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Shared Ownership Will Not Provide All The Answers For Key Workers Hoping to Buy

The Government has made the startling admission that it does not know how many people have transitioned to full ownership under its Shared Ownership model. Despite not knowing how effective it is, the Government has set out its expectation that Shared Ownership will account for the “vast majority” of the home ownership homes it funds.

Whilst the proposed new Shared Ownership model will make it easier both for people to buy an initial stake and then to increase their equity in the property, for some, the uncertainty over exactly how long it will take them to fully own their home will still not suit their needs. If you buy an initial 10% stake, after 15 years of gradual staircasing at 1% you would still only own 25% of the home. Legal fees apply at each increase and if shared owners want to buy larger shares using the existing process then all fees (valuation and legal) remain their responsibility. However large their share is, tenants also have to pay 100% of service charges.

For some aspiring homeowners, this part-rent, part-own process remains complicated and unattractive. Yet with first-time buyer deposits jumping £10,000 last year to nearly £60,000, key workers and those on lower incomes will struggle to buy on the open market. Despite the return of some 10% deposit mortgage deals, rising house prices combined with a partial public-sector pay freeze make saving this amount of money completely unrealistic for many.

As we have argued before in this blog, the key to widening access to home ownership is addressing the difficulty in saving for a deposit. It is this that is blocking many renters who could afford mortgage repayments from being able to buy a home. This has been compounded by coronavirus. The Joseph Rowntree Foundation’s annual report on poverty highlights that 41% of private renters who have seen a drop in income since March have had to use their savings to make up for the shortfall; savings that they might have been hoping to use for a house deposit. Many others didn’t have any savings to fall back on; over two thirds of social renters and almost half of private renters in the bottom half of the income distribution had less than £500.

Rent to buy schemes address this hurdle by not requiring any initial deposit when people move into a brand new house. They also provide a clear and defined route to full ownership with tenants buying their home outright at a set 5 yearly interval. Paying only an affordable rent enables them to save more for a deposit than if they were renting privately. At Rentplus we add to that by giving them a gifted lump sum of 10% of the value of the property when they are ready to buy.

In the meantime all repair and maintenance costs are covered by the landlord and service charges are included up until the point they become full homeowners.

The model is open to aspiring buyers provided they are working or in training. They undergo a financial assessment of their likely ability to buy before being accepted onto the scheme. Generally, applicants need to be on the local housing waiting list or Help to Buy or Shared Ownership register to be considered and they usually have a local connection to the area. In some areas up to half of tenants have moved out of existing social housing; freeing this up to be re-allocated to those most in need. Over half of all our tenants are key workers.

Unlike the unknown effectiveness of shared ownership in helping people to fully own their home, this spring the first of Rentplus’ tenants will become 100% homeowners after just 5 years.

Whilst all tenants are currently on track to buy, inevitably down the line some people’s circumstances will change and not everyone will be successful in purchasing at the planned date. In these cases tenants can opt to renew their tenancy in five year increments up to 20 years. If at this point they still can’t buy, we will work with the council and housing association to support them to look for new accommodation. They will have still benefitted from a 20 year affordable rent.

Rentplus’ model is fully funded by institutional investment bringing in additional housing finance and enabling councils to direct their grant funding to delivering social rented homes.

The main constraint to the model is that demand outstrips supply as only a small proportion of local authorities have adopted it to date.

Homes England reported a 34% decrease in affordable home ownership scheme starts over the six months to September 2020. Whilst coronavirus was a factor, this highlights the much greater role that privately funded providers can play in boosting the overall number of homes for first-time buyers with no reliance on Government funding.

The Government and local authorities should do more to encourage the development of innovative home ownership models on a much wider scale instead of putting all their eggs in the unproven, shared ownership basket.

<strong><span class="has-inline-color has-accent-color">Steve Collins</span></strong>
Steve Collins

Chief Executive of Rentplus, the leading affordable rent to buy housing provider.
Steve has over 25 years’ experience in housing and development, both in private and public-sector organisations.

This includes working for the then Homes and Communities Agency where he had responsibility for the successful delivery of over 42 Government programmes with a combined value of c.£900m pa, aimed at accelerating the delivery of housing and public sector land across the country.

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Deposit Barrier Must be Addressed to Widen Access to Home Ownership

With an average deposit of £21,000 required, the Government’s much heralded ‘First Homes’ will remain beyond the reach of a large number of aspiring homeowners. This includes the 61% of private renters who have no savings at all, those who are unable to rely on the bank of mum and dad and a high percentage of key workers whose incomes are not high enough to enable them to save.

To truly widen access to home ownership we must address the deposit barrier. Only then will we be able to open the housing ladder to those on lower incomes. The Government has proposed that a quarter of all new affordable homes will be First Homes: homes for first-time buyers sold at a discount of at least 30% of market value. Whilst the lower price will no doubt make these homes more affordable to some, there will remain a significant portion of aspiring homeowners for whom they will still be out of reach because they simply cannot raise the amount required for a deposit.

Based on the average price paid by a first-time buyer, even after the 30% discount a buyer under ‘First Homes’ would need to have saved £14,000 for a 10% deposit. With lenders dramatically reducing the number of mortgages available to buyers with small deposits it is now more realistic for a deposit of 15% or 20% to be required. This equates to £21,000 or £28,000 respectively, plus legal fees and moving costs. Factor in that just 10% of private renters aged 16-34 have savings of between £5,000 and £15,999 and this keeps the dream of home ownership beyond the reach of all but a small minority of young renters.

It’s not just the deposit which is a barrier but also the income needed for a mortgage. Lenders will generally offer four and a half times a buyer’s salary. Based on an average First Homes house costing £140,000, if the buyer did manage to save a 10% deposit they would need a mortgage of £126,000. This would require them to have a salary of £28,000. However, a newly qualified nurse starts on a salary of less than £25,000 and it would take 6-7 years’ experience until they had reached this salary threshold. What about the key workers in the care and retail sectors who have kept the country going through the pandemic on a minimum wage?

There is a home ownership model which provides a solution to these barriers. ‘Affordable rent to buy’ helps tenants to save up to buy the home they are renting. It is different from other rent to buy schemes as the tenants benefit from an affordable rent for a much longer period of up to 20 years compared to just 5, and when they are ready to buy they receive a gifted, 10% deposit which they do not have to repay.

The model does not require buyers to provide any upfront deposit to access the scheme. Instead, they undergo a financial assessment which looks at whether they will be likely to be able to buy in up to 20 years’ time. For example, for a newly qualified nurse the provider would see that within 10 years she or he would be able to afford the mortgage so they would be eligible for the scheme, even though they couldn’t afford a mortgage or deposit now. Based on their finances, they will choose to aim to buy at year 5, 10, 15 or 20. Rather than having to remain in private rented accommodation up until this time, the nurse would live in the home they know they will one day own and pay 80% market rent helping to save more each month towards a deposit with a long-term, secure tenancy.

A number of local authorities have already adopted the model. As well as helping more people onto the housing ladder, they are experiencing the model’s wider benefits including that it houses many families from the housing waiting list. 17% of the families benefitting from the scheme come from social rented homes that they no longer require freeing these up for those in greatest need. On top of this, the model is fully funded by pension funds and institutional investment so not using up any of the grant funding local authorities access from the Affordable Homes Programme to deliver homes for social rent.  

To truly help level up home ownership, the Government should ensure that models which more effectively address the barriers to home ownership are included alongside First Homes. This will encourage local authorities to consider adopting innovative models like this to address their local housing need and help make home-ownership a reality for many who otherwise can only dream of it.

<span class="has-inline-color has-accent-color"><strong>Steve Collins</strong></span>
Steve Collins

Chief Executive of Rentplus, the leading affordable rent to buy housing provider.
Steve has over 25 years’ experience in housing and development, both in private and public-sector organisations.

This includes working for the then Homes and Communities Agency where he had responsibility for the successful delivery of over 42 Government programmes with a combined value of c.£900m pa, aimed at accelerating the delivery of housing and public sector land across the country.

Steve has significant experience in the affordable housing sector where he managed the allocations of the affordable housing grant programme.