Save for a HomeBuy deposit Rachel Terry Sam Lister supported by Chartered Institute of Housing
The Chartered Institute of Housing The Chartered Institute of Housing (CIH) is the professional body for people involved in housing and communities. We are a registered charity and not-for-profit organisation. We have a diverse and growing membership of over 21,000 people both in the public and private sectors living and working in over 20 countries on five continents across the world. We exist to maximise the contribution that housing professionals make to the wellbeing of communities. Chartered Institute of Housing, Octavia House, Westwood Way, Coventry, CV4 8JP Tel: 024 7685 1700 Email: customer.services@cih.org Website: www.cih.org The Housing Corporation The Housing Corporation is the government agency that funds new affordable homes and regulates housing associations in England. It invests in social landlords and other bodies which now provide over two million affordable homes for people in need. The Housing Corporation has an important role in promoting sustainable communities and good practice. Housing Corporation, 149 Tottenham Court Road, London W1T 7BN Tel: 0845 230 7000 Email: enquiries@housingcorp.gsx.gov.uk Website: www.housingcorp.gov.uk Save for a HomeBuy deposit Produced by CIH and funded by the Housing Corporation Written by Rachel Terry and Sam Lister Original research by: Rachel Terry Chartered Institute of Housing and Housing Corporation 2008 Design and production by: Jeremy Spencer Cover photo: Fantasista/fotolia.co.uk While all reasonable care and attention has been taken in compiling this publication, the publishers regret that they cannot assume responsibility for any error or omissions that it contains. This publication has been supported by the Housing Corporation; the contents do not necessarily represent the views of the Corporation. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by other means, electronic, mechanical, photocopying, recording or otherwise without prior permission of the publishers. 2
Contents Executive summary 4 Background to Save for a HomeBuy Deposit scheme 6 Proposals for a Save for a HomeBuy Deposit scheme 8 1 The development of the Save for a HomeBuy Deposit scheme 8 2 The concept of notional equity 8 3 Key features of the Save for a HomeBuy Deposit scheme 9 4 How landlords would pay for the matched payment 10 5 Promoting and running the scheme 10 6 The advantages of a Save for a HomeBuy Deposit scheme 11 7 The difficulties with a Save for a HomeBuy Deposit scheme 12 8 Implications for government 12 9 Next steps 13 Appendix 1: Examples: Save for a HomeBuy Deposit scheme 14 Appendix 2: Estimating take-up of the scheme 17 3
Executive summary The Save for a HomeBuy Deposit scheme is a new policy proposal from CIH. The scheme is designed to promote financial inclusion and sustainability of ownership amongst lower income groups. It also helps to achieve a greater degree of parity between groups of social housing tenants that currently have different home purchase rights. The scheme has particular relevance during the credit crunch as it provides an option for aspirational owners who wish to defer purchase until the market is more stable. It should also help promote more responsible and rational behaviour amongst aspiring owners once confidence in the market returns. Over the past decade, the rate of growth in house prices has far outstripped the growth in earnings of those in low or modest paid work. This has been true in all English regions not just in London and the South. In part, this rapid growth in house prices has been fuelled and sustained by a wealth cascade whereby housing equity is transferred to prospective first time buyers from their parents to help them get on the property ladder. House prices have risen to levels that require most first-time buyers to find a significant deposit. This means that the prospects of achieving ownership for those that are outside the wealth cascade such as the children of social housing tenants will become increasingly remote. For those who aspire to home ownership but whose capacity to sustain it is marginal, the longterm trend in house prices has created additional pressure to enter the property ladder. They fear that ownership may move rapidly beyond their reach forever. This pressure has undoubtedly led to some to enter ownership which they will find difficult to sustain. Despite recent and predicted further falls in house prices as a result of the credit crunch, it seems likely that when the market starts to recover, there will still be a significant affordability problem for people on modest incomes in all the regions. This is because of the substantial growth in house prices over the past ten years. The credit crisis has also exposed the vulnerability of those who are the most marginal home owners and is reflected in the rising repossession rates. Those who are at the greatest risk will be those who entered ownership in the last five years and were then at the margins of affordability. Many of these recent new owners will come under pressure when the initial discount period of their mortgage comes to an end. Outside the wealth cascade, inequalities in the opportunity to become a home owner also exist between different groups of social housing tenants with respect to their purchase rights (e.g. right to buy vs. right to acquire). This suggests a case for restructuring current low cost home ownership schemes to achieve more equitable outcomes. More controversially, perhaps, there is also a degree of unfairness as to the way in which social landlords and their tenants share the benefits arising from government grant that was used to build their home. Social landlords finance the purchase of a new home within the lifetime of a tenancy (if it runs for 30-50 years) from the tenant s rent payments. However, the tenant does not receive any equity share in return for their rent. Arguably, a fairer system would be one which allows the tenant to share in the benefits of government subsidy which has been invested in their home and which they will help their landlord acquire. Redistribution could be justified if it helps achieve the government s wider policy objectives for investing in social housing which include improving social mobility and the life chances of tenants. 4
The Save for a HomeBuy Deposit scheme is a new policy proposal from CIH. It is designed to redress at least in part the relative inequalities outlined above that exist between the different groups of home buyers and between social housing tenants and their landlords. It seeks to achieve this in a way that will promote a rational approach to entering ownership and which is likely to result in more sustainable outcomes.. It was developed in conjunction with the Save with Rent Saving Gateway scheme which rewards small savings for those whose incomes are so low that they have no realistic prospect to enter home ownership in the immediate future. The Save for a HomeBuy Deposit scheme is intended for social tenants who are better off and aspire to home ownership but who could not afford full ownership without some financial assistance. It is also intended to help their adult children living at home to enter into low cost home ownership with greater confidence that their move will be sustainable. This scheme has emerged from a research study for the Chartered Institute of Housing (CIH), 1 funded by the Housing Corporation. The Save for a HomeBuy Deposit scheme will help tenants make the step up into home ownership whilst meeting the twin objectives of improving fairness and sustainability through two key design features: tenants saving for a deposit are entitled to a payment from their landlord, which matches the amount they have saved. This payment is capped at the value of the equity they have notionally earned through their rent payments. The matched payment can only be used when exercising one of their HomeBuy options and will help to provide a step into home ownership; in order to qualify for a matched payment, the tenant must establish a pattern of saving where the amount saved is equivalent to the additional costs of home ownership. This will help the tenant to make a more informed judgement as whether their ownership will be sustainable or whether it would be better to defer buying in the immediate future. CIH believes that the Save for a HomeBuy Deposit scheme will help the government achieve a number of its objectives for housing and communities. A number of landlords involved in the development of the scheme have said that they would interest in piloting it. However, it would not be possible to run a pilot until the government has approved changes which would allow tenants to receive additional subsidy and relaxed restrictions on landlords as to the use of capital receipts. CIH will ask the government to consider these changes so that discussions with landlords and tenants on the detailed issues can take place that would allow the scheme to be piloted. 1 The Housing Corporation Innovation and Good Practice study to devise an equity stakes scheme for tenants by Rachel Terry (CIH/Housing Corporation, November 2007). The study report provides references for documents referred to in this paper. 5
Background to Save for a HomeBuy Deposit The Housing Green Paper 2 published in July 2007 recognised the growing affordability problem for people on modest incomes who aspire to home ownership. Over the previous decade, house prices consistently rose faster than earnings in all English regions. This resulted in, on average, house prices of the most affordable homes that were more than seven times lower quartile earnings. This was not just a problem in the south: the ratio between earnings and house prices has also risen sharply in the north of England in the period since 1997. The Green Paper noted that: rising house prices create pressure for first-time buyers. Nearly 40% of first-time buyers aged under 30 now depend on help from family or friends to get them started on the housing ladder. In London an assisted young first-time buyer had an average deposit of 57,000 compared to 12,500 for unassisted young first-time buyers. This pattern had also been identified by Professor John Hills in his review for Communities and Local Government of the role of social housing. In his report 3 he noted that as the number of elderly owners grows, there is the prospect of housing inheritances creating a wealth cascade that supports house prices that would be hard to sustain on the basis of mortgages alone. If this occurs, it will make the position of those outside the cascade the children and grandchildren of tenants increasingly difficult. The prospect of house prices that are rapidly accelerating away beyond the reach of those on modest incomes can create the situation where aspiring home owners are panicked into buying in desperation to get a foot on the property ladder. As recent changes in the housing market have brought into focus, these are the home owners who are at greatest risk of losing their homes during an economic downturn especially when any initial discount period of their mortgage comes to an end (usually after two or three years). The risks to sustainability are even greater for former social housing tenants who, being unable to benefit from the wealth cascade have no substantial equity to fall back on. John Hills also identified inequalities between social housing tenants who have different purchase rights open to them (e.g. right to buy or right to acquire). These different rights raised problems of equity, complexity, and could act as a barrier to mobility within the stock. He suggested that a radical option would be to revise equity purchase rights so that they applied across social housing on common terms. The generosity of these terms would depend on the policy makers objectives: simply offering a more flexible alternative to the value of remaining as a social tenant might imply less generous terms than historic right to buy discounts; positive encouragement might imply systems where any equity purchase was matched with a grant of additional equity in a more generous way than implied by neutrality. In addition to the inequalities that exist between different groups of prospective home owners, there is also a degree of unfairness as to the way in which landlords and tenants share the benefits of government subsidy. The payment of grant enables the landlord to finance the purchase of a home within the lifetime of a tenancy (if it runs for 30-50 years) from the tenant s rent payments. However, in return, the tenant does not acquire any share in the equity although they do, of course, benefit from sub-market rents. A redistribution of the benefits that arise from subsidy can be justified if it helps the government achieve its core policy objectives for investing in social housing. The Hill s Review identified the key objective for social housing to be to improve the life-chances and social mobility of tenants. Providing tenants with the opportunity to acquire an asset and build their financial capacity through home ownership in ways that build sustainability help achieve this goal. 2 (2007), Homes for the future: more affordable, more sustainable, Department for Communities and Local Government, (Cm 7191), published by The Stationery Office. 3 (2007) Ends and Means: The future roles of social housing in England, John Hills, CASE/CLG/ESRC. 6
Some landlords may consider that redistributing the benefits from grant interferes with their business model (i.e. accepting risk in exchange for grant) and this cannot be justified on policy grounds alone. However, where the tenant receives the benefit in the form of a discount rather than a cash payment the landlord receives a lower receipt rather than incurring an additional cost. Reduced sale proceeds do not equate to increased costs because most landlords do not factor capital receipts into their business plans. This does not apply where the tenant chooses Open Market HomeBuy (which does require a cash payment) and therefore under our Save for HomeBuy Deposit scheme this option would be at the discretion of the landlord. 7
Proposals for a Save for a HomeBuy Deposit scheme 1 The development of the Save for a HomeBuy Deposit scheme The development of the proposal arises from a recent study supported by the Housing Corporation which was carried out to find an affordable way to give tenants some benefit from the increases in value of their home. It is designed to help improve the life chances of social housing tenants and so is consistent with the central aim of social housing reform identified by the Hills Review. The original proposal had two objectives: to help tenants acquire financial assets, i.e. to address the asset based welfare agenda; and/or to help tenants, or their children, into home ownership. Having identified that there is no simple and straightforward way that both these objectives could be achieved in a single scheme; the study developed two separate schemes with as many common features as possible. The Save with Rent Saving Gateway scheme 4 rewards small savings for tenants whose incomes are so low that they have no realistic prospect of being able to afford home ownership in the immediate future. The Save for a HomeBuy Deposit scheme is intended for tenants who are better off, and might be able to move into low-cost home ownership with a little help but who cannot afford to purchase even with a right to buy discount. It is also intended for adult children living with tenants, for whom it may make the difference between affording low-cost home ownership and looking to social housing to provide them with the opportunity to live independently. In both cases, it eases the pressure on the limited supply of social housing. As part of the original research method an initial scheme proposal was considered by an expert focus group of landlords and tenants. A key design concept to emerge from this group was that the scheme should be designed to create a stepping stone for tenants that would help them get used to the financial commitment of low cost home ownership before they actually become owners. 2 The concept of notional equity The Save for a HomeBuy Deposit scheme is based on the concept of notional equity which has been earned by tenants through their rent payments for those who have a realistic aspiration for home ownership. The scheme is based on the concept of notional equity, rather than real equity in the home, so that the additional costs of home ownership and the responsibility are deferred until the tenant has saved for a deposit and can demonstrate that they can afford the extra cost of owning, compared with renting. Most social rented housing schemes have the benefit of grant or cross-subsidy to reduce the borrowing required to finance them over 30-50 years. Tenants typically pay rent sufficient for their landlord to pay off loans supporting the initial purchase of the property over the 30-50 year period. An element of rent can therefore be construed as a contribution to the landlord s purchase of equity in the property. This suggests that tenants could be allocated an amount of notional equity each year, to reflect a sharing of that element of rent for the landlord s loan repayment. 4 (2008) Save with Rent: how social landlords can help deliver the Saving Gateway, Rachel Terry and Sam Lister, CIH/Housing Corporation. 8
The scheme is based on the assumption that it is reasonable for the tenant to benefit from approximately 25% of the landlord s loan repayments through the rent that they pay, in the form of notional equity. The landlord needs the larger (75%) share to reflect: the rent restructuring regime, that takes control of rent setting away from the landlord, their ownership and management risks, and the landlord s funding arrangements. It is proposed that notional equity is earned each year and that the landlord keeps a record of the amount earned for tenants registering with the scheme. The value of notional equity would be realised only through the Save for a HomeBuy Deposit scheme. It would determine the amount of savings the landlord would match as a discount for home ownership. Tenants saving under the scheme would be rewarded with the matched funding when they finalise their home ownership arrangements. Although the concept of linking notional equity to the landlord s loan repayments might appear simple, in practice it would be difficult and inconsistent between landlords. There is no straightforward formula for matching tenant contributions to loan repayments from rent with their landlord s expenditure on this. A proxy match of 2% per annum of the loan repayments for 50 years was therefore adopted. The tenant s notional equity percentage, based on a 25% share with the landlord, would then be 1 2% per annum, for each full year as a social housing tenant. It is proposed that the valuation of notional equity is determined by the (pre-discount) average RTB sale values in the region. This could be refined to reflect the different average RTB sale values in the region for one, two, three and four bed-roomed and larger properties. If the tenant has moved from one social tenancy to another, the total period in social rented housing would qualify for the calculation of notional equity (as for a RTB discount). 3 Key features of the Save for a HomeBuy Deposit scheme The Save for a Homebuy Deposit scheme has been developed to help those social housing tenants that have a realistic aspiration to home ownership, to get used to paying the cost of home ownership each month before they become home owners. The scheme would enable those who have not got family or friends who could support them financially, to save for a deposit in a more advantageous way than is currently available. It would also enable those social tenants with adult children at home to help them save for a deposit for house purchase. The landlord would encourage those tenants who would like to buy, but cannot quite afford it, to make regular savings each month (through an account provided by a financial institution of their own choice) towards a deposit. Over time, the tenant would increase the amount of their regular saving until the total of their monthly saving plus rent would be equal to the cost of the low cost home ownership option they want to pursue. This should persuade tenants to defer purchasing their home under Social HomeBuy or RTB/RTA, or moving under Open Market HomeBuy, until they could demonstrate that they could afford to do so. The landlord would match the tenant s savings when the tenant moves into home ownership. The maximum level of savings that would be matched would be determined by the value of the tenant s accumulated notional equity. The matched payment would be made in the form of a larger discount than would otherwise be available for Social HomeBuy and RTB/RTA or as a cash subsidy for Open Market HomeBuy. 9
4 How landlords would pay for the matched payment It is proposed that local authority landlords would fund the matched payment for Open Market HomeBuy purchases under the scheme from RTB receipts (that would otherwise go to government for pooling). Housing associations would use net sale proceeds out of the Recycled Capital Grant Fund. A property vacated under the scheme could be sold on the open market, with the sale proceeds providing a fund for matched payments for future Open Market HomeBuy purchases by tenants, if that was shown to be necessary. The government would need to agree that the net sale proceeds after the costs of sale and repayment of debt on the property could be applied to the scheme. Landlords would have to be comfortable that they could meet the potential matched funding commitments before launching the scheme. It would be possible to limit the scheme: either to Social HomeBuy and RTB/RTA purchases only, or to Open Market HomeBuy purchases only so that properties would be vacated. A number of landlords involved in the development of the Save for a HomeBuy Deposit scheme have said they would consider piloting it if the necessary changes in policy were made. CIH believes these changes can be justified because the scheme will help the government meet its objectives for housing and communities because it will: promote financial inclusion and independence by providing an incentive to develop a habit of saving improve the social mobility and life chances of social housing residents who are outside the wealth cascade by helping them acquire a financial asset help tenants and non-householders achieve their aspirations for home ownership promote ownership which is more sustainable in the long-term by providing additional financial support to the most marginal home owners an incentive to aspiring owners to defer purchase during the credit crisis and until such time as they can demonstrate that they can afford it. 5 Promoting and running the scheme A landlord choosing to offer a Save for a HomeBuy Deposit scheme would draw up a promotional leaflet for tenants, targeted at those with a realistic aspiration for home ownership. It would set out how the tenant s regular savings could be matched when the tenant becomes a home owner. The matched payment could be made to purchase their current home under the Social HomeBuy or RTB/RTA schemes, or a different one under Open Market HomeBuy. The landlord would arrange for tenants wishing to join the scheme to have an interview with a money adviser. This would ensure that the tenant understands the costs and responsibilities of home ownership, has a realistic aspiration to become a home owner and understands the implications of a change in circumstances (for example, unemployment or the birth of a child). Having decided to join the scheme, the tenant would open a savings account with a savings institution of their choice (if they do not already have a suitable savings account). They would register details of their account with the landlord. Having set out the criteria for notional equity and matched savings, the landlord would have nothing more to do under the scheme, except to produce statements of the amount of notional equity (when requested by the tenant, and not more often than annually, unless the tenant has started the home buying process), and then later to make the matched payment. The landlord would not have anything to do with the tenant s arrangements to save. The tenant would have to demonstrate to the landlord that they could afford their preferred home ownership solution, before the landlord would be obliged to make the matched payment. The tenant would have to show regular payments into their savings account for each of the most 10
recent 12 months. Each of these payments, together with their rent, would need to cover the projected mortgage costs, insurance costs (including insuring against the loss of income) and an allowance for maintenance and repairs of their planned home ownership. See Appendix 1 for some examples. The landlord would check that the recent monthly rent plus savings would adequately cover the monthly payments needed for the preferred home ownership solution. If the landlord could demonstrate that the amount was inadequate, and the tenant was unwilling or unable to switch to a more affordable home ownership solution, the tenant would not be eligible for matched savings for at least another year, while they increase their savings to an adequate level over at least twelve consecutive months. The most recent average RTB sale value figure for the region would be used to calculate the value of the tenant s notional equity when the tenant is about to move into home ownership. This would be the maximum amount of tenant s savings that would be matched. Matched savings payments by the landlord for the tenant to purchase under Open Market HomeBuy would be paid directly to the solicitor handling the house purchase. For a purchase by the tenant of their current home, the landlord would increase the discount by the matched savings amount. Tenants who have already purchased part of their property under Social HomeBuy would not be eligible to participate in the scheme, as they would have made the transition to home ownership already. Joint tenants would share eligibility for the scheme. It is proposed that all tenants in a joint tenancy would have a joint savings account for demonstrating the eligibility for matched saving, or it could be in the name of just one tenant. Adult children living at home in a social tenancy would be encouraged to participate by opening a savings account and making regular savings towards a deposit, if they aspire realistically to home ownership. Their parent (i.e. the tenant) could, if they wished, assign to the adult child the notional equity for which the parent would have qualified provided the child still lives in the family home. The adult child would then earn matched funding based on their own savings up to the limit of their parent s notional equity. An estimate of the possible take-up of the Save for a HomeBuy Deposit scheme is made in Appendix 2. This suggests that about 1% of social housing tenants might take-up the HomeBuy Deposit scheme. 6 The advantages of a Save for a HomeBuy Deposit scheme The scheme helps to demonstrate to tenants the financial implications of home ownership. Matched payments are made only after the tenant has saved regularly, for at least a year at the level sufficient to bridge the gap between their rent and the expenses they would have to meet as a home owner. The scheme would act as a filter mechanism, by preventing those who wish to benefit from a matched payment from becoming a low cost home owner until such time as their income and financial management is sufficient to be able to sustain it. The scheme would provide encouragement and support to tenants to improve their financial management skills and meet their housing aspirations. It therefore contributes towards the vision for social housing advanced by the Hills Review in which it acts a springboard for social advancement and improved life chances. The scheme is designed so that the administration involved is kept to a minimum making it straightforward and easy to implement. By paying the matched funding as an increased discount on purchase of the property, there would be no capital gains tax liability. 11
7 The difficulties with a Save for a HomeBuy Deposit scheme Landlords would face a conflict of resources when deciding whether or not to offer the scheme. The amounts required to help ensure sustainable home ownership would be at the expense of capital works on the existing stock or on new supply. Payments by the landlord under the scheme for a move into Open Market HomeBuy would be analogous to previous Cash/Tenant Incentive Scheme payments, targeted at tenants to move into home ownership, and justified by the freeing up of an existing social tenancy. Although funded in the past by government, there is currently no government funding for the Cash Incentive Scheme. Some local authorities are offering a cash incentive scheme using their own resources. It is anticipated that there would be a few cases under the scheme where tenants would help their adult children into home ownership; in such cases there would be no vacated property. However, it would help take some pressure off waiting lists and could be justified on the basis that it would help achieve the wider objectives of improving social mobility and life chances. A similar justification could be made in the of case RTB/RTA or Social HomeBuy although a social tenancy is lost and under the existing rules local authorities can only reinvest a proportion of the capital receipt in new housing. Landlords that are charities would have to be certain that the scheme would be seen as having a charitable purpose, so that it could be available for their tenants. A number of charitable housing associations may not have capital receipts available to fund the scheme, although over time the scheme would itself generate capital receipts for them from the Social HomeBuy and RTA purchases. Any incentive scheme of this kind inevitably carries a deadweight cost. Some of those receiving payments under the scheme would be able to move into home ownership without the matched savings incentive. So the spending on those people would not buy the landlord any additional benefit. This would be minimised by landlords encouraging tenants to go ahead with home ownership, where they could demonstrate that they could afford to straight away. The risk that those that could afford to move into ownership might defer to build up their discount is reduced by capping it at the lower of either the tenant s notional equity or the maximum discount available under the RTB. Given that those who aspire to home ownership are usually motivated to enter it at the earliest possible opportunity it seems likely that the deadweight cost will be minimal. 8 Implications for government The HomeBuy Deposit scheme would further government policy in helping tenants into home ownership in a practical way. The scheme would help ensure the sustainability of home ownership for tenants moving into owner occupation. The National Audit Office has calculated that the amount of government grant to provide a low cost home ownership home could be less than half that of providing a social rented home. 5 Even with the additional subsidy required for matched payments helping social sector tenants and their children to become home owners represents good value for government because it helps prevent the existing stock from becoming silted up. However, in the case of Open Market HomeBuy capital receipts would have to be spent to meet the matched payment (because it requires a cash payment instead of a discount) although this can be justified because it would release a social rented unit at a fraction of the cost of building a new one. 5 (2006) A Foot on the Ladder: Low Cost Home Ownership Assistance, National Audit Office, TSO. 12
The Treasury will be concerned that the amount of help that goes to beneficiaries who would have entered ownership without assistance (the deadweight cost ) is kept to a minimum. However, this is unlikely to be significant as tenants that could afford home ownership without the matched payment are likely to go ahead and purchase. By joining the scheme, there would be a delay of at least 12 months with the risk of higher house prices then. The scheme would cause a conflict in terms of priority for resources. This is because the capital receipts generated from tenants purchasing, less the amount of matched saving required from the landlord, would be insufficient for the landlord to purchase a similar number of new properties for rent. However, given that the total subsidy required to assist the tenant into ownership will be considerably less than that required to build a new social rented home then it still represents good value for money. If local authorities choose to implement the scheme, there should be more RTB receipts for pooling, but the receipts would be less than on sales outside the scheme. The scheme would be making double subsidy available for tenants. This would have to be cleared with government. The benefits would be that: more tenants would be able to take-up Social HomeBuy and Open Market HomeBuy after 2 or 3 years of saving ; and purchases by tenants under the RTB or RTA are likely to be more sustainable than in the past, potentially saving Housing Benefit costs for temporary accommodation following repossession. If 1% of social housing tenants in England were to take up the Save for a HomeBuy Deposit scheme and save for 3 years, using the examples in Appendix 1 for 25% Social HomeBuy and Open Market HomeBuy, the matched funding required would be about 300 million to create about 25,000 Social HomeBuy purchases and 15,000 social housing vacancies. The Social HomeBuy purchases would generate capital receipts of about 830 million. 9 Next steps The Save for a HomeBuy Deposit scheme would require extensive consultation and market research with tenants to ensure that the administrative costs would be justified by the likely takeup. It is recognised that the proposals here are just the starting point for many discussions on detailed issues. If there are social housing landlords keen to pilot the scheme, CIH could work with them on further development. Implementing the scheme would also require some changes in government policy which would need to be approved: the acceptance that tenants who benefit from the scheme could receive double subsidy; and existing capital receipts could be spent on achieving Open Market HomeBuy purchases under the scheme. 13
Appendix 1: Examples: Save for a HomeBuy Deposit scheme Assumptions used in examples: Average RTB sale value in London 150,000 Average RTB sale value in London 3 years later 170,000 Average RTB sale value in London 5 years later 185,000 Value of Open Market HomeBuy property 160,000 Value of Open Market HomeBuy property 3 years later 185,000 Rent 85 per week = 370 per month Tenant has been a tenant for 10 years at start of scheme. Social HomeBuy & RTA maximum discount 16,000 Home ownership mortgage on annuity basis for 25 years at 7 3 4% So Notional equity at start of scheme = 10 (years as tenant) x 1 2% x 150,000 (av RTB sale value in London) = 7,500 3 years later notional equity = 13 x 1 2% x 170,000 = 11,050 5 years later notional equity = 15 x 1 2% x 185,000 = 13,875 25% Social HomeBuy To purchase a 25% stake, they would have to pay 150,000 x 25% less the discount of 16,000 x 25% = 33,500 Calculation on joining Scheme: Assuming tenant seeks mortgage of 33,500 this would cost about 250 per month. In addition they would have insurances of say 40 per month, an allowance for maintenance and repairs of say 50 a month and rent on the remaining 75% of 250 per month. ie projected Social HomeBuy outgoings of 590 per month. This would be 220 per month more than they are currently paying in rent. In the first year of the Save for a HomeBuy Deposit scheme they might save 70 a month = 840 In the second year of the Save for a HomeBuy Deposit scheme they might save 150 a month = 1,800 In the third year of the Save for a HomeBuy Deposit scheme they might save 220 a month = 2,640. At the end of year 3: They have demonstrated that they could afford the cost of the 25% purchase (at the price 3 years before). Their total savings would then be 5,280 + interest earned. Their notional equity would be 11,050 (see assumptions above). The matched savings that would be paid by the landlord in the form of increased discount would be 5,280 They could then purchase the 25% stake for 170,000 x 25% less the discount of 16,000 x 25% less the matched saving discount of 5,280 = 33,220. This could be financed by a 33,220 mortgage 14
75% Open Market HomeBuy To purchase a property in the market under the Open Market HomeBuy scheme with a 25% equity loan would cost 160,000 x 75% = 120,000 Calculation on joining Scheme: Assuming tenant seeks mortgage of 120,000 this would cost about 900 per month. In addition they would have insurances of say 40 per month and an allowance for maintenance and repairs of say 50 a month ie projected home ownership outgoings of 990 per month. This would be 620 per month more than they are currently paying in rent. In the first year of the Save for a HomeBuy Deposit scheme they might save 150 a month = 1,800 In the second year of the Save for a HomeBuy Deposit scheme they might save 400 a month = 4,800 In the third year of the Save for a HomeBuy Deposit scheme they might save 620 a month = 7,440. At the end of year 3: They have demonstrated that they could afford the cost of Open Market HomeBuy (at the price 3 years before). Their total savings would then be 14,040 + interest earned. Their notional equity would be 11,050 (see assumptions above). The matched savings that would be paid by the landlord (to the solicitor acting for the tenant for the purchase) would be 11,050 ie matching capped at their notional equity. They could then purchase the Open Market HomeBuy property with 25% equity loan for 185,000 x 75% less the matched savings of 11,050 = 127,700. This could be financed by 120,000 mortgage + 7,700 of the tenant s savings. Right to Acquire purchase To purchase the property under RTA, they would have to pay 150,000 less the discount of 16,000 = 134,000 Calculation on joining Scheme: Assuming tenant seeks mortgage of 134,000 this would cost about 1,000 per month. In addition they would have insurances of say 40 per month and an allowance for maintenance and repairs of say 50 a month i.e. projected home ownership outgoings of 1,090 per month. This would be 720 per month more than they are currently paying in rent. In the first year of the Save for a HomeBuy Deposit scheme they might save 100 a month = 1,200 In the second year of the scheme they might save 250 a month = 3,000 In the third year of the scheme they might save 400 a month = 4,800 In the fourth year of the scheme they might save 600 a month = 7,200. In the fifth year of the scheme they might save 720 a month = 8,640. 15
At the end of year 5: They have demonstrated that they could afford the cost of the RTA purchase (at the price 5 years before). Their total savings would then be 24,840 + interest earned. Their notional equity would be 13,875 (see assumptions above). The matched savings that would be paid by the landlord in the form of increased discount would be 13,875 i.e. matching capped at their notional equity. They could then purchase the property under RTA for 185,000 less the discount of 16,000 less the matched saving discount of 13,875 = 155,125 This could be financed by 134,000 mortgage + 21,125 of the tenant s savings. 16
Appendix 2: Estimating take-up of the Save for a HomeBuy Deposit scheme If the respondents in the Housing Corporation s survey of tenants published in 2006 are representative of housing association tenants generally, the number of tenants likely to be interested in the Save for a HomeBuy Deposit scheme would not be very large. Just under a quarter (23%) of respondents indicated that they would like to move home in the next two years, of which just 11% would like to become an owner-occupier. This latter figure accounts for just 2% of all housing association tenants. Clearly, the scheme would be more helpful for those seeking to move in a longer timescale. When asked what type of accommodation they wanted to be living in ten years from now, 13% said that they would like to be an owner-occupier or buy a property. For comparison, Genesis Housing Group found that over half of their customers surveyed said they were positive about ownership, with those on incomes above 400 per week being the most positive. It was clear that people s aspirations to become home owners were not being met. Not surprisingly, the high cost of housing was the overwhelming barrier identified by 94 per cent of respondents. 70 per cent of Genesis Housing Group s customers believed they could not get a mortgage and more than two-thirds did not have a deposit. Their customers felt overwhelmingly that their landlord had a role to play here 90% agreed they should do more to help customers who want to buy their own homes by arranging a mortgage (68%), helping tenants to save for a deposit (67%), and by offering flexible tenure (68%). Notting Hill Housing found that 63% of its social renters said they intended or would like to own a home in the future. 15% intended to buy a property within the next five years, the same proportion in the longer term, and a third would like to buy but do not believe they will ever be able to afford to do so. Notting Hill Housing already has a saving scheme for tenants called RentPlus. This is a savings scheme to accumulate a lump sum which can be used to prepare for home ownership. Tenants overpay on rent and receive certain bonuses from the Housing Trust e.g. tenants can do their own minor repairs in return for a bonus. Most participants identified positives and negatives with the schemes, but were open to the idea of considering such options if they came to buy. These surveys suggest that it would probably be realistic to estimate that only about 1% of social housing tenants would take-up the Save for HomeBuy Deposit scheme if it was offered by their landlord. The need for capital funding is likely to deter some landlords from offering the scheme. The landlords involved in this study believed it would be worthwhile in order to ensure that tenants can really afford home ownership. In particular the local authority landlords reported that it is not uncommon for households exercising the RTB to experience difficulties because they underestimated the commitment required for full ownership. 17