Establishing affordability and means testing
1. 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 Registered Social Landlords must ask prospective owners to complete when they are applying to the Open Market Shared Equity Scheme.
2. An applicant must purchase the maximum amount of equity that they can reasonably afford, taking account of other financial commitments and the associated costs of home ownership. However, they must be strongly encouraged NOT to exceed the income multiples set out in paragraph 4 (this is important to ensure that the mortgage will remain affordable to the household over the long term, even if mortgage interest rates or other living costs rise). There may be circumstances where a 'rule of thumb' assessment shows that an applicant is unable to afford the minimum 60% equity purchase but the mortgage quote indicates that the applicant can afford above the minimum 60% equity stake that is required. In these cases, if the buyer's independent financial advisor can provide written evidence demonstrating that the applicant will be able to sustain the mortgage payments as well as all other associated housing related costs then the application may be eligible to participate in the scheme.
3. The maximum level of mortgage that an applicant is capable of funding and any other personal contribution that they are able to make will be based on the following criteria.
An applicant should provide the 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 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, at least 90 per cent of the balance should be treated as a contribution towards the purchase of a property.
4. 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.
5. In the event that it is a joint application but only one applicant works then the individual application rule would apply.
6. Registered Social Landlords should note that the 'rule of thumb' will not be appropriate in the case of applicants who are self employed. 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.
7. An applicant should provide details of the anticipated level of mortgage finance available. Applicants are normally required to provide quotes from three different lenders. Where this is not possible, there should be clear justification of the reasons. Applicants should be able to obtain quotes that do not involve a credit search. 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 the lender whether a quote will include any form of credit search. If a quote does require a credit search the lender should explain to an applicant any potential consequences. The lender should also obtain the applicant's consent before carrying out the search.
8. The 'rule of thumb' should be used to compare the quotes provided by the three mortgage lenders approached by an applicant. In the event that the level achieved by an applicant is less than the rule of thumb, an applicant must provide justification. If the level achieved by an applicant is more than the rule of thumb, an applicant must provide evidence that they have taken independent financial advice, reference to which is made in section 11 below. However, as noted in paragraph 2, applicants should be strongly discouraged from doing this unless they can show that they have considered how they would fund any future increase in mortgage or other living costs.
9. In assessing applications to the scheme Registered Social Landlords should disregard any lump sum payments to a widow, widower, or partner of service personnel as a result of their partner having been killed in action.
10. The issue of how any debts incurred by applicants are treated will require to be considered by Registered Social Landlords. Secondary loans incurred for housing purposes, essential transport costs, or to meet care and support costs may be taken into account.
11. In certain circumstances where a couple have applied to the scheme certain issues may impact on the maximum level of mortgage that they can obtain, for example an adverse credit score. Where the mortgage quote in these cases is lower than the rule of thumb , Registered Social Landlords may consider additional written evidence from the applicant's independent financial advisor that a) provides information on what the issue(s) are that have affected mortgage quote; and b) confirmation that the applicant is able (taking into account any other existing loan and payment commitments) to sustain the mortgage payments as well as all other associated housing related costs. If the Registered Social Landlord is content with this additional information provided it may provide flexibility for the application to be eligible to participate in the scheme.
12. 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 paragraph 13 below.
13. It is also essential that applicants are fully aware of their housing related costs and the financial responsibilities that come with home ownership. Registered Social Landlords should encourage applicants to seek independent legal and financial advice on all housing related costs at the earliest possible stage.
14. Where households have, of necessity, exceptional housing and living costs which can be evidenced, greater flexibility will be required when operating the Open Market Shared Equity Scheme . This may result in lower levels of equity stake requiring to be considered (to a minimum of 51 per cent). There are no set formulas 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 . 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.
15. The complexity of mortgages repaid solely through benefits means that Registered Social Landlords should consider the need to employ specialist assistance from an organisation experienced in the issues facing people with particular needs when buying a home.
16. The following table illustrates how the grant eligibility criteria described above would apply to four households seeking to purchase under the Open Market Shared Equity Scheme in areas with different maximum price ceilings. These are the procedures that Registered Social Landlords must follow when assessing applications to the scheme.
|Local area||Perth & Kinross||Inverclyde||East Lothian||South Ayrshire|
|Household type||Single income||Single income||Joint income||Joint income|
|Household size||1 person||1 person||3 person||4 person|
|Passport application stage|
|Maximum price ceiling||£110,000||£70,000||£135,000||£130,000|
|Income per annum||£20,000||£15,000||£38,000||£32,000|
|Maximum mortgage (1)||£60,000||£45,000||£95,000||£80,000|
|Financial contribution (2)||£65,000||£45,000||£125,000||£92,000|
|Proposed equity stake % (3)||65.00%||64.29%||92.59%||70.77%|
|Passport issued (Yes/ No) (4)||Yes||Yes||No||Yes|
|Property purchase stage|
|Price of chosen property (5)||£100,000||£69,000||£129,000|
|Confirmed mortgage (6)||£60,000||£45,000||£80,000|
|Confirmed available savings||£5,000||£0||£12,000|
|Actual equity stake % (7)||65.00%||65.22%||71.32%|
|Eligible for assistance||Yes||Yes||Yes|
|Grant required (8)||£35,000||£24,000||£37,000|
|Scottish Ministers' equity stake % (9)||35.00%||34.78%||28.68%|
1. The 'maximum mortgage' is calculated by multiplying the applicant's income with the appropriate lending multiplier norm.
2. The 'financial contribution' is calculated by totalling the 'maximum mortgage' and the 'available savings' amounts. Having satisfied the Registered Social Landlord of the maximum level of funds the applicant can raise, it becomes self evident whether the applicant satisfies entry into the scheme financially and the maximum level of equity they can afford to purchase (see below).
3. The proposed equity stake percentage - expressed to two decimal points - is the 'financial contribution' expressed as a percentage of the local maximum price ceiling.
4. An applicant receives a 'passport' to look for a property if the proposed equity stake percentage is at or below 90 per cent. The applicant would then search for property within a defined price bracket specified - given that they are normally expected to take an equity stake of between 60 and 90 per cent of the value of a property.
Using case number 1 for illustrative purposes, the applicant's passport letter would specify that they are now able to look for a property that is valued between £81,250 and £100,000. This is because a purchase within this price bracket would mean that the applicant would be taking an equity stake percentage that was within the agreed parameters of the scheme, based on their 'financial contribution' at passport application stage. (A purchase at over £100,000 would mean that applicants were being subsidised to buy a more expensive house than the 'going rate' for first time buyers (taken as the first quartile). A purchase under £81,250 would mean that an applicant could afford to pay over 80 per cent and therefore does not qualify.)
5. The value of (or price to be offered for) the chosen property cannot exceed the local maximum price ceiling.
6. If the 'confirmed mortgage' exceeds the 'maximum mortgage' at passport application stage, the applicant must provide firm evidence that they have been working with an Independent Financial Adviser. In the event that the 'confirmed mortgage' is less than that assumed at passport application stage, the applicant must provide justification as to the reasons why.
7. The 'actual equity stake %' - expressed to two decimal points - is calculated by expressing the 'confirmed contribution' as a percentage of the 'price of chosen property'.
8. The 'grant required' is the difference between the 'price of chosen property' and the 'confirmed contribution'. The figures shown exclude the Registered Social Landlord's agreed administrative costs, which would be included in practice.
9. The 'Scottish Ministers' equity stake %' - expressed to two decimal points - is calculated by expressing the 'grant required' as a percentage of the 'price of chosen property'. When calculating the 'Scottish Ministers' equity stake %' the 'grant required' figure must exclude the Registered Social Landlord's agreed administrative costs.