Low-cost home-ownership

Last updated 03/02/2010: 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.

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:

Shared equity

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. 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 connecction to specific schemes.

The CML on behalf of lenders have lobbied for less restriction and variation in eligibility criteria and we have seen a move towards a more standardised approach by government. However for rural housing in particular access can be more restrictive.

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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.

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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. HSBC

2 shared ownership schemes have been operating since April 2006:

Social HomeBuy - which enables social tenants to buy a share in the property they currently live in.
New Build HomeBuy - which enables people to buy a share in a newly-built property.

There are specific things that a lender will look for with a shared ownership mortgage. The CML has produced joint guidance with the Housing Corporation and the National Housing Federation which provides information for lenders, registered social landlords, housing associations and conveyancers on a range of issues. The guidance was most recently updated and re-issued in July 2007.

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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Improvements to 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.

We have worked during 2008 and 2009 to bring about improvements to shared ownership. This includes:

Updating and extending the mortgage protection clause (MPC) achieved through the new shared ownership lease
Engaging with the FSA to examine the case for allowing lenders to calculate LTV for capital purposes against the whole value of the property. ongoing
Developing guidance for lenders and housing associations on handling shared ownership arrears and possessions published in 2009
Collecting better quality shared ownership data ongoing

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Shared equity

The other main type of LCHO scheme is the shared equity model. The government has focused their attention, during 2009, on new build shared equity and particularly on HomeBuy Direct. 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.

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Homebuy Direct

Homebuy Direct, an equity loan scheme, was announced in September 2008 and is expected to be operative from early 2009. The scheme is funded by government to the tune of £400 million, and is intended to assist up to 18,000 first-time buyers. Only new-build properties on sites of participating developers can be purchased under the scheme. Over 130 developers and up to 1,000 sites are within 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. Lenders do not have to "sign up" to the scheme; government hopes that a range of lenders will participate when approached to lend on a property that is within the scheme.

More details of Homebuy Direct can be found in the Homebuy Direct Prospectus.

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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.

CLG has also published a guidance document for local authorities and other affordable housing providers called Delivering Affordable Housing. In paragraphs 75-78 this recognises lenders' concerns, and suggest that one option to help alleviate problems is to introduce an occupancy 'cascade' that provides the opportunity for housing to be made available to a broader group of people or a wider area, if nobody meeting the given criteria comes forward within a specified period.

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.

A s106 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.

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The Pomeroy review of prospects for private sector shared equity

A review into the future of the private shared equity market was commissioned by Communities and Local Government in July 2007 in order to follow up the conclusions of the Shared Equity Task Force (SETF) which reported to the Department in December 2006. Communities and Local Government asked that the review should consider what has happened in the private shared equity market since December 2006 and whether there are any barriers which have
held it back; and provide advice on what the future might hold for private shared equity.

Key questions included in the terms of reference were:

Is the market developing as the Shared Equity Task Force predicted?
What shared equity products currently exist and how successful are they?
Are any barriers to the development of the market due to market or state
failures?
What does the future of the private shared equity market look like and what
can be done, by the public and private sectors, to facilitate its development?

The review was carried out by Brian Pomeroy. A short report giving the conclusions of the review has been published by government. The report will not be published in full as it contains commercially confidential information.

The conclusions of the report are:

There has been very little development of private sector shared equity since the Shared Equity Task Force reported in December 2006. Despite a variety of shared equity schemes other than the Government’s own HomeBuy scheme, there has only been one truly unsubsidised private sector product, Flexishare run by Advantage, a subsidiary of Morgan Stanley. This scheme had a small volume and has recently been withdrawn from the market.
There has been a significant amount of interest by the private sector in developing shared equity schemes; however, these initiatives have been put on hold by the credit crisis which began in the middle of the review. It is less likely that financial organisations will launch new products which have untested risk attached to them in the current environment.
Leaving aside the credit crisis, the main constraint on the development of private shared equity has been the difficulty of finding investors willing to take the exposure to house price risk which is inherent in the shared equity concept, and to do so in significant volumes. The reasons for this reluctance include:
- uncertainty about future house price movements coupled with the absence of a hedging market through which to lay off risk;
- lack of knowledge of the cash flows which investors would face, particularly in relation to “staircasing”;
- simple lack of familiarity with what would be a new investment concept for institutions who would not individually wish to be first to take it up; and
- for a large scale scheme to take off, there would need to be an organisation which actively designed and promoted it to both investors and mortgage intermediaries, but no institution has so far stepped into this role.

While various policy or fiscal measures were suggested most had already been identified and considered by the Shared Equity Task Force. There is no major measure that government could take which would radically transform the situation.
So far as the future outlook for private shared equity is concerned, it is relevant to note that:
- although there have been concerns about the affordability and complexity of shared equity, a significant number of people interviewed for this review considered that a demand for such products does exist, not only at the bottom of the housing ladder, but also further up it.
- some appetite for holding house price risk has been demonstrated by investors, even though not always in the form of private shared equity.
- reputable institutions whose judgement would generally be respected in the market have taken the potential for shared equity seriously, even though very little has actually yet occurred.
- a number of those involved considered that an important barrier to progress so far has been the lack of familiarity with shared equity and its newness, rather than a fundamental flaw in the concept.
- the need for affordable housing continues to exist and, as mortgage lenders apply tighter financial criteria to loans, the opportunities for buyers to “stretch” into conventional mortgages becomes more limited, thus making shared equity more attractive.

Although there can be no certainty of what may happen in the future, these factors suggest that there is a reasonable prospect that attempts to establish private shared equity could be renewed once more favourable market conditions return

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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 demand
for 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.