Whenever a borrower approaches a mortgage broker wanting a right-to-buy mortgage, many will have thought ‘is it really worth my time, to do this case?’ It is easy to see why brokers would not be enthused with infrequent requests of this nature, as many lenders are unwilling to lend to low income earners who sometimes have a poor credit history and who, usually, require low loan amounts. However, despite these preconceptions the right-to-buy sector still offers the mortgage intermediary great earning opportunities.
Right to buy has now been around for 23 years and has been the most successful home ownership initiative ever in the UK, with over 1.5 million council flats and houses, worth over £75bn at today’s prices, having been bought by their tenants since 1980. These former tenants originally paid around £35bn for their homes. This has contributed to the increased proportion of owner-occupiers in the UK, from 55% in 1979 to nearly 70% (16.7 million) today.
The scheme originally offered tenants discounts of up to 70% of the market value of their rented property with the amount of discount dependant on whether they were living in a house or flat and how long they had been a tenant.
The initiative was a powerful political weapon for the Thatcher government enabling it to win votes, especially from those living on council estates. It also promoted the Conservatives’ stance of home ownership over tenancy, and the scheme reached a peak in 1982 with 240,000 right-to-buy transactions. After this the following four years saw a decline in the number of sales, but then another peak was reached in 1989 with over 200,000 sold.
Opponents say that right to buy has had little impact, especially on less popular housing estates where lower-income tenants are more prevalent. However, supporters of the right-to-buy initiative say the scheme has succeeded in creating genuine mixed communities, as owner-occupiers live next door to council tenants.
In 1999, the present Government changed the rules on right to buy by reducing the maximum cash limits on discounts to ‘ensure that the scheme provided better value for taxpayers, as well as still offering generous discounts to purchasers’. These limits ranged from a maximum of £38,000 in London and the South East to £22,000 in North East.
This was revised again in June 2002, when the Government commissioned research into the abuses of right to buy following concerns raised by ministers. Unsurprisingly after a leak which indicated that the Government planned to curtail the initiative, a flood of applications was received.
Then in January this year John Prescott, the Deputy Prime Minister, announced new plans to more than halve the right-to-buy benefits for 42 council areas in London and the South East (see map). From March this year local authorities were allowed to choose whether to slash the maximum discount to £16,000. Of the original list of 42, two councils succeeded in winning exemption ‘ Christchurch in Dorset and Spelthorne in Middlesex ‘ and one new council was added after Greenwich argued that it was under the same housing pressure as its neighbours. Four other London boroughs which asked to be exempted were turned down and these included the two ‘flagship’ Tory councils of Wandsworth and Westminster. A spokesperson for Wandsworth Borough Council, says: ‘Ministers were totally out of touch with the aspirations of ordinary people.’
The deadline date for applications eligible for the higher discount in the 41 council areas was 27 March. Also in March, Lord Rooker, the minister of state for housing and planning, presented a draft Housing Bill to Parliament which outlined further restrictions to right to buy in a bid to prevent the abuses to the system. The main changes affecting right to buy are as follows:
• The qualification period to be eligible extended from two to five years.
• The payback period if former tenants sell their homes extended from three to five years (if the property is sold within this period, the former tenants must ‘payback’ the original discount given).
When launching these measures, Lord Rooker, said: ‘The Government is committed to right to buy. These reforms will continue the process of modernising the scheme. ‘It will make it harder for companies and individuals that exploit the discount rules and benefit at the expense of those who need affordable housing.’
The draft Bill will be under consultation for 10 weeks from the end of March.
Punishing the poor
The Tories believe that John Prescott has ‘misdiagnosed’ the scale of the problem following the issue of the Heriot-Watt University study, which preceded the draft bill from Lord Rooker. David Davis, shadow deputy prime minister, highlighted that the poorest people would suffer under the recent discount cuts and that the abuses were small scale.
He said: ‘First he [John Prescott] sneaked out the unpopular, ‘punish the poor’ policy of reducing the right-to-buy discount in a written statement. Now he has tried to smother this [report] and it is obvious why.
‘Prescott is not just punishing the many for the sins of the few. He is also punishing the many for the failure of the Government. Those ‘abuses’ might not take place were there a more effective lending system.’
Davis also said that one-parent families, the retired and low income earners would suffer the most from cuts in discounts, as together they account for the vast majority of council house buyers.
In October last year, the Tories also proposed extending the right-to-buy scheme to housing association tenants.
Unsurprisingly, the homeless charity, Shelter, is delighted with these proposals. Ben Jackson, director of external affairs at Shelter, says: ‘They will offer a glimmer of hope for the thousands of families desperate for somewhere decent to live.’
But what do these changes mean for mortgage intermediaries?
All these recent changes have undoubtedly created uncertainty and panic buying in some areas, notably in Scotland where there was a huge 77% increase in right-to-buy applications between July and September 2002, following the implementation of the Housing (Scotland) Act 2001. The Act set a maximum discount of £15,000 for new tenants and extended the qualifying period to five years.
Most importantly for any mortgage intermediary looking to increase sales in this market, there are still around three million local authority rented properties in the UK. This makes up about 15% of the UK’s total housing. Around 60,000 council flats and houses are being bought by their tenants every year, with many more being re-sold.
Despite many preconceptions, the vast majority of council home-buyers are not in mortgage or service charge arrears and are glad they bought their homes. The department for transport, local government & regions (now disbanded and included within the office of the Deputy Prime Minister) stated that arrears and repossessions among right-to-buy purchasers are around the same level as first time buyers generally. Therefore, brokers should not be put off by any pre-conceived ideas of the type of client it may attract.
Many borrowers will also require full financial reviews, giving intermediaries the opportunity to ‘up-sell’ products such as pensions and investment plans. Also, there are many council estates in prosperous and high property value areas, and there may also be adult children living in the property with parents, which may also give the intermediary extra opportunities.
Right-to-buy express completion
In addition, many lenders now offer a service called ‘right-to- buy express completion’ which removes the need for a deed of postponement from the council or local authority. This will enable many right-to-buy cases to be processed a lot quicker and so reducing the amount of time a broker needs to spend on a case, and enabling them to be paid a lot sooner. Some lenders will even pay brokers a small fee to use this service.
Such examples highlight the opportunities that still exist with right-to-buy properties and with a low interest rate environment. Mortgages have never been more affordable to those with low incomes. It must also be remembered that although the mortgage itself may be small and have a low perceived value to the intermediary, a satisfied client is usually a client for life.
With regard to the future, as has been mentioned previously, there are still over three million rented local authority properties in the UK and so right to buy is still a huge market for lenders and mortgage intermediaries alike.
In February’s monthly house prices report from Nationwide, the price of a typical house stood at £118,521, up 25% on the same period a year earlier. Although February’s house price growth slowed to 0.4%, it is too early to say that this is the start of a sustained slowdown. However, it does feel that a gentle slowdown is likely towards the end of the year, but this still means prices in December should be up 10% from a year earlier.
This is still good news to any potential right-to-buy borrower and should act as an encouragement to take their first step on the housing ladder, as property is still a good investment.
In the meantime, mortgage intermediaries who actively target possible right-to-buy customers may be pleasantly surprised at the quality of borrowers they attract and be even happier at the increased earning capacity they find for themselves.
41 councils in London and the South East have had their maximum discount entitlements slashed to £16,000.
Right-to-buy borrowers are no more likely to get into arrears than any other first-time buyers.
Some lenders have removed the need for a deed of postponement which speeds up the process and may even bring in an extra fee for brokers.