Written Evidence Submitted by Leeds Building Society [SHO 0072]

 

Introduction

 

Leeds Building Society is the fifth largest building society in the UK, representing 878,000 members nationally and lending £20bn to over 250,000 mortgage customers. We are the largest Shared Ownership lender in the UK and have been awarded Best Shared Ownership Mortgage Lender by What Mortgage for eight consecutive years.

 

We are proud to say that half of all new borrowers at Leeds Building Society in 2023 are first-time buyers. As a mutual, the very reason we were founded in one of the poorest parts of Leeds almost 150 years ago, was to help people own their own home and save for their future. Putting homeownership within reach remains our driving purpose to this day.

 

We welcome the opportunity to submit evidence to the committee’s inquiry on Shared Ownership and hope to contribute further as the inquiry proceeds.

 

 

Summary

 

Shared Ownership was created over 40 years ago to help people into ownership. Over that time (1982-2022) deposits for first-time buyers on the open market have more than quadrupled as a share of earnings, from 25% to 115%. The average deposit paid by a first-time buyer in 2022 was £68,700. Our research shows that the minimum time it would take a private renter in England to save the average deposit is over 12 years, and a staggering 25 years in London.

 

Shared Ownership remains to this day, the most effective means of reducing the deposit hurdle for first-time buyers. Other attempts, such as Help to Buy equity loans, have come and gone, and House of Lords research indicates these have potentially contributed to the underlying problem of high house prices. In that context, Shared Ownership is a tried-and-tested means of expanding ownership without unintended detrimental consequences for the wider market.

 

In November 2022 Leeds Building Society undertook research of shared owners and found that 72% agreed that Shared Ownership helped them to buy sooner, 77% were happy with their experience, and over 65% believed it had saved them money compared to renting privately.

 

From our lending, we can see that Shared Ownership is a significant help to sole buyers, making it possible to buy at an earlier age (if at all, in some parts of the country) and to begin to grow their equity sooner.

 

With that said, we recognise that the consumer experience can and should be improved to grow accessibility to the scheme and to ensure its benefits are felt throughout occupancy. We support calls for a national Code of Good Practice to improve transparency of fees, clearer marketing guidelines, and much greater national publication of data to inform the market and government.

 

Other challenges associated with Shared Ownership may be addressed by the new model lease, and bedding-in time is required to assess this. We are also cognisant that some other perceived issues with Shared Ownership relate to wider leasehold issues, building safety for example.

 

To build a strong housing market we require a significant increase in homes of all tenures in the coming decade and beyond. Shared Ownership should play an expanded role within the mix. For those for whom traditional routes to ownership appear insurmountable, it is our view that Shared Ownership is one of the best means of putting homeownership within reach.

 

 

Response

 

Do the schemes Shared Ownership and Right to Shared Ownership provide good value for money for the potential users of the scheme?

 

  1. Shared Ownership (SO), and Right to Shared Ownership (RtSO), help to reduce the deposit hurdle to home ownership like no other affordable housing schemes – in this context, they represent value for money, helping get people onto the housing ladder quicker, and more affordably, than otherwise possible.
  2. LBS conducted research in 2022 that showed once first time buyers were told about SO and what it is, 60% said it would either help them get on the ladder in the future whilst 22% of homeowners feel it would have helped them get on the ladder sooner – however 36% of people hadn’t heard of SO. Of those that had used it, 77% said they needed a smaller deposit and 72% they were able to buy quicker.
  3. England’s average house price is £304,000 (May 2023 ONS). A 10% deposit, typically a minimum requirement for a new build house, would be £30.4k. Assuming savings of £200/month (with the Society’s own research on its Home Deposit Saver suggesting 52% of FTBs are looking to save between £100 & £300) this would take c. 12.5 years to save. A customer purchasing the same property with a typical 40% share would need a 5% deposit of £6k which would take c. 5 years to save.
  4. Rent typically starts at 2.75% of the unowned share which is significantly lower than average mortgage rates (Rightmove’s weekly tracker 08/08 shows an average 5yr 90% product is 6.16%).
  5. The difference in monthly cost for the same value property, as a result, would be c. £1.8k/month for standard residential (£273.6k mortgage) vs. £1.2k/month for SO (£115k mortgage and rent of 2.75% on £182k) – assuming the same mortgage rate (6%) which is broadly aligned to LBS’s current rates.
  6. Total savings for SO vs. standard residential are therefore £24k once on deposit, and £644/month due to differences between mortgage and mortgage/rent.
  7. We do note that this value is point in time, and that things can happen whilst people are in their SO property e.g. unforeseen rises in service charges that may not be applicable to mainstream residential properties, also costs for lease extension. This should be explained thoroughly to prospective SO purchasers to enable them to make an informed decision as to whether the scheme is right for them at point of sale and throughout their period in the scheme.

 

How can the Government ensure that SO and the RtSO remains an affordable programme in light of rising provider costs and inflation?

 

  1. This question could be answered for both providers and shared owners.
  2. Rising provider costs are potentially covered by service charges but we note that the increases in service charges, and the methodology behind them, may not be understood by consumers.
  3. To address the point on affordability for shared owners and how this links to provider costs, note that SO rent reviews allow only for upwards increases and accounts for the impact of inflation (using RPI, rather than the UK’s official inflation measure, CPI (which ONS does not consider a good measure of general inflation (https://www.ons.gov.uk/economy/inflationandpriceindices/articles/shortcomingsoftheretailpricesindexasameasureofinflation/2018-03-08#:~:text=Overall%2C%20RPI%20is%20a%20very,status%20as%20a%20National%20Statistic)). In view of this the consumer argument would likely be that inflationary rises are more than covered in their annual rent increases.
  4. Having a clear articulation of what the rising costs are and how inflation impacts providers may help the Government to formulate a clear solution as to how best to ensure that SO and RtSO remain affordable programmes.
  5. Different providers will have different costs so a one size fits all approach is unlikely to be appropriate but anything done should balance the needs of all parties i.e. Government needs to ensure that that the scheme remains affordable, providers need to be able to recover costs, and consumers need to understand what costs are being paid for by them and why, to help them understand that they are fair and proportionate.
  6. We note the voluntary agreement by the largest providers in 2022/23 to cap rent rises in light of the cost of living, reflecting most providers’ commitment to good outcomes for shared owners, and also likely a recognition of the unsuitability of RPI as a measure.

 

What support can be offered to SO tenants given the impact of leasehold properties?

 

  1. SO leaseholders should be treated in line with other leases, however noting the higher likelihood of a shared owner being a first-time buyer and the complexity of leases (as a lender, we are sometimes asked to review leases/section 106 arrangements for some sites prior to their development and as a result know that there isn’t a one size fits all approach), more could be done to explain various elements.
  2. Whilst the buyer’s conveyancer may explain elements that matter to a prospective purchaser, this is unlikely to be the experience of every purchaser – particularly for those not using a specialist SO conveyancer.

 

What impact, if any, are changing sector regulations having on the SO and RtSO Scheme?

 

  1. Changing regulations have the potential to improve SO and RtSO.
  2. The new leases created as part of the Affordable Homes Programme 2021-2026 saw several improvements to SO which should improve the experience of shared owners who purchase a property that has one of these leases attached, however this doesn’t solve the challenges faced by shared owners on older leases.
  3. Whilst providers cannot necessarily change previous leases to include the new things offered on more recent leases e.g. the ability to staircase in 1% increments, thought should be given as to how to explain the differences between leases to customers – particularly if customers hear about newer options and seek to understand their options, and finding out things e.g. 1% staircasing is not a feature of their lease.

 

Is there a lack of mortgage providers for SO properties?

 

  1. Moneyfacts shows (26/07) that there are 62 lenders active in the Mainstream Standard Residential sector vs. 18 in SO, though note the mainstream market is significantly larger than SO – as a result the market is well served with the majority of the big 6, and a number of building societies including Leeds Building Society supporting the scheme.
  2. Historically, feedback from mortgage intermediaries has suggested that although there are sufficient lenders in the market to service most of its needs, more support was required at higher LTV (95%) levels. However, this issue has reduced more recently with more lenders now operating at 95% including Leeds Building Society.

 

What challenges are associated with repair costs being covered by those utilising the SO schemes?

 

  1. All owner-occupiers are responsible for repair costs on their properties, which can be a challenge when these costs are unexpected.
  2. We are interpreting this question as relating to the fact that shared owners do not own 100% of the property but are responsible for 100% of the costs.
  3. The Government’s changes to leases e.g. 10-year initial repair period, minimum lease period, etc. in 2021 as part of the Affordable Homes Programme were, at the time, well received. However as with other lease changes do not help many shared owners.
  4. A way of improvement may be a change in how repair costs are split e.g. boiler servicing costs could be split in-line with share which has a benefit to both landlord & leaseholder.
  5. A challenge for this approach would be that this would likely be reflected in increased service charges which may become more costly over time than the cost of undertaking the repairs on an ad-hoc basis.
  6. Given that the rented share is effectively subsidised to below market level (to the shared owners' benefit - albeit noting that this rent will only increase over time) any outcome also needs to reflect delivery for the provider.A way of mitigating the negative consumer experience of the shared owner being liable for the costs would perhaps be better up-front information about personal responsibilities.

 

How viable is full ownership through the SO scheme and/or the RtSO Scheme?

 

  1. Different shared owners will have different goals when taking out SO/RtSO and full ownership may not be their long term aspiration.
  2. For those who do wish to achieve full ownership, there are a number of options for shared owners to consider:
    1. Customers may seek to leverage equity growth in their SO property and move out of the tenure into a standard residential property using that equity growth as a deposit on a property that they own 100% of. As an example:
      1. Average England house value (May 2023 ONS) = £304k.
      2. Purchased on SO with a 40% share = £121.6k, 5% deposit of £6k, 95% mortgage of £115.5k
      3. 5yr House Price Growth (based on 5%/yr) turns full value to £369.5k, share value to £147.8k.
      4. Assuming a 6% mortgage rate on a 25yr term, £11.6k of capital will have been repaid, giving a total of £43.9k deposit (£26.2k HPI growth, £11.6k equity growth, original £6k deposit) equating to an 11.9% standard deposit on the same average property.
    2. Customers may seek to staircase either fully or partially i.e. to 100% ownership or in increments (including as low as 1%).
      1. Data on staircasing is limited so we can’t be definitive about the number of people who use staircasing as a route to full ownership.
      2. 1% staircasing has only been available to those using the new model lease that launched as part of Homes England’s Affordable Home Programme 2021-2026, though it should be noted that at least one Housing Association (Metropolitan Thames Valley) offered similar functionality prior to the new lease. It is likely too early to tell how successful this will be in terms of increasing levels of staircasing.
  3. 1% staircasing is likely to be more attainable for many customers as it has the advantage of saving on valuation costs (being driven by a link to HPI rather than requiring a valuation) however can only be used once each year for 15 years post ownership to give a maximum of a 15% increase in share. A challenge is likely to be that it’s a relatively small increase in equity (and therefore a relatively small reduction in rental payments) and shared owners will likely consider the opportunity cost of staircasing vs. other everyday costs.
  4. Leeds Building Society recently launched a savings account – Shared Ownership Saver – to support LBS SO mortgage customers to staircase. The money saved – which earns a better rate of interest versus a standard account – could be used to support people into purchasing more shares with 1% staircasing or helping reduce the financial burden of larger staircasing increments.

 

Does the RtSO policy in its current form reduce homeownership risks for individuals from lower income backgrounds?

 

  1. RtSO shouldn’t be viewed solely as a tool for reducing homeownership risks for individuals from lower income backgrounds, particularly considering the scheme’s income cap (£80k, or £90k in London).
  2. The scheme allows people to benefit from SO but does not, however, reduce risks that are applicable to everyone in home ownership e.g. unexpected costs. Indeed, given that people using RtSO will have been a tenant with landlord’s covering costs, these costs may be more problematic.
  3. The new lease offers some protection against this with the 10-year initial repair period but improvement of up-front information as to what the risks of homeownership are may be beneficial.

 

What more can be done to secure the SO scheme as an affordable route into home ownership?

 

  1. Continued funding from Government to ensure that development of SO (grant funded) properties doesn’t slow down, and that alternative methods of delivery (section 106) aren’t reduced due to new schemes e.g. First Homes.
  2. Alternative schemes may fulfil valid needs of prospective homeowners, but without an increase in overall housing delivery (which was a previous manifesto commitment of 300k homes/year) new schemes risk cannibalising SO delivery.
  3. Ensure that upfront information about costs at the outset and throughout the ownership period are made available to customers to help inform their decisions.
  4. Adopt the SO Industry Group’s suggested Code of Practice.
  5. Consider a move for the rental increase calculation to use CPI rather than RPI.
  6. Improve the collection & publication of SO data to help Government, Housing Associations, and Lenders understand the market they’re serving e.g. improved data on staircasing take up.

 

How does the variation of costs from Housing Associations and other providers impact the SO Scheme and the experience of tenants or potential buyers?

 

  1. At an individual customer level, different costs between providers may not have an impact however it could cause questions of fairness where one provider may charge more for the same service than another.
  2. Whilst different providers face differing costs and it is fair that they can therefore charge differently, appropriate justification for these costs should be able to be evidenced to ensure that shared owners know they are receiving fair value.
  3. Different costs can also make comparisons for potential property purchases more challenging e.g. a prospective shared owner may look at two different properties in a similar area offered by different providers and may not know that one has a different strategy for cost increases e.g. service charge increases.
  4. Uniformity should be encouraged where possible (linked to the Industry Group’s call for market participants to adopt the GLA Service Charges Charter) but where this cannot be offered at least a fair justification for costs should be possible or a list of known charges presented upfront.

 

What should be done to improve the Department for Levelling Up, Housing and Communities’ data collection regarding SO and the RtSO?

 

  1. As a lender without access to CORE (which contains SO data), it is difficult to say what should be done regarding data collection. We would note that generally the more data available the better, as it helps lenders understand the markets which we serve – and other Government schemes have given this e.g. Help to Buy.
  2. Examples of helpful data include customer profiles for lenders to help ensure that their product offerings are suitable for the market that takes up the scheme and staircasing information.

 

Are alternative schemes such as ‘Rent to Buy’ viable and do they offer more value for money?

 

  1. Schemes such as Rent to Buy appear viable though are still in their infancy.
  2. We would not comment on their value for money other than to note that they potentially have a different target market to SO and that prospective purchasers of either SO or Rent to Buy should seek to understand what either option means for them.
  3. This again could point to the need for a central hub of information presented in a consumer friendly, yet detailed manner, on different options available to consumers.

 

What more should be done to support first time buyers and those from lower hold incomes onto the property ladder?

 

  1. At a high level we feel the solution here is to deliver on previous manifesto commitments and increase building of homes of all type and tenure (which will naturally lead to more affordable housing inc. affordable rental options).
  2. Make private renting more secure through the Renter’s Reform Bill.
  3. Relieve pressure on Private Rental Sector by increasing availability of Council Housing/Social Rent.
  4. Continued/additional support for savers.

 

September 2023

 

 

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