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This article first appeared in the Red Brick blog: February 2021
The Government has made the startling admission that it does not know how many people have transitioned to full ownership under its Shared Ownership model. Despite not knowing how effective it is, it is making Shared Ownership a key pillar of its “central mission” of helping more people to own their home.
Bids have opened for the next Affordable Homes Programme (AHP) and the Government has set out its expectation that the tenure will account for the “vast majority” of the home ownership homes it funds.
Whilst the proposed new Shared Ownership model will make it easier both for people to buy an initial stake and then to increase their equity in the property, for some, the uncertainty over exactly how long it will take them to fully own their home will still not suit their needs. If you buy an initial 10% stake, after 15 years of gradual staircasing at 1% you would still only own 25% of the home. Legal fees apply at each increase and if shared owners want to buy larger shares using the existing process then all fees (valuation and legal) remain their responsibility. However large their share is, tenants also have to pay 100% of service charges.
For some aspiring homeowners, this part-rent, part-own process therefore remains complicated, uncertain and unattractive. Yet with the number of mortgage deals for those with 5% deposits remaining almost non-existent, house prices continuing to increase and a partial public-sector pay freeze, key workers and those on lower incomes who cannot save for a large deposit will struggle to buy on the open market.
As we have argued before in this blog, the key to widening access to home ownership is addressing the difficulty in saving for a deposit. It is this that is blocking many renters who could afford mortgage repayments from being able to buy a home. This has been compounded by coronavirus. The Joseph Rowntree Foundation’s annual report on poverty highlights that 41% of private renters who have seen a drop in income since March have had to use their savings to make up for shortfalls in income. Savings that they might have been hoping to use for a house deposit. Many others didn’t have any savings to fall back on; over two thirds of social renters and almost half of private renters in the bottom half of the income distribution had less than £500. This also raises the question of how many social renters would be able to afford to exercise the new ‘Right to Shared Ownership’ that is a condition for all social and affordable rented homes funded under the AHP.
Rent to buy schemes do address this hurdle by not requiring any initial deposit when people move into a brand new house. They also provide a clear and defined route to full ownership with tenants buying their home outright at a set 5 yearly interval. Paying only an affordable rent enables them to save more for a deposit than if they were renting privately and at Rentplus we add to that by giving them a gifted lump sum of 10% of the value of the property when they are ready to buy.
In the meantime all repair and maintenance costs are covered by the landlord and service charges are included up until the point they become full homeowners.
Unlike the unknown effectiveness of shared ownership in helping people to fully own their home, this spring the first of Rentplus’ tenants will become 100% homeowners after just 5 years.
Whilst local authorities rightly remain concerned about providing homes for those in the greatest need, rent to buy has a positive knock-on impact. Up to two thirds of the tenants moving into affordable rent to buy properties to date had been on the local housing waiting list. In some areas up to half of tenants have moved out of existing social housing; freeing this up to be re-allocated to those most in need. Over half of all our tenants are key workers.
Rentplus’ model is fully funded by institutional investment bringing in additional housing finance and enabling the council to direct their grant funding to delivering social rented homes. There is significant interest in the sector from investors and an emerging market of SME providers.
With Homes England reporting a 34% decrease in affordable home ownership scheme starts over the six months to September 2020, whilst coronavirus was a factor, this highlights the importance of the much greater role that privately funded providers can play in boosting the overall number of homes for first-time buyers with no reliance on Government funding.
The Government and local authorities should do more to support innovative home ownership models and encourage their development on a much wider scale instead of putting all their eggs in the unproven, shared ownership basket.