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Graduated Ownership

Introduction

A system of intermediate affordable housing delivery first proposed by Future Housing Review in response to the housing crisis in the England. The graduated ownership scheme (GO) is based on framework built around the shared equity scheme which has been used for many years in both the United Kingdom and the United States, and the restricted resale period, a concept which is more commonly encountered in the United States.

 

Key Concepts of Graduated Ownership

Owner’s Percentage
The Owner makes an initial payment (typically a combination of cash and mortgage funds), which is equivalent to a percentage of open market value of the home (‘the Owner’s Percentage’) agreed between the Owner and the Provider at the outset. As shown on the main chart, the Owner’s Percentage may range from 30% to 75%, depending on affordability criteria.

Increment and Owner’s Value
Over time a pre-determined amount (‘the Increment) is added to the Owner’s Percentage to form the Owner’s Value, which is realisable on a disposal of the home. The Increment is a percentage (up to 0.7% pa of the Owner’s Percentage) and it is calculated as a lump sum at the point in time at which the house or flat is sold.

In other words, the Owner’s Value is calculated in accordance with the formula below:

C = (OMV x A) + B

where:

OMV = Open Market Value of the home
A = Owner’s Percentage
B = Increment as at the date of disposal
C = Owner’s Value

Details of calculations of the Increment for the different levels of the GO scheme are set out here.

Residual Value
The Residual Value of the home (i.e. the open market value less the Owner’s Value) is secured by a second charge in favour of the Provider.

Restricted Resale Period
The Restricted Resale Period varies from 12 to 30 years as shown on the main chart. During the Restricted Resale Period the Owner must first offer the home back to the Provider at a consideration equivalent to the Owner’s Value. After the expiry of the Restricted Resale Period, whilst the Owner may sell his home on the open market, the Residual Value is payable to the Provider

Rent and Interest
No rent or interest is payable by the home Owner on the Residual Value.

Upgrade
The Owner may upgrade to a different level of the scheme at any time by paying the difference between Owner’s Values for the old and new levels respectively.

Buyout
The Owner has an automatic right to buy out of the scheme at any time by paying the Residual Value to the Provider.

 

Find out more:

 

Comparison with Shared Ownership

A report by Professor David Cowan and colleagues highlights some of the limitations of shared ownership schemes, a common form of intermediate affordable housing, notably the hybrid nature of the shared ownership tenure. GO schemes may be distinguished from shared ownership schemes  in several respects:

  • The Owner acquires the entire freehold (or leasehold) estate in his home from the Provider, so the ownership itself is not ‘shared’.
  • No HCA model lease is required for a house.
  • Only a normal lease is required for a flat, not an HCA model
  • There is no rent payable on the ‘unowned share’ in a GO scheme.
  • A GO scheme provides the Owner with an automatic bonus (the ‘Increment’) which compensates the Owner for taking on all repairing liabilities.

Grant funding
Discussions have been initiated with the HCA to ascertain what needs to be done to validate the GO scheme for grant-funding purposes. In the meantime, any subsidy required will be met by the Provider itself or through section 106 discounts.

Authorisation by FCA
As from March 2016, any second-charge lending on shared equity schemes requires the Provider to be authorised by the Financial Conduct Authority. Local authorities are exempt from these requirements, as are appointed representatives of authorised firms.

Conclusion
The GO system is designed to be transparent, certain and not unduly complex. As far as the prospective Owner is concerned, GO is demonstrably more affordable than traditional shared ownership. As far as the Provider is concerned, it represents a new brand of tenure that will help to deliver housing efficiently to people at different levels of housing need and maintain sensible controls over time.

V13092015 Copyright Future Housing Review 2015.