The researchers said: “Most participants from across the market [Help to Buy, Right to Buy and Shared Ownership] praised mortgage brokers.” But they also found that: “Shared owners were less enamoured with brokers”.
What explains this discrepancy?
Accounting for cost increases
It’s likely to have less to do with IFAs themselves and more to do with the nature of Homes England’s affordability assessment model. IFAs are currently required to stress test for future rises in mortgage interest rates. But the assessment process fails to take account of contractually inevitable ‘upwards only’ rent rises, at a premium to inflation; likewise potentially rapid and material increases in annual service charges (for those in flats at least).
Not surprisingly, the York research found that: “the relatively low entry cost of shared ownership is not maintained”. However, the maximum affordable equity share policy – combined with a high affordability threshold of up to 45 per cent – leaves shared owners little wriggle room to absorb any subsequent increase in total housing costs, with adverse consequences when wage inflation decouples from general inflation.
For example, between 2012 and 2021 average earnings increased by a higher percentage than shared ownership rent in only two years out of 10.
There are two further problems with the current assessment model:
- It does not explicitly take account of two very different pathways to full ownership: staircasing to 100 per cent, or making a gain on sale in order to transition to full ownership in a subsequent property.
- It ignores other whole-life cycle costs such as ground rent (where applicable) and lease extension.
Planning for the future
Of course, no one can predict what the future holds. But whether the purchase is intended as a ‘forever’ home or a starter home is a useful starting point for affordability assessments with a longer-term perspective.
In the case of a new build home, assuming a buyer intends to sell on relatively quickly, they may not need to plan for lease extension or staircasing. They may not even be that concerned about the inevitable rises in rents and service charges.
However, the situation is different for households purchasing a ‘forever’ home.
Maximising affordability over the long-term will require ensuring sufficient financial headroom to fund both staircasing and lease extension (assuming a 99-year or 125-year new-build lease, or ‘short’ resale lease). Staircasing will be particularly important to minimise exposure to the adverse cumulative impact of inflation-busting annual rent reviews. Without, of course, losing sight of that all-important 80-year threshold for lease extension purposes.
So, is it time for a radical overhaul of Homes England’s affordability assessment model (and the Key Information Document)?
Widening the focus from ‘day-one’ costs to whole-life cycle costs could assist IFAs in helping entrants to the scheme better understand risk, maximise opportunities for full ownership, and plan to minimise potential pitfalls.
With the added benefit of ensuring alignment with the new Financial Conduct Authority Code focus on consumer protection and long-term outcomes, this might just improve those disappointing satisfaction ratings.
