With house prices having spent the last 10 years or more racing ahead of wage inflation and the numbers of new properties being built each year at record lows, it is hardly surprising that housing affordability issues have risen up the political agenda.
In response to this, the government has sought to use shared ownership schemes to allow people the opportunity to buy a share in a property rather than buy outright. But why has take up of these schemes been so low by lenders and borrowers?
Recognising the issues
Recognising the problems that first-time buyers have purchasing a property, the government has introduced a number of schemes that allow eligible buyers the opportunity to purchase a share of a home. These schemes have now been combined under the HomeBuy banner.
To be eligible, a prospective buyer has to be in one of a number of groups that are defined by the government. These tend to concentrate on ‘key workers’ – such as firemen, nurses and police officers – or those currently in social rented accommodation or on a housing list.
If a buyer is eligible for a shared ownership property, although the nuances of each scheme are slightly different, the buyer is able to buy a share in a property. The remainder of the property is held by either the government – or, in practice, a housing association – and the lender.
With average house prices being around the £200,000 mark, the attractions of the schemes are apparent. Allowing prospective buyers the opportunity to purchase a stake of 75 per cent or less of such a property means that they can get themselves onto the property ladder at less cost than otherwise, and enjoy the benefits of homeownership.
However, despite this, the schemes have enjoyed limited success.
Complexity
From a lender’s perspective, even though many of the schemes are open to any Financial Services Authority (FSA) regulated lender, those that have been approached by an applicant for a shared ownership mortgage have reported that the complexity of the schemes has been considerable.
This has meant that processing applications has taken considerably longer than for a conventional mortgage application. This results in the costs associated with the application being higher.
There are two main reasons why this is the case. Firstly, the housing association or local authority staff who are helping the buyer with the application are often unfamiliar with how the mortgage and home buying process works, meaning that buyers and lenders are often given inaccurate information on the status of applications and what is required. Not only does this delay applications but it also generates considerable exasperation on the part of both lender and borrower.
The second issue concerns the use of the Section 106 (S.106) agreement system. This allows planning authorities to put restrictions on a property to ensure, for example, that it is only bought by local people, that it will remain in the ‘affordable’ housing sector or that it can only be bought be people earning below a certain salary level.
These are all very worthwhile aims, and it is hard to argue against them. However, when a lender receives an application for a mortgage where the property is subject to such an agreement, it has to investigate the implication of the agreement for the company.
It can also have repercussions for a lender. It may make sense to a council officer to limit any future sales to local people, but from a lender’s perspective this may have ramifications for the future value of the property concern.
Sorting out these issues takes considerable time and incurs costs that lenders are ill able to afford. As such, it is no surprise that many limit their involvement in this market.
This is all the more unfortunate since the Housing Corporation has worked with lenders to develop a set of s.106 clauses that meet the requirements of lenders and also local authorities and housing associations.
Yet they are never used, meaning that lenders who would like to lend on shared ownership properties are prevented from doing so. Adoption of these clauses by local authorities would represent a major step forward in encouraging lenders to participate in shared ownership schemes.
An off-putting process?
But it not just lenders who have problems with the schemes. So do many potential borrowers.
Although the people the schemes are targeted at have almost always very little knowledge of the housing and mortgage markets, shared ownership mortgages are very complex. And by being even more complex than a traditional mortgage, this can be very off-putting to someone new to mortgages.
This is especially so when the mortgage is likely to be much more complex than any product that the buyer’s parents or friends who maybe helping them have ever had.
Many shared ownership products require the buyer to go through a HomeBuy agent. HomeBuy agents are hardly familiar figures on the high street, and the requirement to use one further complicates the process, deterring potential buyers.
However, the greatest barrier to many potential buyers is raising the deposit. The shared ownership schemes almost all presume that the buyer has difficulty making the monthly mortgage repayment and so seek to minimise the monthly repayment.
But this ignores the reality of today’s housing market. With rents now being higher than comparable mortgage repayments would be, if someone can afford to rent a property, buying one should not be a problem – u
ntil the problems saving for the deposit come along. With property prices being so high, even saving the five figure sum that just a 10 per cent deposit represents can be difficult for hard-pressed first-time buyers. Especially as the high rents that many are paying prevents them from setting aside much each month.
As a consequence, many building societies and other lenders have sought to develop products that allow potential buyers to overcome this problem. Many will now allow a relative’s income or savings to be taken into account.
Others will allow potential future earnings to be considered, while the much maligned 100 per cent mortgage has been instrumental in allowing people otherwise excluded from the property market the opportunity to get on the housing ladder without the need to save a deposit.
It is these products that have been developed by lenders that are allowing people the opportunity to buy a home. Simple and easy to understand, they are responding to the current market in ways that are advantageous to both lenders and that appeal to potential borrowers.
If the government is serious about shared ownership as a solution to housing affordability problems, then it needs to ensure that future shared ownership products are of interest to both lenders and borrowers.
If it can do this, then it will see the take up of its schemes increase. If it doesn’t, then it will still be schemes developed unilaterally by lenders that allow the majority of hard-pressed buyers the opportunity to get onto the housing ladder.
