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Low-cost home-ownership

Last reviewed 10/10/2013: any recent updates in this colour.

Background

The low cost home ownership (LCHO) programme has enabled access to affordable home ownership by giving the opportunity for part ownership. The programme has consisted of a number of schemes with differing characteristics and objectives and has suffered in the past from having too many variations and different models. The government's housing and regeneration investment agency, the Homes & Communities Agency (HCA) deliver the current LCHO schemes under the brand HomeBuy and has worked with the CML to simplify and reduce the products available.

More details of all the HomeBuy schemes operated by the government can be found at www.homesandcommunities.co.uk

This page provides a brief overview of the different types of scheme that are currently available.

 This page contains information on:  

o    Government investment in LCHO 
 

o    Who is eligible for LCHO? 
 

o    What are the main types of LCHO?
 

o    Shared ownership - NEW
 

o    New shared ownership leases 
 

o    Guidance for lenders on shared ownership arrears and possession
 

o    Improved shared ownership leases
 

o    Shared equity
 

o    HomeBuy Direct
 

o    Section 106 and the use restricted covenants in planning agreements
 

o    Evaluation of Social HomeBuy

 

o    Affordable Home Ownership Mortgage Toolkit - a guide for those involved in planning and delivering low cost home ownership

 

Government investment in LCHO

The Homes & Communities Agency issued its 2011-15 Affordable Homes Programme Framework on 14 February 2011 setting out how it will allocate its reduced budget for the spending review period on affordable housing. This include limited funding for new social rented and for LCHO with the majority of funding likely to be directed towards the new affordable rent product. Registered Providers eg housing associations will be able to bid by 3 May 2011 for the ability to use flexibility around rents and tenure to provide new (and convert existing) housing that is let on up to 80% of market rents and shorter flexible tenancies. Bids may include affordable homeownership i.e. LCHO but only where this can be evidenced as responding to local needs and provides value for money.

The highlights of the HCA Framework Document include:

  • The Homes and Communities Agency will invest £4.5bn in new affordable housing through the spending period.
  • The HCA’s Investment Partners will help to deliver up to 150,000 new affordable homes. The majority of the homes built will be made available as Affordable Rent with some affordable homeownership It further sets out (from page 21-23) that:
  • Affordable home ownership options have a role to play in helping first time buyers; Proposals will be considered from providers (eg housing associations) which include affordable home ownership as part of their affordable rent bid;
  • A ‘strong and compelling case has been made by consumers, retail mortgage lenders and providers to ensure consistency, stability and simplicity’ and funding will only be for the provision of properties through 2 standard options – shared ownership or equity loans, both branded under the umbrella ‘Homebuy’ outside London and ‘First Steps’ in London;
  • The HCA expect ‘shared ownership to form the main element of the affordable home ownership offer’ although equity loan will be considered in certain circumstances;
  • Providers eg housing associations can offer ‘equity loans’ to a maximum of 20% of the value of the property and the terms of any equity loan products will have to be identical to the HomeBuy Direct product;
  • Eligibility requirements for LCHO are unchanged but prioritisation is set out in the document – a clear priority for existing social housing tenants who wish to move into home ownership and also second to this a priority for serving armed forces personnel. Aside from these priorities it will be up to local authorities with partners to set priorities within their areas.
  • A cash incentive scheme has been introduced by the government and where it is value for money this can be used to help existing social tenants to access home ownership – again this is at the decision of the local authority;
  • The HCA welcomes proposals for two types of variant on shared ownership for vulnerable groups – Home Ownership for people with long term disabilities (HOLD) and Older People’s Shared Ownership.

London

In April 2012 the Mayor will take responsibility for Housing investment in the capital. The London HCA team will be absorbed into the GLA when this occurs. It has been announced that from April 2012 the income cap for people purchasing homes with three or more bedrooms will be increased to £74,000. For all other room sizes and for single people the cap will remain at £60,000.

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Who is eligible for LCHO?

There are different eligibility criteria for LCHO schemes. However as a general rule access to the HomeBuy (government) schemes is targeted at people who earn less than 60,000. This income eligibility is due to change for London with a proposal to increase the maximum income level to £74,000 for those wishing to purchase a 3 bedroomed home. Housing Associations, through their role as HomeBuy Agents are responsible for assessing potential applicants. Local authorities can, through their planning agreements, define eligibility more tightly in relation to income levels and local connection to specific schemes.

The Homes & Communities Agency has issued a consultation on 2 March 2011 which is proposing to streamline the HomeBuy process and have a single central provider.

The CML on behalf of lenders have lobbied for less restriction and variation in eligibility criteria and in the latest prospectus from the HCA 2011-15 Affordable Homes Programme Framework there is an intention to simply and standardise further. The intention is to have two products - equity loan (shared equity) and shared ownership under the HomeBuy branding. In London the same products would exist but under the branding First Steps.

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What are the main types of LCHO?

There are two main types of LCHO – shared ownership and shared equity. All lenders which are authorised by the Financial Services Authority to enter into regulated mortgage contracts may participate in these schemes but it is up to individual lenders as to whether they choose to do so. The Homes & Communities Agency (HCA) use the brand HomeBuy to cover all the schemes they deliver (both shared equity and shared ownership) to indicate that it is a government funded scheme. In London this branding is First Steps but covers the same two products - equity loans (shared equity) and shared ownership.

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Shared ownership

With shared ownership a provider, usually a housing association, builds a new unit and a purchaser part owns and part rents it. A shared owner is a leaseholder of the housing association, which retains the freehold of the property. The buyer can buy a 25%, 50% or 75% share and can buy additional shares over time (known as "staircasing"). For example, if someone were to buy a 50% share of a property they would get a 50% mortgage and pay rent to the housing association for the other 50%.

There may be some cases where the opportunity to "staircase" (buy an additional share in the property) is limited - typically to 80%. This is because the housing association or local authority wants to retain an interest in the property and make sure that properties remain affordable for future buyers. Not all lenders are prepared to lend in these circumstances.

There are specific things which a lender will look for with a shared ownership mortgage.  The CML has produced joint guidance with the HCA and the National Housing Federation which provides information for lenders, registered providers and conveyancers on a range of issues.  The current version was updated in November 2012. 

A list of lenders offering shared ownership can be found in the publication 'Moneyfacts'.

The Homes & Communities Agency (HCA) have model leases for shared ownership, key worker living and new-build homebuy. The latest version of these model leases are available on the HCA's website in the capital funding guide section. New leases to take effect from 6 April 2010 have been drafted for new-build HomeBuy shared ownership.

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New shared ownership leases

A new model shared ownership lease aimed at creating more certainty for lenders and more clarity for purchasers of New Build HomeBuy shared ownership property has been created by the Homes and Communities Agency (HCA). The revised model lease, which will be adopted by all lenders and housing providers, will come into force from 6 April 2010.

The CML with lenders already lending on shared ownership worked jointly with government and the housing sector to agree a new shared ownership lease that offers additional protection for lenders. The mortgagee protection clause (MPC) has been extended to give a higher level of protection against loss in the event of default. Also the new lease is clearer and seeks to avoid in future protracted negotiation about what is or isn't covered in terms of lenders costs and charges. The new leases must be used for all shared ownership house and flat purchases from 6 April 2010.

The new leases, explanatory notes and key information sheets can be found on the Homes & Communities Agency website.

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Guidance for lenders on Shared ownership arrears and possession

The CML and National Housing Federation (NHF) have now published their joint guidance on shared ownership arrears and possessions. The guidance brings together best practice for lenders and housing associations and stresses the importance of good, timely communication between them. The appendices to the guidance also provide key housing association and lender contact details and a draft lender/association service level agreement.

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Shared ownership lending and capital treatment

Shared ownership lending is more complex than mainstream mortgage products and requires a good level of communication and awareness from all parties involved.

Shared ownership attracts higher capital weightings from the FSA than other products including shared equity, because the FSA requires lenders to calculate loan-to-value (LTV on the buyers share of the property rather than the whole value of the property even though the lender can claim against the landlord's retained share when a borrower defaults on their mortgage. This has been a definite disadvantage of shared ownership and the CML are currently working with government and the FSA to achieve a more favourable, and equitable, position for the capital treatment of shared ownership lending.

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Shared equity

The other main type of LCHO scheme is the shared equity or equity loan model. The government focused their attention, during 2009, on new build shared equity and particularly on HomeBuy Direct as part of their kickstart the market work. The shared equity model enables people to buy a property on the open market with the help of an equity loan, either from a housing association, from the HCA or from a developer. The homeowner then gets a conventional mortgage for their share. Going forward in the 2011-15 programme there will be no new government funding for HomeBuy Direct and there is a stated preference for shared ownership.

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HomeBuy Direct

HomeBuy Direct, an equity loan scheme, has been available from early 2009.  It is government funded, and assists first time buyers.  Only new-build properties on sites of participating developers can be purchased under the scheme.  HomeBuy Direct involves an equity loan of up to 30% provided jointly by a developer and government.  A normal mortgage loan is expected to cover the remainder of the purchase price.

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Section 106 and restricted planning covenants

In new developments, a proportion of houses are often sold as ‘affordable housing’. Local authorities often attach conditions to the way these houses can be sold through what are known as ‘section 106 agreements’ or ‘restrictive covenants’. Buyers should be made aware of these when they buy a new property or when a property changes hands. As a trade association, the CML cannot comment on or give guidance on individual cases or schemes. It will be for individual lenders to decide whether to lend on a particular scheme. However, this webpage gives some general information about lenders' approach to restrictive covenants.

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Lender approach to restrictive covenants

Lenders have experienced difficulties with restrictive covenants imposed by some local planning authorities through planning obligations (for example, S106 agreements) for affordable housing. Local authorities can adopt different approaches to affordable housing in S106 agreements and lenders find it very difficult to deal with the variety of restrictions being imposed.

In August 2006, the Department for Communities and Local Government (CLG) published planning guidelines for local authorities and guidance for delivering affordable housing including a new model section 106 agreement. Lenders support the use of this model agreement which should help to prevent problems.

The section 106 model agreement is currently being redrafted by the Law Society on behalf of the department for Communities and Local Government (CLG). The CML will comment of the new draft version on behalf of lenders before it is finalised.

 

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Key issues for lenders to consider when drafting or agreeing s106 agreements

These are:

  • That the lender always has first charge over the property.
  • Occupancy controls and nomination rights restricting the current and future use of affordable housing to particular groups of people (eg, local people and key workers) but without any time limitations are unacceptable to lenders. If a lender has to take the property into possession, it is obliged to get the best price for the property and sell at the earliest opportunity. If only a very limited number of people are able to buy the property and no suitable buyer is available, the lender will not be able to sell and the borrower's debt will continue to accrue. Lenders therefore favour a cascade mechanism - which involves offering the property to a very local market and gradually widening the net until eventually the property can be sold on the open market. If there is a strong and continuing market for affordable homes in the area then there should be no problems selling the property locally. Alternatively the local authority or housing association could buy the property back in the case of difficulties.
  • If the arrangement is a shared ownership one, the lender will always want a Mortgage Protection Clause (MPC). The MPC in shared ownership leases was designed to cover the lender's loss should it have to take possession of the property on default. The new lease (from 6 April 2010) has an improved MPC as a fundamental clause that must be used.
  • Lenders are also concerned about restrictive covenants that seek to impose artificial market controls for example, those restricting future property sales to a multiple of local or regional incomes. Lenders have direct concerns because if they have to repossess the property they might be unable to obtain the best price because the resale value is restricted to an income multiple. However, even if there is a clause that protected the lender's interest, borrowers could also be affected adversely in the longer term. They could become trapped in the properties, as it is unlikely that incomes will keep pace with house price rises. Borrowers would be unable to re-mortgage and borrow above the restricted price or realise the full market value of their share of the home and move on.

If you are considering a restrictive covenant on a new development you are advised to discuss this with lenders to see whether the restrictions you are proposing will be acceptable, bearing in mind the general points made in this note.

As106 briefing note has been issued by the CML to raise awareness of the template s106 agreement and issues for lenders where restrictive and/or variation clauses are used. The HCA together with the CIH have also produced a useful guide to local authorities and others on improving mortgage ability of affordable home ownership.

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Evaluation of Social HomeBuy

The government published an evaluation of the Social HomeBuy scheme on 12 June. Overall Social HomeBuy is viewed in a positive way by those tenants who have taken an active interest in the product. However, aspirations and attitudes towards home ownership are limited. For a variety of reasons many tenants do not want to be home owners at the present time and recognise the benefits of renting social housing. Social HomeBuy is likely to be within the reach of less than 30% of tenants.

  • Affordability amongst social tenants will limit viable and sustainable demandfor Social HomeBuy. An average of 70% of tenants receive benefits and therefore would be ineligible for a mortgage. Of the remaining 30% of tenants, demand remains limited by income, demand to be a home owner and the desirability of their current property.
  • The attractiveness of property and location for sale will further limit take-up of Social HomeBuy and demand is likely to follow a similar pattern to the Right-to-Buy where houses with gardens on popular estates will see highest demand. Flats are likely to see more moderate demand.
  • There is generally a limited familiarity and demand for shared ownership outside of London and the South East and this is likely to have an impact of potential demand for the scheme.
  • Repairs and maintenance responsibilities post-sale are likely to remain a disincentive for tenants unless they are apportioned according to the equity stake owned. The CML has consistently argued that responsibility for repairs and maintenance should be apportioned according to the share owned.

In addition, the report recognises that the lack of available mortgage products may be a further disincentive to tenants.

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Affordable Home Ownership Mortgage Toolkit

A guide for those involved in planning and delivering low cost home ownership has been jointly procured by the CML and the HCA.

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