Examining the issue in this week’s Market Watch are:
Andrew Baddeley-Chappell, head of mortgage strategy & policy at Nationwide Building Society
Richard Donnell, director of research at Hometrack
Stuart Ropke, assistant director of research and futures at the National Housing Federation
Andrew Baddeley-Chappell, head of mortgage strategy & policy at Nationwide Building Society
The popularity of Right to Buy is closely linked to the level of discount available. While the changes will not impact the discount rates, the discount cap has been increased to £75,000 across the country.
At a time when the government is clearly signalling an appetite for increased Right to Buy activity the FSA has identified Right to Buy as vulnerable customers and classified lending to these as high risk.
Although these statements are not contradictory, the combination of relatively low volumes and additional regulatory risk is likely to deter, rather than encourage, mainstream lenders from operating in this market.
The scheme also highlights a further challenge to the regulatory regime.
As a vulnerable group, Right to Buy customers are required to receive advice, however, it’s likely that the decision of whether to buy or not appears to fall under responsible lending and, therefore, is potentially outside the scope of the advice regime.
The government has stated that it will work closely to ensure that appropriate advice is given. It references lenders and the FSA but not intermediaries, so it is unclear what its expectations are with regards to advice.
Right to Buy looks like being an interesting test case for the proposed regulatory regime.
Will the MMR proposals deliver the appropriate processes to meet customer need? Will all parties respond to the more intrusive and intensive regulatory environment by delivering the robust regime that the FSA would like? Or will we see the new regime result in a further retrenchment to a small core of more mainstream lending.
Richard Donnell, director of research at Hometrack
Since its launch in the 1980s Right to Buy has seen some two million households move from social rented accommodation into home ownership.
Right to Buy has never gone away, but over time discounts have been eroded to less than £20,000 in 2009 and with them, the tenant’s ability to buy.
In April the government relaunched the programme announcing increased discounts of up to £75,000. Undoubtedly, greater incentives will prove an attractive proposition and result in an increase in Right to Buy take-up.
However, discounts aside, a number of barriers which have in recent years limited the number of purchasers still remain. With lending criteria tighter than ever, only a small number of would-be home owners will be able to obtain a mortgage.
Fewer than 20% of council tenants are in full-time employment and in the FSA’s Mortgage Market Review published in December last year, Right to Buy customers were seen as the most likely to default on mortgage payments or be subject to repossession. And as a consequence banks were less likely to lend to them.
Furthermore in high value areas such as London, house prices even with a £75,000 discount, will prove an insurmountable hurdle to all but a small number of would-be home owners.
In other areas of the country, properties may be more affordable but only if mortgage finance can be secured.
Further, increased discounts may help take-up overall, but as to whether the policy will meet new housing replacement targets, that’s another question entirely.
Stuart Ropke, assistant director of research and futures at the National Housing Federation
It is very likely that the much higher national discount will mean that Right to Buy sales will increase.
However, with mortgage availability for first-time buyers and those on low to middle income remaining constrained, it is unclear by exactly how much they will increase by.
The Financial Services Authority has estimated that 40% of existing Right to Buy purchasers have experienced some sort of payment difficulties.
More recent reports suggest that, in some areas, almost half of those benefiting from the government’s mortgage rescue scheme have bought their home through the Right to Buy.
This demonstrates that whatever the response to the increased discount is, it is crucial that people receive appropriate independent financial advice before taking out a mortgage.
Buyers must avoid over-stretching themselves and entering into a unsustainable mortgage.
Housing associations alongside independent financial advisors will continue to play an important role in helping their tenants understand the benefits and risks of entering into home ownership.
