The government has agreed to virtually wipe out a help-to-buy loan on an apartment in a London block with cladding similar to that used at Grenfell Tower, it has emerged.



It will make the write-down on the grounds that the value of the flat in Greenwich has been reduced from £500,000 to £50,000 because the developer has no plans to remove the cladding.

The concession raises the prospect of multimillion-pound losses for the government scheme on any flat that goes into negative equity. This is because, unlike high street mortgages, help-to-buy loans can be redeemed on the sale value of the property rather than the value of the original loan.

Homes England, the agency responsible for the loan, wrote to Mary Tlick (not her real name) last week to say it had agreed she could pay back her loan at the knock-down valuation.

She took out a £95,000 loan with the help-to-buy scheme in 2014 as a 20% downpayment on the two-bedroom flat in New Capital Quay, a riverside development in Greenwich.

She recently got her flat revalued in light of the cladding issue and discovered that it had collapsed in value. The developer and freeholder Galliard is locked in a legal dispute over the cladding and has no immediate plans to remove it.

Tlick wrote to Homes England in March to ask if she could now pay back the loan at the current value and, after some delay, it has now responded to say that under the rules this is possible.

“Homes England has now determined that you may proceed with the redemption of your help-to-buy equity loan based on the valuation provided … ie at a market value of £50,000,” it said in a letter.

This means Tlick has to pay back 20% of the new valuation of £50,000, which is £10,000, leaving the government with a £85,000 shortfall on its original loan.

Homes England declined to comment on Tlick’s case but said: “Every case received by the Homes England mortgage administration team is considered on its own merits and will take in to account the local circumstances of each building. We will allow redemption of a loan if it is within the rules of the scheme.”

A charity that is campaigning for leasehold reform in the UK to liberate home owners from onerous contracts with freeholders said it was time the government took action forcing the removal of such cladding.

Martin Boyd, a trustee at Leasehold Knowledge Partnership, said: “The leaseholders in cladding flats have faced a huge amount of stress and worry over the last 10 months and have now seen their homes massively devalued. If the government is also going to suffer by having to write down these help-to-buy loans, it might finally encourage the sector to help develop a more workable solution. It’s not just the private and shared owners impacted by this problem.”

He said social housing landlords would also be experiencing significant devaluation on their properties, which could put them in breach of their loan covenants.