Section Two: Targeting and publicising the scheme, establishing affordability and conducting means testing
2.1 The New Supply Shared Equity scheme is targeted at three types of project:
Type 1 - Projects which grant fund Local Authorities and Registered Social Landlords to build new properties for sale on a Shared Equity basis.
Type 2 - Projects which grant fund Local Authorities and Registered Social Landlords to purchase properties at an appropriate discount from private developers for onward sale to Shared Equity purchasers.
Type 3 - Projects which grant fund Local Authorities and Registered Social Landlords to develop new properties for sale on a Shared Equity basis to existing owner occupiers whose homes are scheduled for demolition and who wish to participate in an agreed area redevelopment plan.
Type 1 and Type 2 projects
2.2 The majority of funding under the New Supply Shared Equity scheme is directed towards increasing the supply of affordable housing in and around pressured housing markets  . There is a recognised need, however, for flexibility in developing local responses to local housing market circumstances. As a result, the scheme can also be an option in other areas where there is an identifiable local need.
2.3 The following sections provide advice for Local Authorities and Registered Social Landlords on the local targeting of Type 1 and Type 2 projects. They also set out the criteria which Local Authorities and Registered Social Landlords must use when means-testing potential purchasers. Where the project is a Type 3 the Scottish Government must be advised at an early stage whether or not there will be a primary lender (see section 1.6) and also whether the project will be carried out by a subsidiary of a Registered Social Landlord.
The approach to targeting
2.4 In establishing key target groups and developing a programme that is responsive to local circumstances the following stages should be followed when targeting the New Supply Shared Equity scheme:
- establish the strategic and local housing market context;
- identify the target group(s) to be housed;
- identify the appropriate location, type and purchase price of new development; and
- establish affordability and conduct means testing.
Delivering better places
2.5 The Scottish Centre for Regeneration, the Royal Institution of Chartered Surveyors in Scotland and Architecture and Design Scotland have worked with the University of Glasgow to create a good practice guide entitled 'Delivering Better Places in Scotland: A Guide to learning from broader experience'. The aim of the guide is to help public, private, and community stakeholders identify good practice and improve their understanding of delivering better places. A copy of the guide can be found on the Scottish Government's website http://www.gov.scot/Publications/2010/12/31110906/0.
Section 11: Creating better places: case study profiles and reports http://www.gov.scot/Publications/2010/12/31110906/11 details case studies from a number of European countries chosen as development exemplars at both greenfield and brownfield locations.
Establishing the strategic and local housing market context
2.6 Priorities for affordable housing should be set out clearly in strategy documents such as Local Housing Strategies ( LHSs) and associated Strategic Housing Investment Plans ( SHIPs), as well as local authority affordable housing policies. The following questions should be considered when establishing the strategic and local housing market context for New Supply Shared Equity projects:
Questions to consider:
- What are the housing priorities in the local area?
- What are the main regeneration priorities in the area?
- Where are the local pressured housing markets?
- What are the investment priorities in relation to the supply of affordable housing?
- What groups are in particular housing need?
- Are there opportunities for identified needs to be met without the need for subsidy?
- Who can New Supply Shared Equity help, both directly and indirectly?
Likely information sources will include:
- Local Housing Strategy
- Local Strategic Housing Investment Plan
- Affordable Housing Policy
- Local housing market studies and needs assessments
Identify the target group(s) to be housed
2.7 While there should be flexibility in defining the target group(s) to be housed, target group(s) must fit the national objective of supporting households on low to moderate incomes who cannot buy a home without assistance from the scheme. There should be a particular focus on giving priority access to the scheme to first-time buyers, social renters, disabled people, and serving members of the Armed Forces and veterans who have left the forces in the past two years.
2.8 New Supply Shared Equity may also be used to provide affordable home ownership for existing or previous home owners unable to sustain or move back into home ownership due to a significant change in household circumstances.
2.9 Local Authorities and Registered Social Landlords must make sure that duties under the applicable Equality Act Codes of Practice are met when targeting the New Supply Shared Equity scheme.
2.10 Non-United Kingdom nationals are eligible for assistance under the New Supply Shared Equity scheme so long as they do not have a home elsewhere and meet any other eligibility criteria set for the scheme.
2.11 In addition to the strategic information contained within the LHS and SHIP, grant providers and Registered Social Landlords will have to consider detailed information on current market prices and local income levels. This information is available from a range of sources including recent needs assessments, periodic reports from lenders, and from data sources such as the Registers of Scotland.
2.12 Care should be taken in considering the types of housing required. Whilst the primary focus of New Supply Shared Equity is to meet the needs of first-time buyers, this does not necessarily mean the need is solely for 'starter homes'.
2.13 Local Authorities and Registered Social Landlords must be satisfied that the target client group(s) cannot reasonably meet their needs within the locality through buying on the open market without subsidy.
Questions to consider:
- What are the typical prices in identified local pressured markets for houses of various size/type?
- Can reasonable 'average' prices be established locally?
- What income levels are required to purchase in these markets?
- In unexceptional circumstances what income levels would be too low to participate in New Supply Shared Equity?
- Can reasonable 'average' income levels be established locally?
- Are there types/ sizes of housing in particular demand?
- What types of household are excluded from buying on the open market?
- Are there identifiable groups of people excluded from purchasing?
Likely information sources:
Housing market prices:
- Local housing needs assessments (existing or commissioned)
- Periodic reports from lenders (available online)
- Local advertising
- Registers of Scotland - Sasine data
Local income levels:
- Local housing needs assessments (existing or commissioned)
- Salary indicators (such as CACI Paycheck)
Identify the appropriate type, purchase price and location of the development
2.14 With a clear view established on the groups of people that New Supply Shared Equity should benefit locally, Local Authorities and Registered Social Landlords should consider first the type of housing needed, then the appropriate price of housing to be developed, and finally where that development should be located.
2.15 New housing developed for New Supply Shared Equity must meet the basic standard Housing for Varying Needs requirements, on the same basis as other grant-aided projects. In some cases the need to provide a higher standard of accessibility will need to be considered.
2.16 Purchasers will not be allowed to buy a home which is more than one apartment size larger than their current need  , unless there are exceptional reasons - for example due to disability or family breakdown. In the case of someone with particular housing needs arising from a disability, professional advice should be sought to determine any need for larger accommodation over and above this limit. In the case of family breakdown, the number of people in the household may include children who only spend part of the time in the property due to parental shared access. Evidence would need to be provided, however, to demonstrate the need for larger accommodation in such cases.
2.17 Projects should be developed which produce housing at a value appropriate to the income level of the client group(s). The income level of the target group(s) and hence the purchase price that can be afforded with grant support will be an important factor in determining where New Supply Shared Equity takes place.
2.18 The housing developed should be both within the means of the target group(s) and in the appropriate location, taking into account factors such as travel to work times and proximity to schools and community amenities.
2.19 As noted previously, New Supply Shared Equity primarily aims to increase affordable housing 'in and around' pressured housing markets. Where there is tension between the cost of development within a particular area and providing affordable prices for the intended group, Local Authorities and Registered Social Landlords will have to make a judgement about developing outside the area - in a location that is still appropriate for the intended group(s). In all cases, location should also reflect LHS and SHIP priority areas for investment.
Questions to consider:
- What size and type of housing is needed for the identified target group(s)?
- Does the project meet the basic Housing for Varying Needs standards and does an enhanced level of accessibility need to be provided?
- Are the proposed homes suitably flexible/ adaptable for future use?
- Given the income levels of the identified groups, what price of house can each group afford?
- Where are the LHS and SHIP priority areas for investment?
- Could the target group(s) reasonably meet their housing needs by buying without the need for subsidy - or for less subsidy - in a nearby area that is still convenient for travel to work, school, community facilities etc.?
Likely information sources:
- Local Housing Strategy
- Local Strategic Housing Investment Plan
- Local housing needs assessments (income levels of target group(s))
- Local house prices
- Development costs - current land costs, building costs etc.
- Housing for Varying Needs guidance
2.20 Local Authorities and Registered Social Landlords should ensure that any publicity material they produce for projects meets all statutory requirements and is discussed in advance with their advisers and the trading standards department of the relevant local authority. In particular, for Scottish Government shared equity loans to qualify as "exempt housing authority loans", the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 requires that all advertising must be fair, clear and not misleading.
Establish affordability and conduct means testing
2.21 Whilst the market assessment will provide information on the broad income levels of those households who are unable to enter the home ownership market as a result of market pressures being experienced locally, Local Authorities and Registered Social Landlords must undertake a detailed financial assessment of individual household circumstances using the criteria set out below. This information will be obtained from the standard application form which Local Authorities and Registered Social Landlords must ask prospective purchasers of properties in Type 1 and Type 2 projects to complete when they are applying to the scheme ( Annexe B). (In the case of Type 3 projects, Local Authorities and Registered Social Landlords should note that existing owner occupiers whose homes are scheduled for demolition do not need to complete the standard application form in order to demonstrate eligibility.)
2.22 The underlying principle of this is that the applicant purchases the maximum amount of equity that they can reasonably afford, taking account of other financial commitments and the associated costs of home ownership. Local Authorities may provide guidelines on the maximum income levels of applicants which they and Registered Social Landlords may, in turn, publish as part of their eligibility criteria. Care should be taken to ensure that these take account of applicants with particular needs (see section 2.33).
2.23 The maximum level of mortgage that the applicant is capable of funding and any other personal contribution they are able to make will be based on the following criteria.
An applicant should provide the Local Authority or Registered Social Landlord with details of all sources of finance when formally applying to the scheme (see Annexe B). This information will be used by the Local Authority or Registered Social Landlord to determine the anticipated value of mortgage finance, and the value of any other personal contributions. A household income will be considered to be the total of:
- gross earnings, per single person or couple, as appropriate;
- any other income, comprising sickness benefits, unemployment benefit, bank interest, superannuation or pension from previous employment, working families tax credit, widow's pension and shareholder's profits; and
- personal contributions comprising savings, gifts or other financial contributions. The definition of personal savings includes: cash; premium bonds; stocks and shares; unit trusts; bank or building society accounts and fixed-term investments; the surrender value of any endowment policies; property; redundancy payments; and pension lump sum payments.
An applicant may retain £5,000 of any personal contributions held. Above this amount, 90 per cent of the balance will be treated as a contribution towards the purchase of a property.
2.24 A 'rule of thumb' for the estimated maximum mortgage for an applicant in employment would be as follows:
- individual application - individual salary x 3.0 = estimated maximum; or
- joint application - joint salary x 2.5 = estimated maximum.
2.25 In the event that it is a joint application but only one applicant works then the individual application rule would apply.
2.26 Local Authorities and Registered Social Landlords should note that the 'rule of thumb' will not be appropriate in the case of applicants who are self-employed. For these cases, a Decision in Principle from a reputable mortgage provider would be acceptable for assessment purposes. Normally lenders will require sight of a minimum number of years' accounts before providing a mortgage quote although some allow self-employed people to self-certify their income.
2.27 An applicant should provide details of the anticipated level of mortgage finance available. Applicants are normally required to provide at least one Decision in Principle from a mortgage provider. Mortgage searches can leave 'footprints' on the applicant's credit history which may affect the applicant's ability to obtain credit. An applicant should therefore be made aware of the need to confirm with their mortgage provider whether a quote will include any form of credit search. If a quote does require a credit search the mortgage provider should explain to an applicant any potential consequences. The mortgage provider should also obtain the applicant's consent before carrying out the search.
2.28 The 'rule of thumb' should be used to compare the Decision in Principle provided by an applicant. In the event that the level achieved by an applicant is less than the rule of thumb, an applicant must provide the Local Authority or Registered Social Landlord with written evidence confirming why this is the case. If the level achieved by an applicant is more than the rule of thumb, an applicant must provide written evidence from their independent financial advisor confirming that they are able to sustain that higher level of borrowing over the long term.
2.29 The issue of how any debts incurred by applicants are treated will require to be considered by Local Authorities and Registered Social Landlords. Secondary loans incurred for housing purposes, essential transport costs, or to meet care and support costs may be taken into account. However, Local Authorities and Registered Social Landlords may also decide to consider loans taken out for other purposes.
2.30 Where an applicant with particular needs will be using their benefit entitlement to support a mortgage, a multiplier will be an inappropriate measure. The assessment should therefore be conducted using knowledge of the benefit entitlements of disabled people, reference to which is made in section 2.33 below.
2.31 Having satisfied the Local Authority or Registered Social Landlord of the maximum level of funds the applicant can raise, it becomes self-evident whether they satisfy entry into the scheme financially and the maximum level of equity they can afford to purchase.
2.32 It is also essential that applicants are fully aware of their housing related costs and the financial responsibilities that come with home ownership. At a local level this should be done through:
- Local Authorities and Registered Social Landlords encouraging applicants to seek independent legal and financial advice on all housing-related costs at the earliest possible stage;
- ensuring well designed servitudes and burdens/deeds of condition are produced at an early stage particularly in the case of properties with common and shared parts and considering the introduction of development management schemes (as set out in the Title Conditions (Scotland) Act 2003); and
2.33 In promoting the scheme, it needs to be made clear that applicants must purchase the maximum level of equity they can reasonably afford, taking into account other financial commitments and the associated costs of home ownership.
2.34 Where households have, of necessity, exceptional housing and living costs which can be evidenced, greater flexibility will be required in the operation of the New Supply Shared Equity scheme. This may result in provision having to be considered in locations that would otherwise not be considered (as a result of support networks, employment or other factors) or accommodation requiring to be purpose designed resulting in additional costs. These factors, together with the additional living costs that such households face, may result in lower levels of equity stake requiring to be considered (to a minimum of 51 per cent). In addition, in exceptional cases an applicant with a severe disability may have received a compensation payment as a result of an injury. Where the applicant provides evidence that they need to keep funds aside to meet additional living costs ( e.g. the cost of employing a carer), such compensation payments should not affect a buyer's eligibility for the scheme and the applicant may not need to meet the standard requirement to put 90% of their savings over £5,000 towards the purchase of a property.
2.35 There are no set formulae for identifying additional costs but they should be capable of being evidenced by professional supporters or other sources. A means test and affordability exercise consistent with that for other applicants should be undertaken.
2.36 The complexity of mortgages repaid solely through benefits and the issues raised in section 2.27 mean that a Local Authority or Registered Social Landlord should consider the need to employ specialist assistance from an organisation experienced in the issues facing people with particular needs when buying a home.
2.37 Illustrative case studies on establishing affordability and conducting means testing are provided in Annexe C.
Email: John Mcrorie, email@example.com