The Office of the Deputy Prime Minister’s (ODPM) consultation paper entitled ‘Homebuy – expanding the opportunity to own’ was launched in April.
The government wants to increase affordable home-ownership and proposes to do this by bringing together various low-cost schemes under a simple suite of Homebuy variants. The government also proposes to blend public and private funds to enable more people onto the property ladder.
The CML supports the government for pushing the issue of low-cost home-ownership up the political agenda. However, we urge the government to ensure that the proposed scheme is simple and is explicit about the aims of low-cost home-ownership.
The government must decide whether Homebuy is a stepping-stone to full home-ownership or a permanent tenure in itself.
We believe the Homebuy scheme should be a route into full home-ownership and support incentives to allow people to increase their ownership.
One option for achieving this is to allow people to ‘staircase up’ in 10 per cent tranches should they be able to afford it; hence increasing the share of the property they own.
Of course not all households will be able to afford the full property and this is not a problem. But the intention to use the Homebuy scheme as a springboard into full home-ownership needs to be made clear to avoid confusion.
New products
The government proposes to create three new products:
Social HomeBuy intended to help existing social housing tenants buy at least 50 per cent of their home’s discounted value, with the local authority or housing association holding an equity share.
New Build HomeBuy aimed at key workers, existing social tenants, those on the housing register and other first-time buyers identified as a priority for assistance through regional housing boards. Households would buy a 50 per cent share of a new home and the remaining equity share would be held by a housing association.
Open Market HomeBuy aimed at the same groups as New Build but with properties bought on the open market with at least a 75 per cent share purchased.
The proposed equity loan would not be entirely cost free and the ODPM consultation paper made various suggestions about how the government’s share of the equity loan could be charged.
One proposal is that for the first five years the buyer would pay no charge on the equity share provided by the government. In year six however the buyer would pay a maximum 3 per cent charge (similar to social rent) on the government’s share of the equity loan.
Government preference
Another option is for a maximum of 3 per cent to be charged on the government’s entire equity loan from the outset. Alth-ough this would reduce the affordability, and possibly the attractiveness of the scheme, it would also require less public subsidy per unit, freeing up funds to assist other households into home-ownership.
The consultation paper hints that the government favours the first option stating ‘the government strongly believes that the new products should be as affordable to the purchasers as possible’ and goes on to say ‘our preference, therefore, is for a model under which charges on remaining shares are kept to a minimum’.
But the consultation paper is not clear over the way the proposed 3 per cent charge would be enforced. We understand the government anticipates registered social landlords would need a lease to cover this element of the proposed scheme.
Leases however are one of the problems lenders face in existing part-rental shared-ownership schemes. The current Homebuy initiative has managed to avoid lease arrangements and we believe their introduction would not only be a backward step but would also increase complexity for lenders which might make them reluctant to lend on such schemes.
Technical issues
The government also needs to address technical issues, most importantly the definition of ‘qualifying lenders’ who are able to provide mortgages to people who are participating in the scheme.
At present some lenders who are fully-authorised by the FSA are precluded from being involved because the consultation paper states that qualifying lenders can only be banks, building societies and friendly societies. We believe this is an out-dated definition and needs to be replaced by a requirement to be a lender authorised by the FSA.
One aspect of the proposed reforms that hit the headlines was the possibility of private lenders becoming involved in funding equity loans. The proposed scheme with lenders would be piloted with Open Market Homebuy.
It would combine a conventional mortgage for 75 per cent of the property’s value with a 25 per cent equity loan divided equally between the government and lenders.
This would help the government ‘stretch’ its funding and if successful could be extended to other Homebuy models. Although the scheme with lenders will be limited in the first instance, the consultation paper suggests it could potentially be extended further.
Charging structure
Lenders would also need to decide upon a charging structure for their proportion of the equity loan. The consultation paper suggests lenders might decide to make a modest charge or alternatively charge a small premium on the interest rate on the entire share which they do not own, but not both.
Whatever charging structure government and lenders decide upon for their respective shares of the equity loan, it will be much cheaper compared to a normal mortgage for the equivalent share.
This is a vital part of the shared equity scheme. Therefore, developing a product that is good for the borrower is essential as well as satisfying the need for the lender to have a mortgage that is commercially viable.
The CML shares the government’s aim of increasing sustainable home-ownership but we urge it to ensure the scheme does not subject potential home-owners to a complex and bureaucratic system. Going forward, we are continuing to discuss with the government how lenders can interact with the scheme.
We are also continuing to explore ways in which lenders might help fund the equity loan to help more people onto the property ladder. After all, over 80 per cent of people want to be home-owners so we need to be as creative as we can in helping them get there.
Christopher Dean is press officer at the Council of Mortgage Lenders (CML)
