The most recent was unveiled only last week, when the Mayor of London, Boris Johnson, announced plans for the construction of 1,400 homes in the capital, initially available at subsidised rents, with a chance to buy the property later at a discounted price.
But how much practical help does the multiplicity of low-cost home-ownership schemes actually deliver? And how successfully are lenders able to work with the panoply of schemes to help a significant number of people on lower incomes to bridge the gap to sustainable home-ownership?
Government aspirations
Lenders have supported the aims of successive governments to expand access to sustainable home-ownership, where there is demand for it. Different governments have pursued this objective as part of a broader social agenda, partly on the assumption that, in the long run, home-ownership promotes social cohesion and self-reliance and provides households with choice and independence.
Low-cost home-ownership schemes have evolved as part of these broader aspirations to provide housing choice and opportunity. Governments have wanted those on lower incomes to have the option of sustainable home-ownership, and to enjoy the longer-term benefits of owner-occupation.
We are continuing to work with the government and other agencies to help deliver this aspiration. But for low-cost home-ownership schemes to succeed, they need to be easily understood and simple for borrowers to access – and commercially attractive to lenders.
The reality is that while lenders have been keen to encourage the expansion of sustainable home-ownership through workable low-cost home-ownership schemes, there are a number of challenges, including:
the wide range of existing low-cost home-ownership schemes, and the complexity of many of them;
undesirable features of some schemes limiting the underlying security of the property, or the ability to realise it, and therefore undermining the ability of lenders to support them;
the small scale of schemes, which can make the cost of installing systems and training staff to run them prohibitive; and
a lack of reliable information on both the risk and customer profile of this lending activity and on the volume of transactions, which limits the ability of lenders to assess future demand.
The ways in which these challenges manifest themselves become clearer if we look at the range of low-cost home-ownership schemes currently available.
Homebuy Direct
Introduced in September last year, Homebuy Direct was designed partly to help developers deal with a glut of unsold properties on their books. The government is contributing £400 million to the scheme.
Targeted at first-time buyers, Homebuy Direct allows the borrower to buy up to 70% of the property with a conventional mortgage. The rest of the purchase price is provided by an equity loan from the HCA and the developer, which becomes a second charge on the property. (This can be reduced if the borrower pays a deposit.) If the borrower has not bought out the share funded by the HCA and the developer after five years, he pays a gradually increasing fee on the equity loan.
Homebuy Direct represents a significant commitment by the government and builders, but will have only a small overall impact on the housing market. It is intended to help fund 18,000 home purchases in a year, compared to our forecast of 700,000 transactions in 2009 and more than one million a year in more normal market conditions. The number of purchases funded by the scheme probably represents only around 2% of the total number of loans for house purchase.
Lenders’ views
So far, a relatively small number of lenders have formally agreed to participate in the scheme. The government wants to see it fully subscribed and would like more lenders to sign up to it. We agree that the scheme is worth supporting and are encouraging the government to seek lenders’ feedback as soon as possible. Developers, in turn, are seeking assurances that the initiative will be popular.
Lenders generally prefer low-cost home-ownership schemes, like Homebuy Direct, that are based on shared equity – that is, where the purchase is jointly funded by a mortgage and an equity loan. One advantage is that the equity loan helps protect both the borrower and lender from negative equity.
Shared ownership is a different type of model, with the borrower taking out a mortgage to buy a leasehold in a share of the property and continuing to pay rent for the rest of it, which remains in the ownership of the housing association or local authority. This is less popular with lenders than shared equity. The small size of the market overall, and of individual loans, deters some lenders, and the number of firms participating is small.
Shared ownership is more complex than shared equity, as there is no clear process for dealing with a borrower who is unable to keep up with his payments. That can lead to difficulties between the lender and the housing association in working out a solution if the borrower defaults. In conjunction with the Tenant Services Authority and the National Housing Federation (NHF), we have produced guidance on shared ownership for lenders, housing associations and conveyancers.
Other Homebuy schemes
Homebuy is a generic term adopted by the government to brand its range of low-cost home-ownership products. Alongside Homebuy Direct, there are three other variants: social Homebuy, new-build Homebuy and open market Homebuy.
Social Homebuy (reported in a recent article in the Financial Times as having a very low take-up of fewer than 300 households) and new-build Homebuy are shared ownership products.
Open market Homebuy is another equity loan model. There are two separate offerings within this range: Mychoice Homebuy and Ownhome, the latter funded only through co-operatives. Open market Homebuy involves a housing association or co-operative providing an equity loan of between 10% and 50% of the value of the property, with the rest of the purchase funded by a conventional mortgage.
Market conditions
In the past, lenders have sometimes provided a 100% mortgage for the borrower’s share of a property bought under a low-cost home-ownership scheme. However, against a backdrop of falling house prices and a reduced appetite for risk overall, a significant proportion of those lenders participating in Homebuy schemes now require the borrower also to put down a deposit. Many take the view that a borrower will have a greater commitment to the undertaking if they have put in a stake at the beginning.
Recent press coverage has criticised some lenders for classifying low-cost home-ownership mortgages as sub-prime. Firms offering loans under the various schemes have denied this. What is really important, however, is that there are workable low-cost options for borrowers that provide adequate protection for lenders.
Some lenders are also cautious about lending on flats or newly-built property under these schemes, but that is a result of their experiences in the past rather than the shared equity concept.
The HCA envisages no more than 20,000 shared ownership transactions a year, going forward, although that may be an over-optimistic forecast. The government is keen for more lenders to participate but this hinges on schemes being 'lender-friendly.' We have worked with the government to ensure that it focuses on this as schemes are developed and refined.
The future
Despite the aspirations of both lenders and the government to expand sustainable home-ownership partly through low-cost schemes, owner-occupation may be in decline at the moment. According to the Survey of English Housing, just over 68% of the population are now home-owners, compared to 70% five years ago.
While the current shortage of credit and falling house prices are discouraging home-ownership in the short term, attitudes to owner-occupation are also being affected by the decline in secure long-term full-time employment, a lack of effective pension provision, more limited labour mobility, and government tax policies that are in conflict with other state initiatives intended to encourage the expansion of home-ownership.
Does the government now actually believe that the rental sector is the expanding tenure of the future, and that home-ownership will continue to decline in the medium term? Without more research into the outlook for different tenures, it is difficult to see how lenders can take a strategic view of the low-cost home-ownership market.
Conclusion
Those lenders with an appetite for low-cost home-ownership will continue to look more favourably on shared equity than shared ownership. It is less complicated and risky in the current housing market. But for all types of loan, lenders have become much more reluctant to consider anything approaching a 100% loan-to-value ratio.
The government wants lenders to continue to support low-cost home-ownership initiatives. We see them as a potential opportunity to expand access to sustainable home-ownership. But the lack of market data and shortcomings of particular schemes have contributed to a low level of take-up by borrowers and support from lenders.
Last month, we set up a meeting with lenders and a range of other stakeholders to discuss how low-cost home-ownership initiatives can be further improved. What is needed is:
a simplified range of schemes;
better data on the number of potential borrowers and their profile;
more information on expected transactions levels and future demand;
more information on arrears rates; and
guarantees on re-purchasing the property – or of a more flexible approach to tenure – for borrowers who cannot keep up with their mortgage commitments.
We will pursue these objectives with government and continue to work to ensure that the way in which low-cost home-ownership schemes are developed encourages the participation of lenders and borrowers.
