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Making the move: creating a new model for shared ownership

April 2013


Family Mosaic: an introduction

Contents

Family Mosaic is one of the largest housing providers in London and the South East.

Summary

3

1 The challenge

4

2 The respondents

6

3 Buying a home

8

4 Buying shared ownership

12

5 The new model

16

We provide affordable homes to rent and buy as well as care and support services to thousands of people who need extra support. We have around 23,000 homes for rent and serve more than 45,000 people. We provide a range of opportunities for our customers such as training, employment and access to learning.

We partner local communities to make our neighbourhoods better places to live.

www.familymosaic.co.uk

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summary Making the move Shared ownership is critical to the future of social housing, especially in London, because of the cost of living and the lack of capital funds available to build new homes at rents that people can afford. Creating shared ownership opportunities that help some of our tenants to become homeowners will enable us to build and buy new homes to help those in greatest need. In the current financial environment, this approach makes more sense than ever. Realising it in practice, however, is another issue. There are a number of obstacles we face: •      the existing movement between social rent and shared ownership is so low: last year, for example, just 12 of the 188 shared ownership properties we sold were bought by our tenants; •      current shared ownership products do not appear to be attractive to our tenants, nor are they well understood; •      mortgage lenders tend to be reluctant about releasing the necessary funds so that our tenants can get a mortgage. At Family Mosaic, we want to develop a home ownership scheme that our tenants will use, so that we can start to unblock the housing bottleneck. So we decided to conduct some further research into the issue. We started by asking 240 working tenants a series of questions about home ownership. In response, they told us that: •      84% were interested in buying their own home, or another property; •      for those households with an income over £30,000 a year, this increased to 86%; •      the main reasons they didn’t buy a home were the costs, the risks involved and because they liked their existing home. We also asked them about shared ownership: •      67% said they were interested in buying a share in their own home or another property;

•      for those households with an income over £30,000 a year, this increased to 85%; •      the main reasons stopping them were the costs and a lack of information. We then tested our new shared ownership scheme – called Social Homebuy Plus – with a focus group of working tenants. Its key feature is a five-year rent free period. At the end of the session, 12 of the 17 participants said they would consider the scheme. Five said they were still not sure. None said they would not consider the scheme. Simultaneously, we piloted the new scheme with ten tenants. Our initial findings highlight that it’s a labour intensive process, particularly in applying for, and agreeing, shared ownership mortgages. As a consequence, some participants have decided not to proceed with their purchase. We have, though, secured lender approval for Social Homebuy Plus from three leading mortgage companies. If this new model works, it could have a significant impact. If we were able to realise the shared ownership aspirations of half of our working tenants with household incomes over £30,000, we could raise over £100 million to buy or build new homes for the next generation of social housing tenants. Getting the model right, however, is critical. We need to raise awareness about shared ownership with our tenants. We need to create stronger links with potential lenders. And we need to work with our tenants to support them to make the move.

Making the Move | 3


1

The challenge

On 28 September 2012, the Mayor of London launched his new Housing Covenant, setting out the case for increasing the supply of affordable home ownership in London. The covenant was aimed primarily at working Londoners, specifically those in the intermediate housing market: people who are neither eligible for social housing, nor are able to buy a home outright. The Mayor called on those building and selling homes to working Londoners to respond in new ways to the difficulties faced by aspiring homeowners. His comments have been followed by a range of measures announced by the Chancellor of the Exchequer in March 2013, with the aim of increasing home ownership.

more homes and capital will be released and we will be able to help the next generation of vulnerable tenants.

In 2011, we published Changing Direction. This looked at the implications for the ending of lifetime tenancies for social housing tenants. We noted that some of our more vulnerable tenants would continue to be offered lifetime tenancies. Many of our new tenants, however, would be offered a five-year, fixed-term tenancy.

Home ownership is the most common tenure in England and Wales, accounting for around 64% of all households. Although many people – including our tenants – still aspire to own their home, in percentage terms, owner-occupation has been in decline in the UK for the past decade.

By looking at the experience of tenants whose tenancies were five years old, and talking with a cross-section of our working tenants in employment, we concluded that: •      we needed to develop new models of shared ownership; •      we needed to develop a new relationship with our tenants; •      we needed to realign our welfare and employment services to support individual development plans. At the end of their five year fixed-term tenancy, we envisaged that some of our new tenants will be able to move on, so they don’t remain in social housing and become dependent on us. If people move on,

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Being able to move on, however, depends on two factors: first, there has to be somewhere to move on to; secondly, it has to be affordable to our tenants.

There are a number of reasons for this. The lack of available affordable housing is one obstacle. Another is the difficulty of getting a mortgage for those on low incomes and first-time buyers. Moving on from social housing into private rented accommodation is not seen as an option by our tenants. Private sector rents are high, and continue to rise, as the supply of new housing fails to keep up with demand. With the competition for housing continuing to grow, the cost of owning a property also looks set to remain high. This is where shared ownership comes in. As a social housing provider, we believe shared ownership should play three roles: enabling tenants to achieve their aspirations; reducing


the gap between the supply and demand of social housing; and creating homes for the next generation to rent.

Shared ownership sales 2012

Properties sold to non-Family Mosaic tenants

Shared ownership has not, however, been particularly popular with housing association or local authority tenants. In 2012, of the 188 shared ownership properties we sold, just 12 of them (6%) were bought by our existing tenants. Some commentators suggest this is because tenants find it difficult to get a mortgage. Only a limited number of lenders provide shared ownership mortgages because it’s a less attractive business proposition compared to an outright sale. Others note that repairs and maintenance responsibilities post-sale are a disincentive for tenants, unless they’re apportioned equally according to the equity stake in the shared ownership agreement. Another factor is that shared ownership is not a well known product with tenants, the public or lenders. We wanted to test these theories with our working tenants, to discover what was stopping those with ownership aspirations from becoming home owners. We also wanted to establish their interest in, and knowledge of, our existing shared ownership products. Using the results of the survey, we would be able to develop a shared ownership product that met our customers’ expectations, aspirations and prospects.

Properties sold to Family Mosaic tenants

Making the Move | 5


2

The respondents

The survey was conducted by phone and email with 240 residents, all of whom were working. Of those respondents whose age we could determine, 69% were aged between 40-49 years old. Nationally, the average first time buyer is now aged between 35-40 years old: 23% of the respondents were in this age range.

Of those surveyed, 72% were female and 28% were male. By comparison, 59% of all our tenants are female, and 41% are male.

Age range of respondents

20-29 year olds

30-39 year olds

Gender of respondents

40-49 year olds

50-59 years old

Gender of Family Mosaic tenants

59% 41%

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We also asked respondents about their working status: 74% were in full time employment, and 26% were in part-time employment. This varied according to gender: 70% of women were in full-time employment, while over 84% of men had full-time jobs.

Of those who answered the question asking about their annual household income, 64% said they were earning between £15,000 and £35,000. Median income for the respondents is significantly higher than for all tenants in social housing in London: £27,500 per year, compared to £17,368 per year.

Working status of respondents

Annual household income, including benefits

Full time

Part time

£45,000 +

5%

£35-45,000

12%

£25-35,000

32%

£15-25,000

32%

£5-15,000

13%

variable

7%

Making the Move | 7


3

Buying a home

Home ownership aspirations The first question we asked tenants was about their home ownership aspirations: would they consider buying their own home, or another property? Over 64% said they would consider buying their own home, while 62% said they would consider owning a different property. When we look at the responses in more detail, we find that over 84% of tenants would either consider buying their own home, a different property or both (some respondents were interested in buying their own home, but not another property, and vice versa).

64% said no yes to buying their own home

62% said yes to buying a different property

no

16% said they didn’t want to buy their own home or another property

84% 84% saidsaid they they werewere interested interested in in owning owning their owntheir home, own or another home, or property another

22% said they wanted to buy their own home, but not another property

20% said they wanted to buy another property, but not their own home

property 42% said they would buy their own home, and they would buy another property

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Examining the responses by gender, we find that 62% of women would consider buying their own home, compared to 73% of men. Similarly, 57% of women would consider buying another property, compared with 71% of men. When we look at these responses in more detail, 82% of the female respondents either said they would be interested in buying their own home or another property (or both), while the figure for men was 90%.

62% of women said yes to buying their own home, compared with 73% of men

57% of women said yes to buying another property, compared with 71% of men

18% of women and 10% of men said they didn’t want to buy their own home or another property

82% of women said they were interested in owning their own home, or another property

25% of women and 19% of men said they wanted to buy their own home, but not another property

20% of women and 17% of men said they wanted to buy another property, but not their own home

90% of men said they were interested in owning their own home, or another property

37% of women and 54% of men said they would buy their own home, and they would buy another property

Making the Move | 9


When we review the responses according to household income, it’s not surprising to find that the higher your earnings, the more likely you are to aspire towards home ownership. Of those earning under £20,000 a year, 55% said they were interested in buying their own home, while 48% would consider buying a different property. For those earning between £20-30,000, these figures changed to 69% and 68% respectively. For those with earnings above £30,000 per annum, however, over 70% of them were interested in buying their own home, while 75% would consider buying a different property.

Mining this data in more detail, we find that aspirations towards home ownership is very high in this group: only two of the 56 respondents with household income over £30,000 said they were not interested in either buying their own home or another property. We estimate that a quarter of our working tenants have a household income over £30,000 a year: in other words around 2,750 households. Our survey would suggest that 2,365 householders would be interested in owning their own home, or another property. If we could help them realise this aspiration, we would be able to create thousands of new homes for re-letting.

4% said they didn’t want to buy their own home or another property 96% of people earning over £30,000 a year said they were interested in owning their own home, or another property

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21% said they wanted to buy their own home, but not another property 25% said they wanted to buy another property, but not their own home 50% said they would buy their own home, or they would buy another property


no reason why they should move out of their existing home.

When we asked respondents why they hadn’t realised these aspirations, however, the most common response was because of the costs involved in home ownership. The second most popular reason was that they liked their current home. As our Changing Directions report showed, this factor was often significant: tenants saw

With five year, fixed-term tenancies, however, we will support tenants so they can move on from social housing. One option we are offering is the opportunity to buy a share in their existing home.

Which of the following reasons explains why you won’t consider, or are unsure about, buying a property

I can’t afford it

66%

I like my current home

41%

I’d be homeless if I didn’t pay the mortgage

27%

I’d have to move out of my local area

22%

I can’t get a mortgage

22%

The buying process is too complicated

20%

I’d be responsible for maintenance

20%

The property market is too risky

15%

I’m worried about interest rate rises

13%

There’s only a limited supply available

12%

Making the Move | 11


4

Shared ownership

Owning a share in a property Having asked respondents about their aspirations towards outright home ownership, we then asked them about shared ownership. Around 60% said they were interested in shared ownership, with 18% being unsure, and 23% responding negatively. We then asked respondents about their interest in owning a share in their own home, or a different property. Just under half were interested in owning a share in their own home. Just over half were interested in owning a share in another property. Examining their responses in more detail, we find that two thirds of respondents expressed an interest in either buying their own home, another property, or in both. This is almost 20% fewer respondents than those interested in owning a home outright.

no 60% said they were interested in shared ownership

49% said yes to owning a share in their own home

52% said yes to owning a share in another property

33% said they didn’t want to buy a share in their own home or another property

67% said they were interested in owning a share in their own home, or another property

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15% said they wanted to buy a share in their own home, but not in another property 18% said they wanted to buy a share in another property, but not their own home 34% said they would buy a share in their own home and they would buy a share in another property


Male respondents tended to be more positive about shared ownership than female respondents: 70% of men said they would consider shared ownership, compared with 58% of women.

58% of women said yes to shared ownership, compared with 70% of men

Unsurprisingly, income levels also affected shared home ownership aspirations. Over a third of respondents who earned less than £30,000 per year said they were not interested in shared home ownership. For those earning over £30,000 a year, 85% said they were interested in owning a share in their own home, in another property, or in both. In addition, those earning over £40,000 were more likely to want to buy a share in another property than buy a share in their own home (94% interested in buying another property compared with 73% interested in buying a share in their own home).

15% said they didn’t want to buy a share in their own home or in another property 85% of people earning over £30,000 a year said they were interested in owning their own home, or another property

15% said they wanted to buy a share in their own home, but not in another property

20% said they wanted to buy a share in another property, but not in their own home 50% said they would buy a share in their own home, or they would buy a share in another property

Making the Move | 13


Despite shared ownership being less expensive, and less risky, tenants were more interested in outright home ownership. We asked them what prevented them from considering shared ownership. The costs was the most answered response, just as it was when we asked respondents why they had not bought their own home. The second most popular reason was because respondents felt they didn’t know enough about shared ownership.

When we asked tenants whether they were aware of Family Mosaic’s shared ownership scheme, however 63% said they were. Of these people, 37% said that, although they were aware of the scheme, they didn’t know enough about shared ownership. This suggests a need for targeted marketing activities that alleviate any concerns tenants have about shared home ownership. And, since 67% of these respondents said they were interested in shared home ownership, this could have significant results.

What reasons prevent you from considering shared ownership?

63%

It would cost too much

61%

I don’t know enough about it 54%

I don’t like the idea of paying rent and a mortgage 43%

I don’t want to be responsible for repairs and maintenance I don’t want to be a homeowner

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9%


Another reason cited by over half the respondents was that shared home ownership involved paying both rent and a mortgage. They didn’t like the idea of having to pay twice, because this seemed like the worst of both worlds. Similarly, being solely responsible for repairs and maintenance was also an issue for over 40% of respondents. This confirmed the findings of research by the Council of Mortgage Lenders, who argue that “repairs and maintenance responsibilities post-sale are likely to remain a

With the current financial situation, I feel it would be too risky

You have less flexibility as a part-owner

The high cost of properties in central London: it’s where I live and want to continue to live

disincentive for tenants unless they are apportioned according to the equity stake involved”.1 We also invited respondents to tell us of any other reasons that prevented them from considering shared ownership. The gist of some of the most popular responses are captured in the quotes shown below. 1: See http://www.cml.org.uk/cml/policy/issues/166

We could afford it, but with no realistic discount, it’s an unattractive, high risk investment

It doesn’t feel like we will ever get the full 100%

It’s hard to get a loan

Making the Move | 15


5

The new model

In 2012, we developed a new shared ownership model, based on the findings of previous research. We called this Social Homebuy Plus: it retained some of the features of the Social Homebuy product (for example, the discount of up to £16,000 on the value of the tenant’s home), but included additional incentives. Most notably, it offered tenants a rent-free period for the first five years following purchase of a 50% share in their own home.

Based on a house valued at £240,000, during the first five years the tenants would therefore pay £135 per week as mortgage, but no rent. After the first five years, this rent-free period would come to an end: the tenant would continue to pay their mortgage, along with a rent of £50 per week. In this example, the five year rent-free holiday would be worth £12,000 (or the equivalent of a 10% deposit on a mortgage of £120,000).

Social Homebuy Plus (based on a house valued at £240,000)

For the first five years after purchase Rent = £0.00 per week

Mortgage = £135.00 per week*

Family Mosaic charges the tenant no weekly rent for the 50% of the house that it still owns

The tenant pays £135.00 per week to a mortgage company, to pay for a 50% share of the house

For the remaining 20 years of the mortgage Rent = £50.00 per week

Mortgage = £135.00 per week*

Family Mosaic charges the tenant a weekly rent of 2% on the half of the house that it still owns

The tenant continues to pay £135.00 per week to a mortgage company

* - based on repayment mortgage of £106,400 (assuming a 50% share, with a discount of £8,000 and a deposit of 5% has been paid by the tenant)

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To test whether the model might work, we invited a select group of 17 tenants who had taken part in the survey to provide feedback on Social Homebuy Plus. We asked them a series of questions about the attractions and barriers towards shared home ownership, and whether the new model overcame these concerns. The results are shown below.

Social Homebuy Plus appears to address a lot of the concerns tenants had about shared home ownership. Indeed, having explained the scheme to them in detail, at the end of the session 12 of the 17 participants said they would consider the scheme, while five said they were still not sure. None said that they would not consider the scheme.

Focus group feedback on Social Homebuy Plus Would the five year rent free period encourage you to consider the scheme? Would you be able to afford a 5% deposit?

Would you feel confident about securing a mortgage?

Would you consider the scheme if you had to buy a 50% share? Would you consider the scheme if you could only buy a share in your current home? Would you consider the scheme at this cost?

Would being responsbile for repairs and maintenance prevent you from considering this scheme?

Making the Move | 17


One issue a number of participants raised during the focus group was the discount offered on similar schemes by local authorities. Under the Right to Buy scheme, for example, the discount offered to local authority tenants was doubled to a maximum of £75,000: this has now been increased. As well as being a significant figure, it’s also easier to explain as a benefit to potential buyers, as opposed to the savings accrued from a rent free period. Social Homebuy Plus includes an offer of a discount (of between £8-16,000), as well as a rent free period. When this was explained to focus group participants, there was a positive response. One told us that: “I think Social Homebuy Plus is a good idea: it allows people to settle down and own a property. It also provides an opportunity to save because of the rent-free period. Yes, it really appeals to me” Piloting the new model As well as running a focus group to get feedback from survey participants, we have also been piloting Social Homebuy Plus with ten tenants. The key findings from the pilot have been: •      it is a labour intensive process: we have had to spend more time than usual explaining the way the scheme works, as well as assisting pilot participants with, for example, their mortgage applications; •      the mortgage process itself has taken longer than usual. There are fewer lenders who are prepared to offer shared home ownership mortgages, because it is seen as a less favourable business proposition compared to outright sales; •      as a result of the pilot, however, our financial advisors have secured lender approval for

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Social Homebuy Plus from the Halifax, the Leeds and the Woolwich; •      there has been a high fall-out rate: if we can’t improve this, then the idea will fail. The replacement process In 2012, we introduced five year, fixed tenancies for the majority of our new tenants. During this period, we will support them so they are able to move on: for some, moving on will involve buying a share in their existing home. So getting this new model right is critical. A scheme that is both attractive and affordable will help tenants move on from social housing to shared ownership. And it will help us to start to unblock the social housing bottleneck. Our plan is to use the proceeds from the sale of each 50% share to either invest in the purchase of a new home, or to contribute towards our new build programme (see illustration, page 19). We estimate that a quarter of our working tenants have a household income over £30,000 a year: in other words around 2,750 households. Our survey would suggest that 65% of them, or 1,786 householders, would be interested in owning a share in their own home. If half of them – or 893 householders – completed with Social Homebuy Plus, it could raise over £100 million for us to spend on buying and building new homes for a new generation of tenants (based on an average property value of £240,000, and a discount of £8,000 on a 50% share). If we can get it right, Social Homebuy Plus could have a significant impact, not only on our tenants’ lives, but also on the future of social housing.


The replacement process (based on a property valued at £240,000)

An existing tenant decides to buy a 50% share in their existing home

Family Mosaic uses the £112,000 released from the purchase of its share of the home to build a two-bed flat

We are then able to rent out the flat to a young family, or to people with more vulnerable needs

The potential impact

2,750 A quarter of our working tenants have a household income of more than £30,000 a year

893 1,786 If 65% of them were interested in owning a share in their home

And if 50% of them then bought a share in their home using the Social Homebuy Plus scheme

£100,016,000 We would have over £100 million* to spend on buying and building new homes to rent to a new generation of tenants

* - based on an average property value of £240,000 and a discount of £8,000 for an initial stake of 50%, releasing £112,000 to Family Mosaic for each property sold

Making the Move | 19


For further information contact Joanna Birch: T 020 7089 1046 M 07960 821 007 E Joanna.Birch@familymosaic.co.uk

Credits Edited and designed by Matthew Grenier

20 | Family Mosaic

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