Without doubt the main issue in today’s housing market for first time buyers, key workers and those on lower wages is affordability. With little likelihood of house prices falling in the near future, those looking to climb onto the property ladder are left with few options. They can borrow a greater percentage of the value of the house through a 100% mortgage, they can borrow to a greater multiple of their income or they can consider shared ownership schemes.
Essentially, 100% mortgages and extended multiples of income loans are opposite sides of the same coin. Allowing those missing an element in their finances to stretch to a new home. A 100% loan is suitable for somebody who has an income but not the capital, or doesn’t wish to spend their capital. And loans offering more than the standard 3.5 times income are useful for those who have capital for a deposit, but not the income for the property they want.
David Connolly, product development manager at Mortgage Express, says: ‘The fact that 100% mortgages are available to those who have not saved a deposit means people don’t have to watch the price of a home rise faster than they can save the deposit. The main downside is that the interest rate is higher, reflecting the fact that this is a niche product with greater risk to the lender. And with reference to higher income multiples, unfortunately they are not available to everyone.’
The other option, one that doesn’t involve such a financial stretch, or in some cases increased risk, are shared ownership schemes. The majority of shared ownership schemes are run through the Housing Corporation, a non-departmental public body (NDPB) sponsored by the Office of the Deputy Prime Minister. The Housing Corporation funds homes built by Registered Social Landlords (RSL) from money it gets from the Government.
RSL is the technical name for landlords registered with the Housing Corporation. Most are housing associations, but there are also trusts, co-operatives and companies, typically house builders. Housing associations are by far the main providers of new social housing, there are over 2,000 in England, managing around 1.45 million homes.
Help to buy a home
There are two schemes that help people on lower incomes become home owners: shared ownership and Homebuy. The shared ownership scheme allows people to buy a share of the property and pay a rent on the remaining share they do not own, gradually buying further shares until they eventually own the property outright. The Homebuy scheme helps people to buy a home on the open market by buying a portion of the property with them.
Shared ownership is intended for people who cannot afford to buy a home by any other means, so they must be in need of housing but be unable to afford outright purchase. Priority is given to existing public sector tenants or those on local authority waiting lists. Up to four people can apply to become joint owners but all the applicants must individually and jointly meet the eligibility criteria. Prices vary according to location but are usually to be within the budgets of those who cannot afford the prices of properties available for sale in the open market. Normally applicants buy a 50% share but they can buy a smaller or larger share ‘ the higher the share bought the less rent to pay. There is no assumption built into the system that the tenant will buy the rest of the property, although it is hoped that they would eventually be in the position to buy the rest of the property.
However, the low overall valuation of a property and the fact that clients are only buying a portion can cause problems with lenders. Rob Clifford, managing director of broker franchise Mortgageforce, says: ‘Some lenders will veto applications on the basis of minimum loan size or minimum property valuation. The lenders have no problem with shared ownership but the numbers are too small for their generic underwriting rules. We have had properties in depressed areas worth £39,000 where the client only wants to borrow £20,000, and it can result in problems sourcing this type of loan.’
Mortgages for shared ownership are generally provided by high street lenders. For example, Mortgage Express, the specialist subsidiary of Bradford & Bingley, does not cater for shared ownership. Connolly explains: ‘Traditionally it is only the mainstream lenders involved in this type of lending. It is a small part of the overall mortgage market and lends itself as more suitable as an add on to mainstream lending.’
The Nationwide Building Society is a typical example of a high street lender that does cater for shared ownership mortgages. It insists that the client is buying at least 40% of the property and will lend up to 95% loan to value. The product range is the same as for standard mortgages and has the same affordability constraints.
Sherrie Rowlands, spokesperson for Nationwide Building Society, says: ‘We consider it a good scheme to get first time buyers on the ladder. However we don’t make a big issue of the fact that we consider these schemes, because the main problem in the industry is the lack of shared ownership properties to buy. These schemes are finding the same supply problems as the mainstream markets, so it is a small part of our business. Although it has become more popular in recent years with the housing associations taking over from the councils.’
A lack of suitable properties is the biggest hinderance to the shared ownership market. However, the housing associations are trying to make properties available, and in many ways they are being quite successful, but they are not managing to meet demand because it exceeds the supply.
First legal charge
The Homebuy scheme involves clients contributing 75% of the purchase price of a home through a mortgage and personal savings. The RSL will lend the remaining 25%. There are no monthly payments on the loan. Instead, it is repaid when the home is sold. The amount repaid will be 25% of the value of the home at the time it is sold. If they want to, tenants may repay the loan before the house is sold, in which case the amount repaid will be based on the value of the home when the loan is paid back. It is available as a joint purchase provided the joint income and savings are so low as to prevent buying a home in the normal way.
However, arranging this type of purchase can cause more problems for the lenders than with shared ownership. Clifford says: ‘Lenders are interested in recovering the loan expediently. Typically they are only comfortable when they have a first charge on the property. However some of the funding organisations involved in those schemes are not prepared to postpone their legal first charge on their portion of the home in favour of the mortgage lender.’
Steve Hoare, managing director of broker network HomeLoan Partnership, has met similar problems. He says: ‘Lenders have an equal charge with the housing association, so if they have to repossess or claim arrears the association can stop the repossession. Lenders require something similar to a council right to buy deed of postponement. With a right to buy there is a discount on the market value of the property, the deed says that the charge on the discount follows the lender, so on repossession it is the council that will lose out.’
When it comes to applying for these schemes and arranging the purchase, the associations will provide a lot of advice themselves, as they are used to dealing with those who have never considered buying a property before. They will generally help people choose a solicitor and lender but ultimately the individual has to make a choice.
Ripe for advice
However, Hoare believes this whole area is ripe for independent advice. He says: ‘The associations are in effect tied agents, dealing only with the schemes that they run. People will always need advice on whether shared ownership is the best thing for them at all, sometimes it is not the best option as you don’t own the property, which is where an intermediary comes in.’
It is also possible for some housing association tenants to purchase the homes that they are currently renting through a further two schemes. The Right to Acquire scheme gives eligible tenants of registered social landlords the legal right to buy the home they currently rent. And the Voluntary Purchase scheme allows tenants to apply to buy the home they rent at a discount. If the Government goes through with its talk of curtailing the right to buy for council tenants it will be interesting to see what happens to these schemes.
The general shortage of properties is a natural brake on shared ownership schemes, in whatever guise, and is preventing them from becoming a significant sector of the housing market. Clifford says: ‘It is another opportunity for brokers to do business but it accounts for a small part of the market.’ However, with major house building plans now underway across the country, this sector is expected to grow in both size and importance.
Paul Robertson is staff writer
Shared ownership schemes allow borrowers to buy an initial share and pay rent on the remainder.
In Homebuy the borrower pays 75% in a mortgage, with 25% as a loan repayable at redemption.
There is a lack of social housing in the UK, which can make it difficult to find suitable property.