Low-cost home-ownership

Background

The low-cost home-ownership (LCHO) programme has been an important mechanism for delivering a variety of government objectives since the 1980s. The programme has consisted of a number of schemes with differing characteristics and objectives, including the key worker living scheme to target the LCHO programme at key workers. This page provides a brief overview of the different types of scheme that are currently available.  

This page contains information on:  

• Who is eligible for LCHO?
• What are the main types of LCHO?
• Homebuy Direct NEW
• The Pomeroy review of prospects for private sector shared equity
• Evaluation of Social HomeBuy
• Section 106/restricted covenants
• Lender approach to restrictive covenants
• Key issues for lenders
• English Partnerships first-time buyers' initiative

Who is eligible for LCHO? 

LCHO is targeted at people in housing need who cannot afford to purchase on the open market. Priority is given to existing social housing tenants and waiting list applicants, although others who are in housing need and nominated by local authorities may also be housed. There are also key worker schemes particularly targeted at key workers such as nurses, teachers and police officers.

Back to top
 

What are the main types of LCHO?

There are two main types of LCHO – shared ownership and equity loan models. 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.

With shared ownership a supplier, usually a housing association, builds a new unit and a purchaser part owns and part rents it from the supplier. 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 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, but those who have been prepared to do so over the past year include:

• Abbey
• Britannia Building Society
• Cumberland Building Society
• Furness Building Society
• HBOS
• HSBC
• Ipswich Building Society
• Kent Reliance Building Society
• Leeds Building Society
• Nationwide Building Society
• Newbury Building Society
• Woolwich

Two shared ownership models have been operating since April 2006:

• Social HomeBuy - which enables social tenants to buy a share in the property they currently live in. Five lenders have indicated to us that they will be prepared to lend under his scheme. They are the Cop-operative Bank, Halifax, Ipswich Building Society, Nationwide and Newbury Building Society.
• New Build HomeBuy - which enables people to buy a share in a newly-built property.

The Housing Corporation has drafted model leases for shared ownership, key worker living and new-build homebuy. The latest version of these model leases are available on the Housing Corporation's website in the capital funding guide section.  

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. 

The other main type of LCHO scheme is the equity loan model. Open Market Home Buy (OMHB) enables people to buy a property on the open market with the help of an equity loan. The government has replaced all previous versions of OMHB with two products MyChoiceHomeBuy and Ownhome. These will provide an equity loan from a housing association of between 15% and 50%. This has a small charge on it and will need to be repaid when the property is sold. The homeowner then gets a conventional mortgage for their share. Mortgages for the Ownhome product can only be obtained from the Co-operative Bank. Mortgages for the MyChoiceHomeBuy product will be available from those lenders who choose to participate in the scheme. Lenders are still in discussion with housing associations about participation and we do not have a list of participating lenders. Further information is available on the Communities and Local Government department's website or the Housing Corporation website.

The government has recently announced that cash grants of £1,500 will be made available to shared equity buyers under the OMHB scheme. 

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

Back to top

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

Back to top

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.

Back to top

Section 106/restricted covenants

In new developments, a proportion of houses are often sold as ‘affordable housing’. This is usually a condition of the developer getting the planning permission it desires. 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.

Back to top

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 planning authorities (LPAs) adopt different approaches to affordable housing in S106 agreements and lenders find it very difficult to deal with the variety of restrictions being imposed. There is a danger that lenders could withdraw support for these schemes entirely because the cost of continually developing systems to keep up with the new variations is not a viable option, especially as the costs fall on a limited number of practitioners. Although some lenders are very committed to low-cost home ownership, only about 20 operate in the shared ownership market. A list of lenders offering shared ownership can be found in the publication 'Moneyfacts'. 

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.

Back to top

Key issues for lenders

These are:

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. Recent press articles have highlighted this situation and some cases are already subject to legal review. Lenders are therefore unlikely to support these schemes.

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. As noted above, use of the DCLG model agreement and the new guidance should help to prevent problems.

Back to top

English Partnerships first-time buyers' initiative

On 12 December 2006 English Partnerships (EP) issued a press release  announcing the launch of its new First-Time Buyers' Initiative (FTBI). The scheme is aimed at helping 15,000 households to purchase new affordable homes by 2010. About 50% of the sales will be directed towards key workers with the remainder going to groups identified as priorities by each Regional Housing Board. (RHBs were set up in 2003 and are co-ordinating bodies chaired by the Government Office in each region and mainly comprising public sector agencies who advise on strategic housing priorities.) The press release announced that four pilot schemes were already under way, in Feltham, Hendon. Salford and Portsmouth. The first home, in Feltham, was featured in a press release on 31 January 2007.

Under the FTBI, EP will help purchasers buy homes by taking a 25% equity interest in the property. This will sit as a second charge behind a conventional 75% mortgage raised from a lender. EP is currently forming a panel of lenders who are familiar with and supportive of the scheme, and to whom developers and their IFAs can refer clients. Key worker purchasers may have a maximum household income of £60,000. During the first three years EP will not charge for its 25% equity interest. After three years a 1% fee will be charged, rising to a maximum of 3% of the value of the equity interest after five years.

EP has a webpage giving further details about the initiative. This includes a buyers' guide to the scheme, which can be found by scrolling down the publications page of the EP website. The guide sets out a number of examples showing how the scheme works.

The total size of the scheme is subject to decisions in the government's spending review for 2007. At this stage, it is anticipated that there will be a mortgage requirement of around £1 billion over the life of the scheme.

Back to top