The majority of us – especially those who have children – know the story of Cinderella – the beautiful princess who was left behind when the ugly sisters when to the ball. Now, I’m not saying that mainstream mortgages are anything like those pantomime dames but there are definitely some ‘Cinderella’ products in the mortgage world – with right-to-buy (RTB) mortgages being a prime example.
For those of you who haven’t had much experience with this type of financing, let me review the basics. RTB was launched in 1981 by Thatcher’s government as a way for long-term council tenants to purchase their own homes. To qualify for this opportunity, the person needs to fall into one of these three groups:
- Have spent at least five years as a public sector tenant (PST).
- Have spent two years as a PST and had a secured tenancy in existence before 18 January 2005,
- Have spent two years as a PST, were a PST before 18 January 2005 and have been a PST continously since that time.
The discount ultimately varies depending on which category the PST fall into, type of residence and their tenure in the property. The area the PST tenant lives in also affects the reduction, with those in York for example being offered a maximum discount of £24,000 off the sales price.
As the scheme is intended to encourage home ownership rather than purchase and resale, there are restrictions and penalties if the property is resold within five years of purchase. Generally, the owner will be required to repay all or a proportion of the discount, the exact amount being determined on a sliding scale depending on tenure in the property post-initial sale.
This sector, while not huge, is doing very nicely. After the initial rush of sales in 1981, it is estimated by pundits that between 45,000 and 70,000, RTB properties are sold each year.
Finance
So who is financing all these properties? Well, when this scheme was originally launched, many lenders were wary of this new business area. Therefore, local authorities stepped into the breach and helped to organise financing for their tenants.
However, as the market has become more established and lenders have become more flexible, this has become significantly less common. Increasingly, more and more companies in the non-conforming sector such as Preferred, Platform and – most recently – Accord are offering these products.
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RTB mortgages are generally quite similar to other non-conforming products except for the way in which the loan-to-value (LTV) is calculated. Most providers lend on the RTB value – i.e. with the council discount – rather than the open market value of a property. In practice, this means that with lenders happy to lend up to 100 per cent of the RTB cost, many of these tenants can purchase a home without a deposit but still have substantial equity in the property.
Due to the equity within the property, some lenders will even allow people to borrow more than 100 per cent of the RTB cost in order to renovate the property. However, the final mortgage does not generally exceed more than 85 per cent of the open market value of the property.
Challenges
One challenge that advisers do face more often when dealing with right to buy mortgages than other types of residential financing is the specific property type. Some council properties built in the 1950s, which are built out of concrete and fall into the Airey, Unity, Stent, Wates and Cornish categories have been designated defective. These problems are not ‘terminal’ so to speak but costly renovations to bring them up to a standard where a pre-cast reinforced concrete repair certificate can be issued are needed. Even with this, the resale value of the property may be affected and this means that people wishing to buy these properties could have significant difficulty obtaining finance.
In addition to defective properties, those wishing to purchase flats in high-rise council blocks may also face problems finding a mortgage. This is due to a variety of factors including potential difficulties reselling the property and the ‘mixed tenancy’ aspect of most ex-council blocks.
Inherent flaws
But moving on, while the idea of RTB was a good one, there are some inherent flaws in the concept. When Thatcher launched this scheme there was significant pressure for the government to provide the ‘ordinary’ man with the opportunity to purchase his own home. This policy proved so popular that even a change in ruling party was not able to knock this policy of its perch.
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However, this focus has changed and the problems with this system are becoming apparent. Prompted by the recent change in Prime Minister, Shelter, the housing charity, revealed some startling figures. Under the RTB scheme over 1.7 million council properties have been sold off without any additional building to replace the drastically reduced social housing stock. Indeed, their estimates show that fewer than 300 council residents have been built per year by local authorities in this time. This has caused a huge problem. In a country where house prices are rampant, there are now, somewhat ironically, almost 1.7 million people on the waiting list for a council property.
In addition to helping to contribute to a chronic lack of social housing, the RTB scheme has also been open to abuse. Tenants in particularly desirable areas were purchasing their properties and renting them out to gain high rents – a move that was completely against the spirit of the initiative. Indeed this became so bad that in 2003, 42 councils were identified as being hotspots for this practice and discounts were drastically slashed on these properties.
An interesting future
So what of the future of this sector? That is possibly the most interesting RTB question of them all and depends like other things on who is at the helm of the country.
Labour, potentially because it was originally a Conservative initiative and even – giving them the benefit of the doubt – due to the fact it foresees the problems outlined above, is relatively non-committal on this issue. Indeed, it appears to be putting its support and energy into other social housing projects such as the Open Market Homebuy project.
On the other end of the scale, Conservative leader, David Cameron, has repeatedly stated that he fully supports this initiative and – indeed – should he be elected would offer all social housing tenants the opportunity to purchase their own home. He has even said that under these proposals, unemployed people would be able to build up equity in their homes.
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That rather neatly leads us onto one of the problems that we are likely to see in this sector. Repossessions are rising across the nation with Council of Mortgage Lenders’ figures showing a year-on-year increase from approximately 10,000 in 2005 to 17,000 in 2006. Shelter, Citizens’ Advice and other charities have indicated that RTB mortgages may form a disproportionally large percentage of repossessions in future.
They argue that council tenants have been encouraged to purchase properties that they did not necessarily want, due to the lure of the right to buy discounts available. An argument that the Financial Services Authority has in the past lent credibility to through its prosecution of certain intermediary firms for encouraging these actions.
These charities conclude that those living in social housing are going to feel the pinch during any economic downturn more than affluent consumers so they may face losing their homes and returning to council accommodation, therefore putting these tenants back on the social housing merry-go-round and contributing to the pinch this sector is already feeling.
Essentially, the future is just a little rocky for RTB. With a crisis in social housing, a government that is potentially looking for alternative solutions and a shrinking pool of customers, it remains to be seen whether RTB flourishes. Whichever way the wind blows, brokers and lenders need to continue to provide the appropriate products for consumers who do wish to use one of the Cinderellas of the mortgage world – RTB financing.
