Topic 25: Schemes for specific groups of borrower Flashcards
How do shared ownership schemes work?
Shared Ownership schemes work where an individual purchases a share of a property (the maximum being 75%) with a mortgage and a housing association owns the remaining share
The individual makes mortgage payments to their lender
The individual also pays rent to the housing association with the value of rent based on the amount retained by the housing association (the max amount in rent is 3% on the value of the housing associations share in the property)
Then, ideally, the individual will increase their ownership overtime until they own the property in full. This is known as staircasing
In relation to shared ownership schemes answer the following questions:
A) In terms of rent payments, what is the max percentage allowed on the housing associations share?
b) What is the max initial share the purchaser is allowed to have?
A = 3%. the max amount in rent is 3% on the value of the housing associations share in the property
B = 75% (they can have lower. commonly 25% is chosen)
What is staircasing?
Buying further shares in a shared‑ownership property based on its market value at the time of the additional purchase
It means the mortgage, and therefore ownership will increase, whilst rent payments to the housing association fall because their share lowers
What is a shared ownership lease
A shared ownership lease is where the leaseholder lives in a leasehold property using a share ownership scheme to do so
When does the leaseholder of a shared ownership lease qualify for the statutory right to extent the lease?
Only once they own 100% of the property
Most shared ownership leases are in a format approved by the Homes and Communities Agency (HCA)
Give
True or false?
True
Subletting is not permitted
For shared‑ownership property if the property is purchased from an approved qualifying body, such as a housing association, the purchaser has two options for the payment of SDLT
What are the two options?
Option 1: pay SDLT on 100% of the market value of the property at the time of purchase, no matter the share percentage
The standard SDLT thresholds and rules apply here, like purchasing a property normally
Option 2: pay SDLT initially only on the value of the share purchased. This must be reported to HMRC, regardless of the price paid
For option 2 it may seem more attractive as you initially pay less SDLT but there is an issue. Once the owner buys a further share (staircasing) that takes their total share above 80%, SDLT is payable on ALL additional shares bought since the first share was purchased, no matter how much of their SDLT threshold was used and how valuable their property is
What are equity share schemes?
Explain how they work and their postives/negatives
The borrower is the legal owner of the whole property and will pay a deposit and arrange a conventional first‑charge mortgage on an agreed proportion of the property. The scheme provider will then take an equity stake in the balance of the property price through a second
charge.
The second charge is repayable on the earlier of the property being sold or the end of an agreed
term
No interest is charged on the providers ‘share’, but if the property is sold, the provider will receive a percentage of the sale proceeds
For example, the borrower may finance 80% of
the purchase price through a deposit and a repayment mortgage, and the scheme provider will take second charge over the other 20%.
Advantage: Good for first‑time buyers who may be borrowing at their maximum and who wish to keep their monthly payments to a minimum
Good for those who cannot arrange a mortgage large enough to purchase in the conventional way
Disadvantage: If the original loan‑to‑value ratio was high and property price inflation remains low, it will be difficult for the borrower to trade up in the property market because the already limited equity will be further reduced when the lender takes its share.
What are ‘help to buy’ schemes
They are initiatives introduced by the government to help those who could not otherwise afford to buy a property to do so
New initiatives are announced relatively frequently
Tell me the difference between the old model shared ownership scheme and the new model (introduced from APRIL 2021)
Minimum initial share purchase allowed:
Old model = 25%.
New model = 10%
Maximum initial share purchase allowed:
Old model = 75%
New model = 75%
Minimum additional share purchase (staircasing) allowed:
Old model= 10%
New model= 5%. Also, some providers may allow a minimum of 1% to be purchased each year for a maximum of 15 years
leasehold Shared ownership property
Old model = standard lease was for 99 years.
New model = standard lease is 990 years
Max Rent payable to provider:
Old model: 3% of value of providers share
New model: 3% of value of providers share
To be eligible for the help to buy shared ownership scheme what is required?
Max income is £80k or £90k if in London
Buyers will need to find a deposit of at least 5% of the value of the share being bought. The rest can be mortgaged
What is the help to buy shared ownership scheme?
Works in the same way as normal help to buy schemes
It gives priority of property to those in the armed forces
It led to the new model of shared ownership being enforced on any new build property from April 2021. It makes it much easier for those using the shar sownserhip scheme to obtain the property
What does the new model of shared ownership scheme apply to
Applies from April 2021 to NEW BUILD shared ownership properties
Homes purchased before that date are subject to the original rules (old model)
What is the First Homes Initiative?
It is one of the many help-to-buy schemes the government have introduced
Must be 18+ with a combined income
less than £80,000 (£90,000 in London)
The buyer(s) must have a mortgage or home purchase plan to fund at least 50% of the discounted purchase price.
After the discount has been applied, the initial purchase price must be no more than £250,000
Offered by developers voluntarily in co‑operation with local authorities.
For developers to offer the scheme at least 25% of the affordable housing in a
development must be included in the First Homes scheme (ie, if the development is building 8 houses at least two must be registered under the scheme)
What is right to buy?
Right to buy gives the tenants of social landlords in England and Northern Ireland (the House Sales Scheme) the right to buy the property they are renting
It enables a secure tenant of a local authority, district council, London borough council or certain registered social landlords to purchase their property at a discounted price.
Right to buy gives the tenants of social landlords in England and Northern Ireland (the House Sales Scheme) the right to buy the property they are renting
It enables a tenant of a local authority, district council, London borough council or certain registered social landlords to purchase their property at a discounted price.
Tell me the eligibility criteria for those in the England and the discounts available (note, it is different to Northern Irelands but I haven’t included that on any flashcards)
England: The minimum period as secure
tenant to acquire right to buy is 3 years
Discounts available:
Houses: 35% (after 3–5 years’ tenancy). 1% per year after 5 years
Flats: 50% (after 3–5 years’ tenancy). 2% per year after 5 years
Maximum discount allowed = 70%
I am a secure tenant in England and have lived in my property, a house, for 22 years
Assuming I am eligible for right to buy, what is the discount I will receive if I purchase the property
Same question but it is a flat instead
House = discount received will be 57%
Flat = discount received will be 70%
WHY: How the discount is calculated for Houses: 35% only after 3–5 years’ tenancy. 1% additionally per year after 5 years
Therefore my answer is, 35 + 22 = 57%
For Flat: How the discount is calculated: 50% after 3–5 years’ tenancy. 2% per year after 5 yeat
Answer is therefore 50 + 44 = 94 but the max discount allowed for both house and flat in england is 70 so the answer is 70%
WHAT IS A ‘PRESERVED RIGHT TO BUY’?
Where a tenant had a secured tenancy with a local authority and ownership of the property was transferred to a housing association while they were a tenant
The tenant will have a
‘preserved right to buy’, which means they have the right to buy based on their combined tenancy
If a secure tenant exercises their right to buy they will receive a discount valued depending on the time they have resided in the property
If that same tenant then sells the property soon after ( say 1year or 5 years) what happens?
Some or all of the discount may be payable based on a tapering effect
Year 1 100%
Year 2 80%
Year 3 60%
Year 4 40%
Year 5 20%
Year 6 + : No repayment required
Example:
Purchase price £100,000
Discount (20%) £20,000 from right to buy
Subsequent sale price in year 4 is £150,000
Discount to be repaid
(20% of sale price x 40% – ie discount repayable in year 4 which is:
150,000 x 20% = £30,000
£30,000 x 40% = £12,000
It is so they do not gain more money from the property increasing in price. It makes it proportionate to the discount they received when buying and when selling
How do mortgages work with right to buy properties?
Most lenders will consider mortgage applications from tenants wishing to purchase under the right‑to‑buy legislation.
Lenders’ attitudes vary – some will lend based on the market value of the property, while others will base
lending on the discounted price
What is right to acquire?
It is basically the same as right to buy but instead it is for tenants of housing associations
They may acquire (ie buy) their housing association property after three years of tenancy.
Tell me the differences between right to buy scheme and right to acquire scheme
Right to buy = Gives tenants of social landlords in England and Northern Ireland the right to buy the property they are renting at a discounted rate with the amount discounted depending on the time they have occupied the property
Right to acquire = Similar to above except it is for tenants of housing associations and discounts are based on a flat rate monetary amount which vary according to location of the property and the length of tenancy does not affect the discount.
(ALSO, The landlord does not have to sell the specific property the tenant lives in – they could choose to offer an alternative property to the tenant)
What are equity release schemes?
Equity‑release plans are designed to enable homeowners who do not have a
mortgage on their property to release some of the equity in order to provide
capital or supplement their retirement income.
While aimed at those who do not have a mortgage, these schemes are also available to those with small mortgages.
Some of these schemes involve mortgages – known as lifetime mortgages –
and some involve the sale of the property to a provider in exchange for a benefit: the latter are known as home reversion plans
What are lifetime mortgages?
Lifetime mortgages are regulated by the FCA and defined as the following:
Regulated mortgage contracts available only to older borrowers over a certain age and where the lender cannot seek full repayment until one of the following events occurs:
the borrower’s death;
The borrower moves elsewhere permanently (carehome or another main residence)
The borrower sells the property;
The lender exercises its legal right to take possession under the mortgage contract
In relation to lifetime mortgages most lenders provide a no‑negative‑equity promise. What does this mean and why is this offered?
This means the
borrower cannot owe more than the value of the property when the loan is due to be repaid
Lenders offer this because of the risks associated with interest roll up, which is a common feature of lifetime mortgages.
Why does interest roll up lead up higher debts?
Because the accrued interest is added to the principle balance, and subsequent interest calculations are based on the new higher balance
For example: debt will double approximately every 11 years at 6.5 per cent interest, or
14 years at 5 per cent or 18 years at 4 per cent. Interest roll up is a common feature of lifetime mortgages so borrowers who wish to leave money to heirs should be fully aware of this risk
Explain how lifetime mortgages work.
Borrower raises lifetime
mortgage on property (Mortgage usually
on fixed-rate basis
* Lender restricts
lending, usually to
between 25% and
55% of property
value)
No regular payments of capital or interest made
(Interest is charged at lender’s lifetime mortgage rate. Interest charged but not paid is
added to the
loan (rolled up) - this is one of the risks of lifetime mortgages
When borrower dies, goes into permanent residential care or moves, property is sold
Original loan repaid to the lender, plus the interest that has rolled up over the mortgage
term.
What hybrid lifetime mortgage schemes?
Who are they useful for:
Hybrid lifetime mortgage schemes are lifetime mortgages initially arranged on
an interest‑only basis, with the borrower making regular interest payments.
However, the contract gives the borrower the right at any time to switch to an interest roll‑up basis and stop making interest payments
Hybrid lifetime mortgage schemes are helpful for the following:
Borrowers who are a few years below the lender’s minimum age for an interest roll‑up scheme, but intend to take advantage of
roll‑up as they get older.
Borrowers who are approaching retirement who have an
interest‑only mortgage but have no way of repaying the capital or affording a normal mortgage in retirement.
Also good for those who want to combat the effects of interest roll up
A lifetime mortgage can be arranged on a drawdown basis
Tell me about this:
Who will this benefit?
The lender agrees
a maximum lending limit and the borrower can draw down lump sums as they wish, subject to a minimum withdrawal, typically £2,000 to £5,000.
Interest is charged on the amount outstanding, but is rolled up rather than paid each month
Who this benefits:
The benefit of this type of loan over a standard lifetime mortgage is that interest only accrues on the amount actually borrowed, so the borrower has
a degree of control and the debt will not increase as rapidly.
it will allow the borrower to provide an annual income by drawing down capital, while maintaining control over the speed at which the debt builds up.
What are Retirement interest‑only mortgage?
The retirement interest‑only mortgage is defined in MCOB as:
“An interest‑only mortgage:
1) which is not an interest roll‑up mortgage;
2) Only available to older customers above a specified age
3) under which the lender is not entitled to seek full repayment of the loan until the occurrence of one or more of the specifiedevents.
They were introduced because of demand due to the number of borrowers unable to repay, interest‑only mortgages at the end of the term
What is a home reversion scheme?
Alternative to lifetime mortgages.
The homeowner sells all or part of their property to the lender in return for a capital sum, an income or both. The original owner then enters into a lifetime lease agreement with the provider, usually at a nominal annual rent, allowing them to reside in the property for the remaining of their lifetime. Upon death, moving into care or after a specified period of time has passed (lets say 20years), the provider takes full control of the property
Tell me about all the following in relation to home reversion plans:
Legal ownership, including how it works if the provider only takes part of the property
Taxation (ie, is the cash released by the scheme taxed or not)
Legal ownership -
Full reversion =
Legal ownership is transferred fully to the provider
Partial reversion = where part of the property is entered into the plan, the provider takes full legal title
to the property, but the previous owner becomes the beneficial owner of the part they retain.
Taxation - The cash released is NOT subject to tax. However, some schemes use the cash released to buy an annuity which is where it can be subject to income tax
Tell me the benefits of a home reversion plan over a lifetime mortgage
Tell me the benefits of a lifetime mortgage over a home reversion plan
Where home reversion plans are better:
Occupant lives rent free in their home so may improve there standard of living as they are more disposable income
No interest roll up risk
Generally, home reversion plans provide more cash when compared to lifetime mortgages. This is because
the reversion provider owns the property or part of it from the outset and do not charge interest.
Where lifetime mortgages are better:
The minimum age for a home reversion plan is higher than lifetime mortgages
The equity released with home reversion plans is at a large discount to the property’s value. For example, a property valued at 200k, only 100k may be released. This is because the reversion providers is accounting for the fact they will not receive any interest over the term of the reversion plan
Lifetime mortgage generally offer better legacys to heirs
What safeguards have the equity release council introduced
Appicant must be required to seek advice
Providers must promise a no negative equity guarantee
Portability (A borrower must be allowed to transfer the loan to another property)
Right to penalty‑free payments (Equity release products should include a facility for borrowers to make voluntary repayments)
For understanding. Difference in risk between a home reversion and lifetime mortgage
What is shared ownership?
What is equity share?
Share Ownership = An arrangement offered by providers such as housing associations. The buyer initially buys a share of the property, with a deposit and a conventional mortgage, and the provider retains the remaining share. The new owner pays rent to the provider on the retained part. The owner has the right to buy further shares of the property up to 100%.
Equity Share: A borrower buys a share in the property from a provider (lender or developer) with a deposit and a conventional mortgage, and the provider holds the balance as an equity share through a second charge. An example would be 80% to 20%. The provider does not charge rent on their share, but if the owner sells the property the provider will receive 20% of the sale price
What is right to buy?
Secure tenants of social landlords gain the right to buy the property at a discount to its market value after three years of tenancy. The initial discount after three to five years’ tenancy is 35% for houses and 50% for flats, with further discounts added for each subsequent year of tenancy. The maximum discount is 70%, with monetary limits also applying depending on location
The minimum and maximum initial shares available through the Help to Buy shared ownership (England) taken out today are WHAT?
10% and 75%
New model is 5% and 75%
buyer using a shared ownership scheme will pay a maximum rent of 3% to the:
provider, based on the value of the part retained by the provider.
lender, based on the value of the part retained by the lender.
provider, based on the value of the property when purchased.
provider, based on the value of the part retained by the provider.
Shelley bought a property in July 2022 through the Help to Buy shared ownership (England). The property will be:
freehold.
leasehold on a 99-year lease.
leasehold on a 990-year lease
leasehold on a 990-year lease
All property bought using the scheme is leasehold. From April 2021 the standard lease term was increased from 99 years to 990 years.
ason bought a flat in England using the Help to Buy Equity Loan scheme, with an equity loan of £15,000 to help afford the £150,000 purchase price. He has made no repayments of the loan and is now selling the flat for £200,000. How much will he have to repay to settle the equity loan?
£15,000.
£20,000.
£50,000.
£20,000.
If no repayments of the equity loan have been made and the property is sold, the equity loan is repaid as a percentage of the sale price. In this case it would be 10% of £200,000 = £20,000.
Ed and Kelly have been living in their local authority house in London for eight years and now want to exercise their right to buy it. What discount are they entitled to, ignoring any monetary cap that might apply?
35%.
38%.
41%
38%
The discount for houses starts at 35% after 5 years’ tenancy and accrues at the rate of 1% for each additional year, up to 70%. Kelly and Ed have been tenants for 8 years, which would give a discount of 35% + 3% = 38%
Aleksy and Danuta exercised their right to buy their local authority flat, receiving a discount. At what point could they sell the flat without having to repay any of the discount?
Three years after purchase.
Five years after purchase.
Ten years after purchase
Five years after purchase.
The discount is repayable during the first five years of ownership, with the proportion of the discount payable reducing each year
Which of the following would not be defined as a lifetime mortgage by the FCA? A mortgage:
requiring interest and partial capital repayments each month.
with no capital repayments that allows interest to be accumulated each month.
requiring interest and full capital repayments each month
requiring interest and full capital repayments each month
A lifetime mortgage cannot require full capital repayment until the borrower dies, leaves the property without a reasonable expectation of returning, sells the property or moves to another main residence. However, a lifetime mortgage can contain a condition requiring some repayment of capital during the term.
Which type of lifetime mortgage arrangement would result in the lowest interest accumulation?
Roll-up.
Drawdown.
Annuity-based scheme
Drawdown.
A roll-up scheme would result in interest accumulating on the whole loan each month. An annuity-based scheme would use the amount borrowed to buy an annuity, but as a large lump sum is taken at the start to buy the annuity, interest would accumulate on the whole loan each month. A drawdown scheme means that part of the total advance available is taken each time. This will reduce the total interest accumulated, as interest is only accumulated on the amount actually drawn.
ohn took out a home reversion scheme when his house was valued at £200,000, entering 70% of his house into the scheme. On his death the property was valued at £300,000. How much, if anything, would pass to his estate?
Nothing
£60,000.
£90,000.
90000
The home reversion company owns 70% of the property so will receive 70% of the sale proceeds. This leaves 30% (£90,000) to John’s estate. The value of the property when the plan started is not relevant
Which of the following is untrue of a home reversion plan?
The minimum age for the plan tends to be higher than for a lifetime mortgage.
Drawdown is not generally an option on such plans.
The planholder’s right to occupy the property is guaranteed by a lifetime lease
Drawdown is not generally an option on such plans
Many home reversion companies offer a drawdown option, whereby the planholder can sell further ‘chunks’ of the property at a later date
Which of the following is untrue in relation to shared ownership?
The property is bought on a freehold basis.
It involves paying rent to the provider.
The maximum initial share is 75%.
The property is valued at its open market value
The property is bought on a freehold basis.
Shared‑ownership properties are ALWAYS bought on a leasehold basis, not freehold
A shared‑ownership mortgage is one on which part of the loan attracts zero or very low rate of interest. True or false?
True False
False: a loan on which part is repayable at zero or a very low rate of interest is a feature of the equity‑share mortgage
In an equity‑share mortgage arrangement, the borrower pays rent for a portion of the property while owning the remainder. True or false?
False
Ben and Gerry are hoping to buy a property in London, using the First Homes initiative (England) scheme. Which of the following is true?
They must arrange a mortgage to fund at least 75 per cent of the discounted price.
Their combined income cannot exceed £80,000.
The property price cannot exceed £420,000.
The discount will be 20 per cent of the market price
The property price cannot exceed £420,000.
The property price in London cannot exceed £420,000
Under the right‑to‑buy scheme, in England, the max discount on a flat is 60%. True or false?
False
70% is the maximum discount for a house or a flat
Gary and Ayesha are buying their local authority flat in Leeds under the right‑to‑buy scheme, having been tenants for six years. What is the maximum discount they could claim?
52%
Moira and Ken (both aged 67) are considering an equity release scheme because they would like to improve their standard of living. Their three daughters are all in favour, although Moira and Ken are concerned that the scheme would prevent them leaving as much of their estate as they would like to their daughters and grandchildren. An adviser would suggest a home reversion plan for them. True or false?
False
Moira and Ken meet the criteria for lifetime mortgages and home reversion plans schemes. They want to leave as much of their estate as possible to their family, so a home reversion plan would not be ideal, because they would be giving up the value of all (or part of) the house. A lifetime mortgage will allow them to leave the remaining equity to their heirs, and by taking a drawdown plan they can take money as and when they wish while keeping the compounding effect of interest roll‑up to a relative minimum. As long as house prices increase at a reasonable rate, they would have a good chance of leaving a substantial part of the property to their heirs.
The minimum age for a home reversion plan is usually lower than for a lifetime mortgage. True or false?
True False
False
the lifetime mortgage minimum age is usually between 55 and 60, while the minimum age for a reversion plan is at least 65
Home reversion plans generally allow more capital to be released than lifetime mortgages. True or false?
True False
False
