Owe Dear

Turns out most of London’s super-prime property owners are mortgaged to the hilt and the bailiffs are starting to lick their chops, says Ross Clark

Turns out most of London’s super-prime property owners are mortgaged to the hilt and the bailiffs are starting to lick their chops, says Ross Clark

For much of the past year there has been a general assumption that the credit crisis would only really affect the lower end of the property market — the reason being that at the top end, cash is still king. What, the argument goes, would the buyer of a £10 million house in Kensington be doing with a mortgage?

Failing to pay it off, in the case of one homeowner. The top end of the London property market took a knock last month with the repossession of a £10 million house in Holland Park. The former owner, financier Robert Bonnier, turned out to have a mortgage in the region of £7 million. The property, for which Bonnier’s company paid £11.6 million in 2007, is now on the market for £10 million, reflecting the plunge in prices.

He is not alone in having a vast mortgage. The more the credit crisis goes on, the clearer the picture of debt in the prime-property market becomes. And no one can rule out more removal vans quietly drawing up in the streets of Kensington and Chelsea over the next few months before the bank comes for the keys: one Mayfair agent last week speculated that there are five properties in Mayfair in danger of repossession over the coming months.

Outside London, too, the bailiffs have started to arrive on the gravelled driveways. Also repossessed last month was the £3.5 million Clifton Hall outside Nottingham, whose businessman owner claimed to have fled the property after being spooked by its ghosts.

According to the Council of Mortgage Lenders, 1,500 mortgages were taken out for values in excess of £1.5 million during 2007. Given that the number of properties sold for prices above £2 million in 2007 was 1,645, according to the Land Registry, it would seem that the overwhelming number of prime properties are mortgaged to a substantial degree.

According to the credit agency Experian, there are 70 mortgages over the country with outstanding balances over £5 million. Among them are a few vast mortgages where the monthly repayments come in at the price of a small flat.

The largest current mortgage balance that Experian has seen is £10 million. But brokers Savills Private Finance say they have organised one for £18 million — which, at an interest rate of 6.5 per cent, means monthly repayments of £97,500.

‘If people’s income is based around financial services, their income could well have plummeted from £1 million last year to zero this year,’ says Ray Boulger of mortgage brokers Charcol. ‘They are going to be affected by the ability to pay their mortgages just like anyone else.’

Buyers of £10 million homes are less prone to negative equity than buyers in the mass housing market: very few lenders, adds Boulger, ever did lend more than 75 per cent of the value of a £10 million property.

But in one sense the position of multi-million-pound borrowers is worse: anyone with a £10 million loan will find it harder to remortgage as lenders cut back on mega-loans. A year ago, for example, the Abbey would lend buyers up to £7.5 million. In May it slashed its maximum loan to £550,000, although it has since raised that to £1 million.

Borrowing large sums of money isn’t going to get easier over the next few months. Among the few lenders still prepared to lend sums of £5 million and more, says Boulger, are the Halifax and the Bank of Scotland. With their takeover by Lloyds TSB, conditions are likely to get tougher: Lloyds TSB, through its Cheltenham & Gloucester subsidiary, recently cut the size of loan it is prepared to lend from £5 million to £2 million.

Anyone wanting to borrow £5 million may soon find themselves limited to the private banks, where they will find themselves paying higher rates of interest. Boulger indicates that a typical loan would come in fixed at 1.5 per cent above the Bank of England’s base rate.

Given that so many prime properties are, contrary to popular belief, bought with vast mortgages, it isn’t hard to guess what effect the reduction in the supply of large mortgages will have on the housing market. If you cannot get the credit to buy your £10 million town house in Kensington then you cannot buy it.

The number of sales in the prime-property market has not quite plummeted as far as the sales in the mass housing market, but the slump is gathering pace nonetheless. Between May 2007 and May 2008 the number of sales of properties for over £2 million plunged by 16 per cent, from 96 to 81.

If you have your semi-detached in Reading repossessed, your lender will nowadays at least go to the trouble of putting you in touch with Shelter, the homeless charity. Whether Robert Bonnier resorted to that service or not isn’t known, but one thing is for sure: the stucco terraces of Belgravia and Kensington are not immune from the bailiff’s knock. I foresee a few twitching curtains in London’s wealthiest streets over the next few months.