The Evaluation of Low Cost Initiative for First Time Buyers (LIFT)

4. AFFORDABILITY

Introduction

4.1 This chapter looks at the affordability of LIFT schemes for purchasers.

Equity Stake Purchased

4.2 Table 4.1 gives average, minimum and maximum equity stakes for NSSE and OMSEP¹⁴. A breakdown by local authority area is given in Appendix 6.

Table 4.1: NSSE and OMSEP purchases 2005/06 to 2009/10 - mean, median and min / max %age stake purchased

	NSSE %	OMSEP %
Average stake	62	65
Median stake	60	62
Minimum stake	25	25
Maximum stake	88	80

Source: LIFT Sales Log Database

4.3 Across Scotland the average stake purchased was slightly higher for OMSEP (65%) than NSSE (62%). However, in some local authority areas stakes purchased under OMSEP were, on average, significantly higher than for NSSE. This was most notably the case in North Lanarkshire (20% higher), East Dunbartonshire (17%), East Lothian (17%), Moray (16%) and Angus (15%).

4.4 Table 4.2 shows the percentage owned by sharing owners according to survey returns from RSLs at March 2010. This data does not cover all RSLs with shared ownership properties, but gives a reasonable picture of patterns of shares. A breakdown by local authority area is given in Appendix 7.

Table 4.2: Percentage tranche purchased by sharing owners - March 2010

% Share Purchased	No.	%
25%	2,632	62.9
50%	1,390	33.2
75%	162	3.9
Total	4,184	100

Source: Scottish Government survey of RSLs providing shared ownership property

4.5 The data shows that despite the option to increase their share, very few sharing owners own more than half of their home, with 96 per cent owning either a 25 per cent or 50 per cent share. A strong majority of sharing owners (2,632 - 62.9%) own 25 per cent of their home. A third (1,390 - 33.2%) own a 50 per cent share. In comparison with NSSE and OMSEP purchasers, sharing owners tend to own lower amounts of equity in their homes.

Assessing Affordability - Borrowing

4.6 We have considered the affordability of LIFT purchasers' borrowings based on available data ¹⁵. Since purchasers' income has been recorded within bandings (e.g. £15k to £20k) we have calculated lending multiples for the mid and top end of the income range. All of the available mortgage data related to the financial years 2008/09 and 2009/10 and the vast majority of data (97%) related to 2009/10.

4.7 Current Scottish Government guidance on assessing shared equity applications indicates that as a 'rule of thumb' an individual applicant should borrow a maximum of three times their salary, and joint purchasers twice their salary. Applicants are required to obtain quotations from three mortgage lenders. If the level of borrowing achieved is less than the rule of thumb the applicant must provide justification. If the level of borrowing is more than the rule of thumb, the applicant must provide evidence that they have taken independent financial advice.

4.8 As the LIFT guidance has changed over time in response to market conditions we have drawn on the Scottish Government's Housing Need and Demand Assessment Guidance ¹⁶. This states that (for both open market and intermediate affordable housing) a "household is considered able to afford a home if it costs up to 3.5 times the gross household income for a single earner household or 2.9 times the gross income for a dual income household".

4.9 Data collected through the LIFT Sales Log Forms should include the total household income. However, in the majority of cases where there is more than one earner, our view is that the income range recorded is for the first occupant (rather than the household). As such we have used the single earner multiple in our analysis. Looking at the lending multiples for each sale we have been able to calculate the number of purchasers borrowing at greater than 3.5 times for the mid-point and top end of the income range.

Table 4.3: NSSE and OMSEP purchasers borrowing above affordable borrowing level*

No. borrowing at greater than 3.5 times income	NSSE		OMSEP
	No.	%	No.	%
At mid-point of income range	33	19	253	31
At top end of income range	12	7	82	10

*of total number of purchasers where mortgage information is available.
Source: LIFT Sales Log Database

4.10 Table 4.3 show that at the mid-point of the purchaser income ranges, nearly a fifth of NSSE purchasers and a third of OMSEP purchasers were borrowing at levels greater than the Scottish Government assessment of affordability. This proportion reduced to seven per cent for NSSE and ten per cent for OMSEP when compared to the top end of the income range. However, this assumes that the income information provided for the sales log form included all income taken into account in the mortgage calculation.

4.11 The analysis of shared equity prices and borrowing levels suggests that while the cost of full home ownership was greater for NSSE, housing costs were more affordable for NSSE purchasers compared to OMSEP.

Accessing Mortgages

4.12 As part of our telephone interviews we asked purchasers about their experiences of accessing mortgages, and their views on the affordability of their home.

4.13 There were varied experiences of accessing mortgage finance. However, all of the people that we spoke to had successfully financed the purchase of their home and most had done so prior to the credit crunch. Experiences may be different in the current economic situation.

4.14 Of the sharing owners that we spoke to that had financed their share with a mortgage, nearly three-quarters said that they had experienced some difficulty in obtaining a mortgage. However, this was mainly to do with the process in terms of legal and administrative procedures rather than any issues of affordability. In particular some consultees expressed concern that they were forced to use a lender designated by the RSL.

"I approached a number of banks about lending for shared ownership, but found that they were not willing to lend for this. Most knew nothing about shared ownership."
Sharing owner

4.15 There were general concerns about the limited choice of lenders providing mortgages for shared ownership.

4.16 A significant minority of the shared equity purchasers that we spoke to told us that they had experienced some issues with obtaining mortgage finance. A recurring theme was the difficulty in obtaining three quotes from separate mortgage lenders. Several consultees also noted that they were surprised that they had to pay Stamp Duty on the transaction.

"The key issue for me was finding a lender. The RSL pointed me in the direction of some lenders. All had very different approaches toward shared equity and I found it quite hard to get the three mortgage quotes required."
NSSE purchaser

4.17 The LIFT shared equity procedures require RSLs to encourage applicants to seek independent financial advice. We found there were positive comments from shared equity purchasers who had accessed the support of independent financial advisors or mortgage brokers. Purchasers found that these professional advisors generally had a good level of awareness and understanding of shared equity and of mortgage lenders that were active in this market.

4.18 None of the GRO purchasers that we spoke to identified any issues in terms of accessing mortgage finance.

Perceptions of Affordability

4.19 Sharing owners had mixed views on whether shared ownership was an affordable option. In particular there were concerns about the occupancy charge paid to RSLs and additional costs for maintenance to be met by the sharing owner.

4.20 For the sharing owners we spoke to, the average occupancy charge was £146 a month. The highest was £230 a month and the lowest approximately £100. We asked participants to tell us about occupancy charges excluding additional maintenance charges but the figures should be treated with caution as some consultees were unclear about their charges and what was included. We surveyed RSLs to find out current occupancy charges excluding maintenance. We found significant variation in occupancy charges, with a 62 per cent difference (or £921 per annum) between the highest and lowest charges.

4.21 Many sharing owners were unhappy at the management and maintenance charges that they pay. Some felt that it is unfair that the sharing owner has to meet full maintenance costs and pay a rental charge. Some consultees felt that they had not been made fully aware of maintenance responsibilities and costs at the time of purchase.

"I do not find my housing costs affordable. It is fundamentally wrong to have to pay the total cost of maintenance on top of the occupancy charge. It defeats the purpose of low cost home ownership."
Sharing owner

4.22 Roughly half of the sharing owners we spoke to said that shared ownership had been a good deal for them financially. However, half the consultees said that it had not been a good deal and some argued that other housing options would have been better for them.

4.23 The majority of NSSE purchasers said that their shared equity home was affordable. None of the consultees would have been able to afford their current home without shared equity although some said that they would have been able to afford a smaller property or one in a less attractive area.

"If I hadn't used the shared equity scheme I think I might have bought a smaller flat using a mortgage."
NSSE purchaser

4.24 Some NSSE purchasers were more reserved about the affordability of the scheme, mainly stating that it was "just" or "reasonably" affordable. Several consultees said that the scheme was made less affordable by unexpected management and maintenance costs.

4.25 The vast majority of NSSE purchasers stated that it had been a good deal for them financially. However, one consultee questioned whether this will be the case when she comes to sell her property.

"It was a great deal financially but now, when I want to sell it, it probably isn't going to work out because I will be left with a big loss."
NSSE purchaser

4.26 A majority of OMSEP purchasers said that that their housing costs were affordable and had given them access to home ownership. However, a relatively small proportion of OMSEP consultees stated that the costs were difficult but manageable.

" We find our housing costs quite tight but manage and accept that we have made lifestyle choices."
OMSEP purchaser

4.27 We spoke to three OMSEP purchasers that were struggling to afford their housing costs. In one case, the purchaser was a ( RTB) owner that had moved into an OMSEP property following regeneration activity. This person was now living in a higher Council Tax band area and felt 'forced into' shared equity. The other two were experiencing difficulties as a result of household circumstances.

4.28 Most OMSEP purchasers felt that it was a good deal for them financially, although a small number were either unsure or argued that it had not been a good deal for them.

"In some ways shared equity was a good deal financially as it allowed me to buy. But I will lose out if I improve my home and then sell."
OMSEP purchaser

4.29 The GRO owners that we spoke to were generally positive that their homes were affordable and some said that affordability was the main attraction for purchasing. All but one of the consultees stated that their ongoing housing costs were affordable. One person was concerned about growing mortgage and factoring costs. A majority of the GRO purchasers stated that it was a good deal for them financially.

"This was the right option for me, as I could make a lot of money from it."
GRO purchaser

Property Resales and Repossessions

4.30 Up to 2009/10, one NSSE property and five OMSEP properties had been repossessed. Two OMSEP properties had converted to rent under the Mortgage to Rent scheme. All repossessions and conversions to Mortgage to Rent took place in 2008/09 and 2009/10. The overall number represents less than 0.2 per cent of properties. Income data is not available to draw any conclusions about the borrowing multiples of the purchasers involved.

4.31 The Scottish Government's shared ownership survey found that from 2005/06 to 2009/10, 22 shared ownership properties had been repossessed; 18 had been repurchased by the RSL (as a result of the sharing owner experiencing financial difficulties), and 12 repurchased under Mortgage to Rent. This is around 0.9 per cent of sharing owners identified in the survey and is a higher proportion than for shared equity. However, as the majority of shared equity owners had not been in their homes for as long a period, the figures are not directly comparable. Information on repossessions and Mortgage to Rent is not available for GRO properties.

Summary

Purchase Prices

4.32 The average purchase price and purchaser contribution was lower for an OMSEP property than a NSSE one. On average OMSEP purchasers had lower income levels.

Borrowing Levels

4.33 Nearly a fifth of NSSE purchasers were borrowing at levels greater than the Scottish Government assessment of affordability (3.5 times income) when taking the mid-point of their stated income range. Assuming all purchasers were at the top end of the stated income range, seven per cent (12) were borrowing at a level greater than the affordable rate. This is despite the fact that shared equity purchasers must provide evidence that they have taken independent financial advice.

4.34 At the mid-point of the OMSEP purchaser income ranges nearly a third borrowed at multiples greater than 3.5. At the top end, ten per cent were borrowing at a level greater than the affordable rate. On this basis, NSSE purchasers had more affordable housing costs when compared with OMSEP purchasers.

4.35 The data suggests that while housing costs were more affordable for NSSE purchasers, the cost of outright home ownership was greater for NSSE compared with OMSEP.

Views on Affordability

4.36 The majority of NSSE and OMSEP purchasers were positive that their home was affordable to them. We identified a very small number of purchasers experiencing difficulties as a result of household circumstances.

4.37 No NSSE or OMSEP purchasers said that they would have been able to afford their current home without the help of shared equity - but some said that they would have been able to afford a smaller home or one in a less attractive neighbourhood.

4.38 Sharing owners raised some concerns about occupancy charges but there were more complaints about bearing full maintenance costs. We found significant variation in occupancy charges for shared ownership. Of the GRO owners we spoke to, all but one felt that their housing costs were affordable.

Financial Difficulties

4.39 The proportion of LIFT purchasers losing their homes as a result of financial difficulties was significantly higher among sharing owners than shared equity purchasers.