate-related risks and opportunities. Reporting requirements help meet these expectations and build trust in the financial system.
• Supervision & intervention: The Bank of England, as the UK’s central bank and regulator, has an obligation to ensure the safety and soundness of financial institutions. Assessing and monitoring exposure to climate risks allows for more effective supervision and intervention.

Overall, the Bank of England’s requirements for reporting on portfolio exposure to flood risk and climate change reflect a broader recognition within the financial sector of the importance of addressing climate-related risks and integrating them into decision-making processes.

These requirements are part of a global trend towards greater climate risk disclosure and management in the financial industry.

What does this mean if you’re looking to purchase land or property?

It means now more than ever that background checks, such as a property specific flood report, are required. With 25% of flooding happening outside areas formally designated as being flood prone, it’s important to cover all bases.

With more lenders keeping a closer eye on flood risk, this could lead to a spiralling effect, where certain regions in the UK may become ‘unmortgageable’.

How can Ashfield help?

As a flood risk report specialist, we are well aware of these impending issues and already have a solution to help property developers and buyers navigate this potential issue. We offer our Property Flood Review report, which can better inform developers and potential homebuyers when they are looking to buy a new property. Delving deeper than our competitors, we cover more data sources to provide peace of mind. We are also able to provide practical advice to reduce the risk or impact of flood damage on your property.

Get a flood risk assessment today and be confident that you won’t be refused a mortgage due to a flood risk.