Proposals to slash ground rents and save some homeowners in England and Wales thousands of pounds over the term of their lease are being consulted on by the Government.

Housing Secretary Michael Gove launched a consultation on Thursday setting out options, including capping ground rents at a so-called “peppercorn” rate for existing leaseholders, freezing ground rents at current levels and capping the ground rents at a percentage of the property value.

Ground rents are payments made by leaseholders to the freeholder, under the terms of a lease. The payments can vary from a nominal value to a significant amount that increases over the term of the lease.

The consultation outlined how ground rents have historically been of a low or nominal value but have “now become something more than just a token amount and have instead evolved to be a means for a freeholder to continue to charge rent from a leaseholder throughout the term of a lease, regardless of the amount paid to buy the property”.

In the latest English Housing Survey (2021-22) 86% of owner-occupier leaseholders surveyed reported paying a ground rent, averaging £298.

In research published for the Welsh Government on the sale and use of leasehold in Wales in 2021, the median average rent of leaseholders in flats was £150 and in houses was £200.

The consultation document said: “It may be confusing as to how much the increase will be. We have seen examples of ground rent clauses leaving some leaseholders responsible for thousands of pounds worth of charges annually. If the leaseholder falls behind on payments, they risk losing their home.”

There can also be significant problems when people are re-mortgaging or looking to sell up. Mortgage lenders consider ground rent as part of the affordability assessment.

The consultation said: “Evidence suggests that above certain thresholds (often £250 or 0.1% of the freehold value of the property) some either have policies that prevent lending, or, in the absence of a policy, are likely to exercise a discretion that may lead them not to lend.”

The document added: “Those who cannot afford to buy their freehold or extend their lease are worst affected, stuck paying ground rents and without the means to escape the trap.

“We continue to hear examples of sales falling through multiple times because the freeholder will not agree to vary a lease and limit the ground rent, meaning that lenders view the investment as too risky.

“Some leaseholders must pay an additional charge to their freeholder for the collection of the ground rent, in addition to the ground rent itself.

“Leaseholders have contacted the department to describe the pressure that they feel in these circumstances and the detrimental impacts it is having on their wellbeing and mental health.”

The document also highlighted the confusion for homebuyers, adding: “Buyers need to consider not just the purchase price of a property but the ongoing ground rent costs when determining the best choice for them and their family.

“This opacity can make it harder for people to take informed decisions about what is best for them and make the process of buying a home more complicated.”

Forming part of the Leasehold and Freehold Bill in this week’s King’s Speech, the Department for Levelling Up, Housing and Communities will consult on five options for how the Government could intervene to cap the ground rent leaseholders have to pay.

The proposals being considered are setting ground rents at a peppercorn; putting in place a maximum financial value which ground rents could never exceed; capping ground rents at a percentage of the property value; limiting ground rent in existing leases to the original amount when the lease was granted; and freezing ground rent at current levels.

The Government has already legislated so that new residential leases are restricted to a peppercorn ground rent.

The Leasehold Reform (Ground Rent) Act 2022 means that if any ground rent is demanded as part of a new residential long lease, it cannot be charged at more than the cost of one peppercorn per year – effectively setting the rate to zero.

Mr Gove said: “People work hard to achieve the dream of homeownership. They plan, toil, sacrifice, save and should rightly be proud to get on the housing ladder.

“However, far too many are burdened with onerous ground rents – these punitive charges can leave some paying thousands of pounds a year for nothing in return.

“Ground rent can feel like an annual reminder that you do not own the land your home stands on, that your lease on it is finite, and that there is a payment for the privilege of staying there.”

The Leasehold and Freehold Bill, to be introduced to Parliament shortly, aims to make it cheaper and easier for people to extend their lease or buy their freehold; increase lease extension terms to give people more security and peace of mind; give greater transparency over service charges and insurance commissions; and make it easier for people to manage their building themselves.

The public consultation, which applies to England and Wales, will be open for six weeks and the Government said it will consider all responses to inform the final decision. It aims to introduce the reforms through the Leasehold and Freehold Bill.

People can respond online, in writing, or by emailing Groundrents.Consultation@levellingup.gov.uk.