Help to Buy, the United Kingdom’s (UK) housing program wherein the government insures 95% mortgages, has allowed thousands of middle- and upper middle-class homebuyers to make it into the market, but that still leaves low-income families with little help. A new plan is now being suggested that will allow these families to purchase at least 25% equity in a home while the rest is owned by a Home Association, thereby keeping monthly rent-cum-mortgage payments low. Other shared ownership plans on the table include do-it-yourself arrangements among homebuyers and collective pension fund purchases. For more on this continue reading the following article from Property Wire.
A major expansion of newly built shared ownership could help low and modest income working families across the UK onto the property ladder, while keeping their housing costs affordable, according to a new analysis from an independent think tank.
The report, from the Resolution Foundation, shows that shared ownership, where buyers purchase at least 25% of the equity in a home and pay a low rent on the remaining share owned by a Housing Association, is affordable for a couple with one child on £22,000 in 87% of local authorities in Britain, assuming they spend no more than 35% of their net income on housing costs.
The report also show that the latest phase of Help to Buy, which provides a government guarantee on 95% mortgages, is really geared towards households on middle and higher incomes whose main barrier to home ownership is raising a large deposit rather than meeting high monthly mortgage costs.
For low and modest income working families, while it is the case that Help to Buy greatly reduces the time it takes to save for a deposit in most local authorities, the policy still leaves monthly mortgage costs unaffordable across the great majority of the country, the report says.
For example, a couple with one child with net income of £22,000, which is the just over a third of the way up the income distribution, living in a two bed home in Cambridge would have to spend 85% of net income or £1,557 per month on meeting monthly the costs of a 95% compared to 42% of net income or £772 per month for shared ownership.
In the London borough of Hounslow, they would have to spend 76% of net income or £1,395 per month on meeting the monthly costs of a 95% mortgage compared to 38% of net income or £692 per month for shared ownership. And in Exeter, they would have to spend 53% of net income or £970 per month on meeting the monthly costs of a 95% mortgage compared to 26% of net income or £481 per month for shared ownership.
The report points out that shared ownership is more affordable for low income families because they initially take out a mortgage on only a share of a home not the entire property and pay an annual rent of no more than 3% on the remaining share, with annual rent rises in line with RPI plus 0.5%. While they own less equity, their payments are more predictable and they are less at risk from changes in the mortgage market. Shared owners can claim Housing Benefit on the rent but this is rare.
However shared ownership currently accounts for only a very small number of homes, some 174,000 in England. Related innovations such as rent to buy and home purchase plans have also so far failed to achieve scale.
The Resolution Foundation report says that with growing numbers of families stuck in the private rental sector, shared ownership needs to become the mainstream fourth tenure to help meet their aspiration to own, generate much needed new housing supply and help address Britain’s growing wealth gap, while also reducing volatility in the housing market.
The report calls on government to make this a reality by creating a new shared ownership equity fund to encourage an increase in the number of homes built for shared ownership, building on the current Build to Rent fund that was announced in last year’s Autumn Statement to kick start purpose built private rented accommodation.
The report also proposes that many of the regulations and restrictions that currently limit the flexibility of shared ownership should be stripped away. For example restrictions on marketing properties through estate agents, sub letting properties and more onerous valuations than for conventional house sales, should be scrapped and replaced by a simple, transparent set of standards that are easy for buyers to understand.
Other recommendations include bringing private capital from pension funds and other institutional investors into shared ownership by opening up the existing £10 billion private rented sector debt guarantee to low cost home ownership products such as home purchase plans and rent to buy schemes not just pure private rental schemes.
Also local authorities making use of their land to enable the development of shared ownership in areas of high demand rather than shared ownership being delivered predominantly through affordable housing requirements placed on house builders building for sale should be encouraged, it says.
It also points out that reinvigorating Do It Yourself Shared Ownership to give buyers greater choice of properties alongside greater supply of new shared ownership homes, would also be beneficial. The current stock of shared ownership is predominantly newer, smaller properties which are less well suited to families. Do It Yourself Shared Ownership allows buyers to purchase shares of existing properties and is an effective way of to bringing larger, family homes into shared ownership.
‘The aspiration to own a home remains strong among millions of families but the growing gap between renting and traditional home ownership is too great for many. Shared ownership must enter the mainstream, becoming the fourth tenure in the UK alongside traditional ownership, private and social renting as it breaks down the barriers between renting and owning for low and modest income families,’ said Vidhya Alakeson, deputy chief executive at the Resolution Foundation.
‘As well a massive expansion of new homes for shared ownership, we need to strip away a lot of the current restrictions and regulations to make the product more consumer friendly and more attractive to potential shared owners,’ added Alakeson.
This article was republished with permission from Property Wire.