6. Lender perspectives
This chapter considers lenders' perspectives on the Scottish Government's shared equity schemes, including their views on the impact of the schemes for housing markets and access to lending in Scotland.
Lender support has been a key factor for the operation of the three shared equity schemes, particularly in the context of the HtB scheme having been introduced in part to facilitate access to mortgage lending following the 2008 global financial crisis. The number and range of lenders involved in the schemes has expanded over time, with a total of 16 lenders having supported the HtB and/or OMSE schemes at the time of the evaluation (14 with HtB and 7 with OMSE). Interviews were conducted with 8 of these 16 lenders, with the representative body of the banking and finance industry, and with one international lender who had not worked with the Scottish Government schemes.
Research participants were drawn from a range of organisations of different types and sizes, from large international banks to a credit union. This included some lenders who had been working with the UK Government shared equity schemes for a number of years, and there was some variation in the extent to which UK-wide lenders were able to offer Scotland-specific observations and/or break down their market intelligence specific to Scotland. However it is notable that there were common views and experiences across lenders.
Scheme objectives and expectations
A clear point of agreement across lenders was that the objectives of the Scottish Government's shared equity schemes are in line with their own business strategy. Lenders' focus here was on supporting buyers - particularly first-time buyers - into the market in a way that was affordable and sustainable for the customer. This, in turn, was seen as feeding into financial sustainability for the wider market and the individual lender. In this context, lenders generally described the decision to work with the schemes as consistent with their wider lending.
This included some lenders with a specific focus on first-time buyers and the more affordable segments of the housing market, and with previous experience of other low-cost home ownership options. The extent to which the Scottish Government's schemes were perceived to fit with this 'ethos' was seen as a positive for these lenders.
The extent to which lenders had previous experience of the UK Government Help to Buy scheme was also an important factor for those choosing to join Help to Buy (Scotland). This was particularly the case for lenders who were later in joining HtB. The UK Government scheme was described as an established model with no significant issues emerging and nothing to suggest, for example, that Scotland would be a significantly higher risk market.
Several lenders with experience of the UK Government scheme already had systems in place for shared equity products, and required little or no significant changes to adapt to the Scottish Government schemes. Compatibility of systems and minimising the need for information and communications technology (ICT) changes were a significant factor for lenders when joining the schemes, and qualitative findings suggest that these will continue to be significant in any future changes to shared equity schemes. Lenders made clear that, for most, shared equity is likely to comprise a small proportion of their lending, such that it would be difficult to make the business case for significant investment in ICT, training etc. This is especially the case when any funding commitments are relatively short-term as lenders require time to recoup their initial investment.
The importance of systems and ICT was also evident in the experience of the participant who had not been involved in any of the Scottish Government shared equity schemes. This lender indicated that the lead-in time and resources necessary to adapt systems had been the key factor in their choosing not to lend through the schemes. The time-limit on the schemes also contributed to this decision.
Experience to date and perceived impact
Lenders indicated that the Scottish Government's shared equity schemes had broadly met expectations in terms of the level of lending and impact for buyers - albeit lenders had not expected the schemes to represent a substantial share of their lending.
Views were positive on the administration of the schemes. Again this included reference to the extent to which lenders were able to easily adapt existing systems to fit scheme requirements, and lenders also noted the value of support from the Scottish Government team. Some referred to (relatively minor) concerns that the rationale for the reduction in the HtB price cap had not been communicated to lenders, and that this had limited their ability to deal with queries from buyers and brokers. However, participants felt that the Scottish Government had been accessible and knowledgeable in dealing with any queries from lenders.
Lenders indicated that they had particular products for shared equity customers and most offer re-mortgage products (for those moving from other lenders, for buyers to move to another product by the same lender, and to repay the equity share). Participants noted that shared equity products are typified by slightly higher interest rates. However, these higher rates were associated with additional administration requirements (including underwriting) and/or the level of equity provided by the customer, rather than any perception of higher risk associated with those buying through shared equity schemes.
Lenders were generally satisfied with the profile of buyers coming through the schemes. These customers were not seen as significantly different in their profile or payment record to others not using shared equity schemes. Participants varied in the extent to which they felt able to comment on the specific profile of shared equity buyers in Scotland (as distinct from shared equity buyers across the UK as a whole). However, in terms of profile and the potential impact of shared equity schemes, key findings are summarised below.
Lenders suggested that the schemes may have helped buyers to enter the market slightly earlier than would have been feasible without assistance, because they do not need to wait as long to save a deposit. Participants suggested this may be particularly the case for those who do not have access to 'the bank of Mum and Dad' and/or are living in high cost private rental markets.
Buyers using Help to Buy (Scotland) in particular were seen as including some who may have been able to buy without assistance in the foreseeable future, and/or who may have been supported to access new build when they would otherwise have started in the lower end of the resale market. Some also suggested that HtB customers may be more likely to enter the market at the 'second rung' of the property ladder, for example buying a larger property or a house rather than flat.
Participants suggested that the NSSE and OMSE schemes may have had a greater impact in terms of the proportion of buyers who would otherwise have been unable to access the market. These schemes were described as being more specifically focused on those with limited housing options. HtB was generally described as having an impact by bringing forward demand.
In terms of maximising impact, there was broad support for the reduction in the price cap and equity share limit for HtB, and more generally an approach that focuses on those who most need support. Participants lending through the NSSE and OMSE schemes saw real value in these schemes targeting key buyer groups. However, the tension between very small volumes of lending and the type of 'standardised/high volume' approaches used by the larger lenders was highlighted.
In terms of issues or potential constraints limiting impact of the schemes, some expressed concerns regarding a potential lack of clarity for buyers on the detail of shared equity loans. This included medium to longer-term considerations such as limitations on resale and repayment of the equity stake. However, this was not seen as a significant issue - indeed some contrasted the 'simplicity' of Scottish Government schemes with buyer confusion around interest charges for the UK Government scheme. Participants also saw HtB as having a strong profile with buyers, in part due to promotion by larger developers. It was suggested that more could have been done to promote the NSSE and OMSE schemes and raise awareness for buyers and mortgage brokers.
Participants did not express concerns around the potential for negative housing market impacts associated with the schemes. The schemes were seen as having minimal risk of displacing open market sales while there continues to be a shortfall in affordable housing supply. However, some did suggest that price caps can limit the impact of schemes in higher value markets, with Edinburgh and Aberdeen cited as examples. OMSE lending being limited to the Home Report value was also seen as restricting access for buyers in more competitive markets; it was suggested that OMSE buyers are in effect restricted to fixed price purchases in these areas.
Participants did not offer a clear view on the scale of the schemes' impact on lending, and most appeared to be of the view that shared equity schemes had not been of sufficient scale to have a significant impact on their overall level of lending. However, some referred to smaller or less quantifiable impacts such as boosting lender confidence. This was seen as particularly important in the years following the 2008 global financial crisis. Some also felt that there may have been an element of lenders reducing their exposure in other areas as a result of their shared equity lending, but again this was not seen as a significant change.
In terms of the future of shared equity schemes in Scotland, some expressed the view that there remains a group of buyers who can benefit from the product. This view appeared to be reflected in support for a clear focus on those most in need of support, including reference to the NSSE and OMSE schemes as more effectively targeting buyers in need to assistance. However, lenders also suggested that decisions around how this benefit is to be weighed against potential for investment to be used to support other housing products or sectors, should be a matter for Scottish Government policy.
Lenders were also clear in their view that any continuation of shared equity in Scotland should retain broad alignment with UK Government schemes. Qualitative findings indicated that there is limited tolerance across lenders for any additional investment in ICT or systems to support what is expected to remain a small proportion of their total lending.
Participants also expressed a view that, if the Scottish Government chooses to end one or more of the schemes, time may be required for the housing and lending markets to adjust. It was noted that ending the schemes would effectively reduce demand from some buyer groups, and that sufficient notice would be required to allow lenders and developers to adapt.
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