Annex C: Establishing affordability and means testing
1. Administering Agents must undertake a detailed financial assessment of individual household circumstances using the criteria set out below. This information will be obtained from the standard application form which Administering Agents must ask prospective owners to complete when they are applying to the Open Market Shared Equity Scheme.
2. An applicant must purchase the maximum amount of equity that they can reasonably afford, taking account of other financial commitments and the associated costs of home ownership. However, they must be strongly encouraged NOT to exceed the income multiples set out in paragraph 4 (this is important to ensure that the mortgage will remain affordable to the household over the long term, even if mortgage interest rates or other living costs rise). There may be circumstances where a 'rule of thumb' assessment shows that an applicant is unable to afford the minimum 60% equity purchase but the Decision in Principle or Key Facts Illustration indicates that the applicant can afford above the minimum 60% equity stake that is required. In these cases, if the buyer's independent financial advisor can provide written evidence demonstrating that the applicant will be able to sustain the mortgage payments as well as all other associated housing related costs then the application may be eligible to participate in the scheme. Please note that, applicants aged 60 or over do not require to take out a mortgage towards the purchase of the new property.
3. The maximum level of mortgage that an applicant is capable of funding and any other personal contribution that they are able to make will be based on the following criteria.
An applicant should provide the Administering Agent with details of all sources of finance when formally applying to the scheme (see Annex B). This information will be used by the Administering Agent to determine the anticipated value of mortgage finance, and the value of any other personal contributions. A household income will be considered to be the total of:
- gross earnings, per single person or couple, as appropriate;
- any other income, comprising sickness benefits, unemployment benefit, bank interest, superannuation or pension from previous employment, working families tax credit, widow's pension and shareholder's profits; and
- personal contributions comprising savings, gifts or other financial contributions. The definition of personal savings includes: cash; premium bonds; stocks and shares; unit trusts; bank or building society accounts and fixed-term investments; the surrender value of any endowment policies; property; redundancy payments; and pension lump sum payments. In the case of applicants aged 60 or over this would also include the contribution made from the sale of any existing property.
An applicant may retain £5,000 of any personal contributions held. Above this amount, at least 90 per cent of the balance should be treated as a contribution towards the purchase of a property.
4. A 'rule of thumb' for the estimated maximum mortgage for an applicant in employment would be as follows:
- individual application – individual salary x 3.0 = estimated maximum; or
- joint application – joint salary x 2.5 = estimated maximum.
5. In the event that it is a joint application but only one applicant works then the individual application rule would apply.
6. Administering Agents should note that the 'rule of thumb' will not be appropriate in the case of applicants who are self-employed. Normally lenders will require sight of a minimum number of years' accounts before providing a mortgage quote although some allow self-employed people to self-certify their income.
7. An applicant should provide details of the anticipated level of mortgage finance available. Applicants are normally required to provide one Decision in Principle and one Key Facts Illustration. Where this is not possible, there should be clear justification of the reasons. Applicants should query with their lender if either of these will involve a credit search. Searches can leave 'footprints' on the applicant's credit history which may affect the applicant's ability to obtain credit. An applicant should therefore be made aware of the need to confirm with the lender whether a Decision in Principle or Key Facts Illustration will include any form of credit search. If either of these does require a credit search the lender should explain to an applicant any potential consequences. The lender should also obtain the applicant's consent before carrying out the search.
8. The 'rule of thumb' should be used to compare the Decision in Principle and Key Facts Illustration provided by a lender to the applicant. In the event that the level achieved by an applicant is less than the rule of thumb, an applicant must provide justification. If the level achieved by an applicant is more than the rule of thumb, an applicant must provide evidence that they have taken independent financial advice, reference to which is made in section 11 below. However, as noted in paragraph 2, applicants should be strongly discouraged from doing this unless they can show that they have considered how they would fund any future increase in mortgage or other living costs. This rule of thumb and the Decision in Principle do not form part of the assessment criteria for applicants aged 60 or over who wish to purchase without a mortgage.
9. In assessing applications to the scheme Administering Agents should disregard any lump sum payments to a widow, widower, or partner of service personnel as a result of their partner having been killed in action.
10. The issue of how any debts incurred by applicants are treated will require to be considered by Administering Agents. Secondary loans incurred for housing purposes, essential transport costs, or to meet care and support costs may be taken into account.
11. In certain circumstances where a couple have applied to the scheme certain issues may impact on the maximum level of mortgage that they can obtain, for example an adverse credit score. Where the Decision in Principle or Key Facts Illustration in these cases is lower than the rule of thumb, Administering Agents may consider additional written evidence from the applicant's independent financial advisor that a) provides information on what the issue(s) are that have affected either the Decision in Principle or Key Facts Illustration; and b) confirmation that the applicant is able (taking into account any other existing loan and payment commitments) to sustain the mortgage payments as well as all other associated housing related costs. If the Administering Agent is content with this additional information provided it may provide flexibility for the application to be eligible to participate in the scheme. It should be noted that it is not an automatic acceptance to the scheme and contribution cannot be reduced just to allow clients to get full 40% equity stake from Scottish Ministers. Justification/evidence would be required.
12. Where an applicant with particular needs will be using their benefit entitlement to support a mortgage, a multiplier will be an inappropriate measure. The assessment should therefore be conducted using knowledge of the benefit entitlements of disabled people, reference to which is made in paragraph 13 below.
13. It is also essential that applicants are fully aware of their housing related costs and the financial responsibilities that come with home ownership. Administering Agents should encourage applicants to seek independent legal and financial advice on all housing related costs at the earliest possible stage.
14. Where households have, of necessity, exceptional housing and living costs which can be evidenced, greater flexibility will be required when operating the Open Market Shared Equity Scheme. This may result in lower levels of equity stake requiring to be considered (to a minimum of 51 per cent). There are no set formulas for identifying additional costs but they should be capable of being evidenced by professional supporters or other sources. A means test and affordability exercise consistent with that for other applicants should be undertaken. In addition, in exceptional cases an applicant with a severe disability may have received a compensation payment as a result of an injury. Where the applicant provides evidence that they need to keep funds aside to meet additional living costs (e.g. the cost of employing a carer), such compensation payments should not affect a buyer's eligibility for the scheme and the applicant may not need to meet the standard requirement to put 90% of their savings over £5,000 towards the purchase of a property. This will apply particularly where applicants are aged 60 or over.
15. The complexity of mortgages repaid solely through benefits means that Administering Agents should consider the need to employ specialist assistance from an organisation experienced in the issues facing people with particular needs when buying a home.
Flexibility under the Open Market Shared Equity Scheme
16. If a person with particular needs is seeking any flexibility from the scheme rules around a) the minimum contribution they need to make to the scheme; and/or b) purchasing a home above the published threshold prices, they will be required to provide written evidence to the administering agent administering the scheme to support this. Further evidence on each of these is provided below.
Flexibility to Lower Minimum Contribution to 51%
17. While the Scottish Government can in certain limited circumstances agree to reduce the minimum equity stake to as low as 51%, this can only apply where evidence is provided that (i) a housing market is particularly pressured or (ii) where a person with particular needs arising from a disability has identifiable additional housing costs (for example a live-in carer). If evidence of either of these two applicable circumstances cannot be provided, the applicant must contribute a minimum of 60% of the purchase price.
Exception to allow purchase of a home above published threshold prices
19. The Open Market Shared Equity Scheme has threshold prices within which all applicants must buy a home. Eligible applicants cannot buy a home for a price that is above the threshold prices set out in their Passport Letter. There is some flexibility around allowing a person to buy a home that is above the published threshold prices.
Applying the Flexibility to the Threshold Prices
20. The Administering Agent will require evidence that the applicant is a person with particular housing needs arising from a disability (if this evidence has not already been provided). If this evidence is provided, the Administering Agent will consider any specific request from an eligible applicant to buy a home that is above the maximum threshold prices for the scheme.
21. In providing flexibility to the maximum threshold prices, it needs to be highlighted to the applicant at an early stage that while the Scottish Government is prepared to be flexible around the threshold prices, it needs to take into account the individual person's need as well as other available houses that are either in the area or surrounding area that could be suitable. We would expect agents to undertake a quick search on Rightmove/GSPC/ESPC to see if there are any suitable properties that meet the specific needs of the eligible buyer within the threshold prices.
22. The Scottish Government will also look at the level of flexibility sought by the applicant (i.e. homes that are reasonably above the threshold prices will be considered but homes that are significantly above the threshold prices are not likely to be considered.
23. Applicants should be aware that they will still be required to purchase a minimum of 60% of the purchase price even if they are seeking to purchase a home that is above the threshold price for the scheme. For example if the maximum threshold price was £165,000 and the Scottish Government agreed for the eligible applicant to purchase a home for £170,000 – the applicant's contribution still needs to be above the 60% minimum requirement.
24. The home must be suitable for the applicant's particular needs i.e. it must satisfy the supporting evidence provided by the applicant along with their application form e.g. if an occupational therapist report suggested that a person with particular housing needs arising from a disability lived in a property that was a) near a hospital and b) on one level with no stairs, then we would expect the property to meet these recommendations. Requests for flexibility because the house is near local shops or near a place of work should not be regarded as acceptable reasons.
25. Applicants who are aged 60 and over who wish to apply for support from the scheme without mortgage finance, are considered as a priority access group providing they fulfil the following criteria:
- Applicants must demonstrate a housing need to move which must include at least one of the following*
- Under-occupation – the applicant is living in property which is too large and needs to downsize
- The applicant's existing property is no longer suitable to meet their needs – (e.g. they can no longer manage the stairs)
- Support – the applicant needs to move closer to family or friends that provide care and support
- Living in private rented accommodation
*Please note this list is not exhaustive and other circumstances can be considered as evidence of housing need.
- Joint applications will be eligible (without the requirement for a mortgage) from couples where one of the applicants is aged 60 or over.
- Joint applications with an applicant aged 60 or over and their offspring under the age of 60 will be eligible, without the requirement for a mortgage, if the applicants can demonstrate that the offspring has a disability that affects their housing needs or ability to sustain a sole occupancy.
26. Evidence of the sale price achieved from a previous house sale or of the formal offer accepted should be requested as part of the assessment process. Reasonable expenses such as legal, estate agency fees and removal costs will be regarded as eligible deductions from the sales proceeds prior to determining the equity stake.
27. The following table illustrates how the grant eligibility criteria described above would apply to four households seeking to purchase under the Open Market Shared Equity Scheme in areas with different maximum price ceilings. These are the procedures that Administering Agents must follow when assessing applications to the scheme.
|Local area||Perth & Kinross||Inverclyde||East Lothian||South Ayrshire|
|Household type||Single income||Single income||Joint income||Joint income|
|Household size||1 person||1 person||3 person||4 person|
|Passport application stage|
|Maximum price ceiling||£120,000||£70,000||£135,000||£130,000|
|Income per annum||£23,000||£15,000||£38,000||£32,000|
|Maximum mortgage (1)||£69,000||£45,000||£95,000||£80,000|
|Financial contribution (2)||£74,000||£45,000||£125,000||£92,000|
|Proposed equity stake % (3)||61.67%||64.29%||92.59%||70.77%|
|Passport issued (Yes/ No) (4)||Yes||Yes||No||Yes|
|Property purchase stage|
|Price of chosen property (5)||£110,000||£69,000||£129,000|
|Confirmed mortgage (6)||£69,000||£45,000||£80,000|
|Confirmed available savings||£5,000||£0||£12,000|
|Actual equity stake % (7)||67.27%||65.22%||71.32%|
|Eligible for assistance||Yes||Yes||Yes|
|Grant required (8)||£36,003||£24,000||£37,000|
|Scottish Ministers' equity stake % (9)||32.73%||34.78%||28.68%|
1. The 'maximum mortgage' is calculated by multiplying the applicant's income with the appropriate lending multiplier norm.
2. The 'financial contribution' is calculated by totalling the 'maximum mortgage' and the 'available savings' amounts. Having satisfied the Administering Agent of the maximum level of funds the applicant can raise, it becomes self-evident whether the applicant satisfies entry into the scheme financially and the maximum level of equity they can afford to purchase (see below).
3. The proposed equity stake percentage – expressed to two decimal points – is the 'financial contribution' expressed as a percentage of the local maximum price ceiling.
4. An applicant receives a 'passport' to look for a property if the proposed equity stake percentage is at or below 90 per cent. The applicant would then search for property within a defined price bracket specified – given that they are normally expected to take an equity stake of between 60 and 90 per cent of the value of a property.
Using case number 1 for illustrative purposes, the applicant's passport letter would specify that they are now able to look for a property that is valued between £81,250 and £100,000. This is because a purchase within this price bracket would mean that the applicant would be taking an equity stake percentage that was within the agreed parameters of the scheme, based on their 'financial contribution' at passport application stage. (A purchase at over £100,000 would mean that applicants were being subsidised to buy a more expensive house than the 'going rate' for first time buyers (taken as the first quartile). A purchase under £81,250 would mean that an applicant could afford to pay over 80 per cent and therefore does not qualify.)
5. The value of (or price to be offered for) the chosen property cannot exceed the local maximum price ceiling.
6. If the 'confirmed mortgage' exceeds the 'maximum mortgage' at passport application stage, the applicant must provide firm evidence that they have been working with an Independent Financial Adviser. In the event that the 'confirmed mortgage' is less than that assumed at passport application stage, the applicant must provide justification as to the reasons why.
7. The 'actual equity stake %' – expressed to two decimal points – is calculated by expressing the 'confirmed contribution' as a percentage of the 'price of chosen property'.
8. The 'grant required' is the difference between the 'price of chosen property' and the 'confirmed contribution'. The figures shown exclude the Administering Agent's agreed administrative costs, which would be included in practice.
9. The 'Scottish Ministers' equity stake %' – expressed to two decimal points – is calculated by expressing the 'grant required' as a percentage of the 'price of chosen property'. When calculating the 'Scottish Ministers' equity stake %' the 'grant required' figure must exclude the Administering Agent's agreed administrative costs.