Affordable Housing Supply Programme: process and procedures MHDGN 2022/02

Annex D: New supply shared equity

Introduction

Please note that throughout this Annex the term ‘grant recipient’ should be taken to include local authorities and RSLs (including local authority arms-length external organisations and RSL subsidiaries where they are the chosen vehicle for providing new supply shared equity properties).  In addition, any reference to rights and obligations contained in documentation which is referenced in this Annex is purely for convenience and regard can only be had to the documentation itself upon which appropriate legal advice should be taken.

New supply shared equity grant recipients should be aware that they are – in certain cases – acting as principals (in relation to the procuring of developments) and in other cases (for example in all aspects of the Shared Equity arrangements with a purchaser) acting as agents for the Scottish Ministers.  In all circumstances however grant recipients must follow the procedures set out in this Annex and have due regard to the interests of the Scottish Ministers.  They must also ensure that all duties of care owed to them by their advisors and contractors (including valuers) are properly extended to the Scottish Ministers.

Target groups

First time buyers

New supply shared equity homes are available to first time buyers on low to moderate incomes who cannot buy a home without assistance from the scheme.  

For the purposes of administering the scheme a first time buyer is defined as ‘A person who does not own nor has previously owned a dwelling in Scotland, the rest of the UK or the rest of the world (all forms of ownership in the legal system of the rest of the UK which are equivalent to ownership in Scotland are treated as ownership)’.[1]

Where joint applications are received and one of the applicants is not a first time buyer the application cannot be processed.

Priority access groups

In addition, priority access is given to the following groups of people (who do not need to be first time buyers):

• people living in social housing
• disabled people
• people aged 60 or over (see below)
• members of the Armed Forces
• veterans who have left the Armed Forces within the past two years, and
• widows, widowers and other partners of service personnel for up to two years after their partner has lost their life while serving.

Applicants who are aged 60 and over

Applicants who are aged 60 and over and who wish to apply for support from the scheme without mortgage finance are considered as a priority access group providing they fulfil the following criteria:

• Applicants must demonstrate a housing need to move which must include at least one of the following:[2]
  • Under-occupation – the applicant is living in property which is too large and needs to downsize.
  • The applicant’s existing property is no longer suitable to meet their needs – for example, they can no longer manage the stairs.
  • Support – the applicant needs to move closer to family or friends that provide care and support.
  • Living in private rented accommodation.
• Joint applications will be eligible (without the requirement for a mortgage) from couples where one of the applicants is aged 60 or over.
• Joint applications with an applicant aged 60 or over and their offspring under the age of 60 will be eligible, without the requirement for a mortgage, if the applicants can demonstrate that the offspring has a disability that affects their housing needs or ability to sustain a sole occupancy.

Existing or previous home owners

New supply shared equity may also be used to provide affordable home ownership for existing or previous home owners who are unable to sustain or move back into home ownership due to a significant change in household circumstances – for example, a marital breakdown.

Grant recipients must make sure that duties under the applicable Equality Act Codes of Practice are met when targeting the new supply shared equity scheme.

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.

Grant recipients must be satisfied that the target client group(s) cannot reasonably meet their needs within the locality through buying on the open market without assistance.

Eligible property types and sizes

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’.  For example, as noted above, new supply shared equity can be used to meet the needs of older people for retirement accommodation.

More generally, purchasers will not be allowed to buy a home which is more than one apartment size larger than their current need[3] 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.

Equity stakes

People buying a new supply shared equity property from a grant recipient must generally take an equity stake of between 60 and 80 per cent of the market value of the property, as set by the District Valuer.  The grant recipient may however agree to reduce the minimum equity stake to 51 per cent.  This is likely to apply where a housing market is particularly pressured, in a regeneration area, or where people with particular housing needs have identifiable additional housing costs.

The grant recipient may waive the minimum equity stake requirement for existing owner occupiers whose homes are scheduled for demolition or for those aged 60 or over who have a housing need.  This means the minimum equity stake can, in these circumstances, be lower than 51%.  These buyers would be expected to invest, as a minimum, the value of their existing property in an equity stake of the new property.  If there is any likelihood of the equity stake being funded purely from the value of the existing property with no lending from an external source it is important that the relevant grant provider is advised at as early a stage as possible.  In all cases, the maximum initial equity stake that any purchaser can take is 80 per cent of the market value of a property.

The level of equity stake that the Scottish Ministers will have in a property depends on the level of equity stake taken by a purchaser.  For example, if a purchaser has an equity stake amounting to 60 per cent of the market value of a property, the Scottish Ministers would have a 40 per cent equity stake in the market value of that property.

Grant recipients must inform applicants that they are expected to make payment of all sums due under the new supply shared equity scheme when they sell their home.  Grant recipients should note that the shared equity arrangements between the Scottish Ministers and individual shared equity owners are intended to run indefinitely.  The Scottish Government has made an amendment to the 20 year security rule pursuant to powers contained in the Housing (Scotland) Act 2014.  The amendment took effect on 15 February 2019 and removes the right to redeem securities after 20 years for those participating in designated schemes (including the new supply shared equity scheme). 

With the exception of existing owner occupiers whose homes are scheduled for demolition, people buying a new supply shared equity property must be means tested in order to establish eligibility (see below).

The responsibilities associated with buying a home under the scheme

An applicant will be responsible for their own legal and valuation costs incurred in relation to the purchase, and for all tax and registration costs.  An independent valuation is required for every transaction, even if the home buyer is not financing the purchase with a mortgage.  This may be the case for applicants aged 60 and over.  Unlike shared ownership, an owner has full title to the property and will not make occupancy payments.

An owner is expected to occupy the property as their only residence and they will be responsible for keeping the property in a good and habitable state of repair.  As well as making mortgage repayments and paying tax to their local authority, an owner must also insure their property.  An owner is responsible for all maintenance, repair and insurance costs and not just a percentage and, if the property has common and shared areas, they will be responsible for paying all common maintenance or service charges attributable to their property.

In so far as practicable, grant recipients should provide applicants with information on common maintenance and/ or service charges, and in relation to the homebuyer’s warranty or guarantee which will apply to the new build property at an early stage as well as reliable and realistic information about when the construction of the property may be finished and other matters referred to in relevant codes, as applicable, such as the Consumer Code for Home Builders or the New Homes Quality Code (see below).

Grant recipients are expected to follow the Factoring Guidance published by the Scottish Federation of Housing Associations in relation to the future management and maintenance of the project and/ or block in which each shared equity property is located.

An owner is not allowed to let the property or any part of it to a third party.  Previously permission to let was given for limited periods in exceptional circumstances.  However, when the Short Assured Tenancy was replaced by the Private Residential Tenancy – in terms of the Private Housing (Tenancies) (Scotland) Act 2016 – landlords were no longer able to provide for the tenancy to run for a limited period of time since a key aspect of the Private Residential Tenancy is that, once created, it continues without limit of time and landlords can only recover vacant possession if (a) the tenant gives notice of their intention to leave or (b) certain grounds exist which justify an eviction order.  This means that letting for short periods is not compatible with the new legislation and will not therefore be granted.

Grant recipients should make sure that applicants are made aware of these obligations (and the associated financial responsibilities) when they apply for a new supply shared equity property.  Grant recipients should also recommend that applicants fully discuss these and all other costs and restrictions – whether arising from the shared equity documentation, the primary lender’s documentation or otherwise – with their financial and legal advisers.

Processing legal documentation

The new supply shared equity scheme legal documentation contains a template sale offer to be used by the solicitors acting for the grant recipient when operating the scheme.  This template offer includes references to the separate legal documents which will regulate the Scottish Government’s equity stake in a property (the shared equity agreement, the standard security in favour of the Scottish Ministers and the ranking agreement).

Scottish Government solicitors have been appointed to provide legal services for the new supply shared equity scheme and they will liaise closely with the grant recipient and their solicitors in order to handle the preparation, completion and registration of the shared equity documentation.

In essence, the solicitors appointed by the Scottish Government (currently Harper Macleod LLP, The Ca’d’oro Building, 45 Gordon Street, Glasgow, G1 3PE) will deal with the shared equity agreement, the standard security and the ranking agreement among the Scottish Ministers, the purchaser and the primary lender.  Everything else including acquisition, title examination, burdens/ deed of conditions/ development management scheme/ disposition of individual houses, searches etc will be dealt with by the grant recipient’s own solicitor.  This will ensure that the lines of responsibility of both the grant recipient and the Scottish Ministers are clear and avoid any duplication of title work or additional costs.

As noted above, the scheme legal documentation contains a standard style of offer to sell which the solicitors which are acting for the grant recipient should complete subject to any amendments and additions which they and the grant recipient deem necessary and/ or desirable in accordance with good market practice and the nature of the development as well as the principles underpinning the Consumer Code for Home Builders or the New Homes Quality Code (see below).

Once agreed, the grant recipient’s solicitors should make a formal offer to sell to the solicitors acting for the purchaser.  If accepted the grant recipient’s solicitors will progress the sale of the plot in the normal manner in accordance with their duty of care whilst the Scottish Government solicitors will deal with the shared equity documentation.

RSLs must also ensure that they have all appropriate licences and authorisations for consumer credit purposes in relation to their role in the administration of new supply shared equity transactions.  (Local authorities do not require any particular licences or authorisations in order to administer new supply shared equity transactions.)  As a consequence of responsibility for the regulation of consumer credit being transferred from the OFT to the Financial Conduct Authority (FCA) with effect from 1 April 2014, any applications for authorisation after that date must be made to the FCA.  The Scottish Government has issued guidance on the impact of the changes to the FCA legislation on RSLs administering shared equity schemes.  RSLs may also wish to consider guidance that has been provided to them by the Scottish Federation of Housing Associations on this particular issue.

Shared equity agreements which are entered into from 21 March 2016 will no longer be classified as regulated consumer credit agreements, provided that they fall within the definition of ‘exempt housing authority loans’ as set out in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.  This should then mean that undertaking debt administration and debt collection in relation to such exempt loans will not themselves be regulated activities for which an RSL would require FCA authorisation.  In order to qualify as ‘exempt housing authority loans’, borrowers (i.e. shared equity purchasers) must be given timely information on the main features, risks and costs of the loan at the ‘pre-contractual stage’.

Grant recipients must therefore ensure that a letter in terms of the template set out is issued to all prospective purchasers who have been assessed as eligible for shared equity support, to explain the key features of the equity loan.  This letter must be issued by the grant recipient before the grant recipient instructs its solicitors to issue to the purchaser’s solicitors a formal legal offer for the sale of the property – this is required so that the explanation to the prospective purchaser is given at the ‘pre-contract’ stage.

Price

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.

Location

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. 

New supply shared equity primarily aims to increase the supply of affordable housing ‘in and around’ pressured housing markets[4].  Where there is tension between the cost of development within a particular area and providing affordable prices for the intended group, grant applicants will have to make a judgement about developing outside the area – in a location that is still appropriate for the intended group(s).

In addition, there is a recognised need 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.

In all cases however, location should also reflect Local Housing Strategy and Strategic Housing Investment Plan priority areas for investment.

Publicity

Grant recipients 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

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, grant recipients 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 grant recipients must ask prospective purchasers of properties to complete when they are applying to the scheme.

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 RSLs 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.

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.

Income assessment

An applicant should provide the grant recipient with details of all sources of finance when formally applying to the scheme.  This information will be used by the grant recipient to determine the anticipated value of mortgage finance (if applicable), and the value of any other personal contributions.  Mortgage lending must be in the form of a capital repayment mortgage – interest only mortgages are not permitted.  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.

For applicants aged 60 or over who are not buying with a mortgage, establishing household income will be less important.  However, grant recipients will want to be satisfied that this type of applicant is contributing the proceeds from the sale of their current or previous property.  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.

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.

In the event that it is a joint application but only one applicant works then the individual application rule would apply.

Grant recipients 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 and one Key Facts illustration 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.  The rule of thumb does not apply to those applicants who are aged 60 or over and who are applying to purchase without a mortgage.

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.  This will not apply for applicants aged 60 or over who are not using a mortgage to purchase through the scheme.

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 grant recipient 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.

The issue of how any debts incurred by applicants are treated will require to be considered by grant recipients.  Secondary loans incurred for housing purposes, essential transport costs, or to meet care and support costs may be taken into account.  However, grant recipients may also decide to consider loans taken out for other purposes.

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 below.

Having satisfied the grant recipient 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.

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:

• grant recipients encouraging applicants to seek independent legal and financial advice on all housing-related costs at the earliest possible stage, and
• 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).

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 (for example, 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.  These factors should be taken into account particularly when the applicant is aged 60 or over.

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.

The complexity of mortgages repaid solely through benefits means that a grant recipient should consider the need to employ specialist assistance from an organisation experienced in the issues facing people with particular needs when buying a home.

For applicants aged over 60, evidence of the sale price achieved from a previous house sale or of the formal offer accepted should be requested as part of the assessment process.  Reasonable expenses such as legal, estate agency fees and removal costs will be regarded as ‘eligible deductions’ from the sales proceeds prior to determining the equity stake.

Illustrative case studies on establishing affordability and conducting means testing are provided in Annex D, Appendix 1.

Third party warranties

Third party warranty premiums will be eligible for grant funding.  Third party warranties are a mandatory grant requirement for all types of new supply shared equity project.

The grant provider will accept NHBC Buildmark, Zurich and Premier Guarantee third party warranty schemes cover, or such other third party warranty scheme as may be acceptable in terms of the Council of Mortgage Lenders’ (now UK Finance) Handbook for Scotland.

In situations where the grant recipient owns the land which is to be developed for new supply shared equity, NHBC Buildmark and Premier Guarantee each require the land owner and builder to be registered under their respective warranty schemes so that effectively a double registration premium is required.  A second registration premium will be eligible for grant funding only where it can be demonstrated that this provides value for money.

Consumer codes

The Consumer Code for Home Builders has been in operation since 2010.  In December 2021 the New Homes Quality Board published its ‘New Homes Quality Code’ with the intention that it will replace the existing codes currently in place.  The New Homes Quality Code will apply to developers which register and activate with the New Homes Quality Board.    

Documentation in connection with sales of new build property under the shared equity arrangement are set out in the legal documentation.  Although the established view is that codes such as the Consumer Code for Home Builders or the New Homes Quality Code do not apply to a sale of this nature, the Scottish Ministers take the view that grant recipients should abide by the spirit of and principles underpinning such codes as applicable and that it is reflected in the sale offer.

Grant recipients should discuss the terms of the relevant code with their solicitors and adapt it to the development as appropriate.  Without prejudice to that, grant recipients and their solicitors should note the following:

• If there is a reservation fee payable in advance of formal offer there should be a written Reservation Agreement in terms of and subject to the relevant conditions in the relevant code.
• If there is no reservation fee or the reservation fee is only payable after conclusion of missives it has been decided that a Reservation Agreement will not be required.  Grant recipients should, however, set out clear details of the estimated cost and nature of any management services the home buyer must pay for.  The offer accordingly requires the solicitor acting for the home buyer to confirm as part of their acceptance that this has been done.
• A similar issue arises with the terms of the home warranty where the home buyer’s solicitor again agrees on their behalf that the terms of cover have been explained to them.
• The covering letter sent to the home buyer’s solicitor along with the offer should draw these matters to their attention.
• Grant recipients should, as a matter of course, provide bespoke advice in relation to health and safety precautions and information on:
• the layout, appearance and plot position of the home
• the list of home contents
• the standards to which the home is being built, and
• a contact person or personnel.

Grant recipients must ensure that a letter in terms of the template set out in the template sale offer is issued to all prospective purchasers who have been assessed as eligible for shared equity support, before the grant recipient instructs its solicitors to issue to the purchaser’s solicitors a formal legal offer for the sale of the property – this is required so that the explanation of the key terms of the equity loan is given at the ‘pre-contract’ stage.

Once the sale is effected grant recipients are required to provide:

• an appropriate after sales service all in accordance with the published After Sale Shared Equity Procedures
• advice on health and safety precautions when living in a development where building work takes place
• an appropriate system and procedures for receiving, handling and resolving buyers’ service calls and complaints as well as advice on dispute resolution, and
• an explanation of the arrangements to complete any work outstanding at handover.

These should be provided in accordance with the relevant code as applicable, together with any other matters which may be required in order to comply with the spirit of and principles underpinning the relevant code.

In providing an after sales service, grant recipients should recognise that the contractual arrangements relating to the design and construction of the houses are between the grant recipient and the building contractor/ developer and design team, and that individual home buyers have no direct contractual recourse against those third parties in the event of snaggings or defects arising in their home.  This is one reason why the provision of an appropriate third party warranty is a mandatory grant requirement as set out above, but in keeping with the spirit of the codes grant recipients should also have procedures in place to assist home buyers in bringing relevant matters to the attention of the builder/ developer during the applicable defects period and in ensuring that such matters are appropriately addressed.  It will not generally be sufficient for the grant recipient to simply refer the home buyer to the terms of their third party warranty cover.

Grant recipients should also ensure that, in their contracts with the builder/ developer, appropriate provisions are included so that the grant recipient can enforce any after sales arrangements against the builder/ developer if required.  For example, when negotiating its contract with the builder/ developer, grant recipients should seek to harmonise the duration of the contractual defects liability period with the duration of the period in the relevant code for reporting defects (two years), and may wish to consider whether to insert specific defects/ snagging reporting arrangements, which permit home buyers to report concerns directly to the builder/ developer, and which require the builder/ developer to remedy such matters within agreed timescales.

Where required and practicable grant recipients should be prepared to enforce the terms of the building contract against the builder/ developer for the benefit of affected home buyers, and should have regard to any outstanding complaints made by home buyers before releasing any contract retention upon the expiry of the defects liability period in the building contract.

Data protection

RSLs and local authorities acting as new supply shared equity administering agents act as data processers in relation to shared equity applications, including after sales transactions.  Further detailed information is contained in the Shared Equity Privacy Notice.  The retention periods for information processed by Administering Agents on behalf of the Scottish Government are as follows:

• Application information and supporting documentation (i.e. forms, wage slips etc) – This should be held for the remainder of the calendar year within which the information was received plus an additional 12 months.
• Shared Equity Owner and Property Purchase Information where Scottish Ministers hold an equity stake – This information should be held by the grant recipient indefinitely until the Scottish Ministers’ securities are discharged and for the remainder of the calendar year plus a further six years subsequent to discharge for audit purposes.
• Non-anonymised Customer Satisfaction Survey and Testimonials – The information should be destroyed within 12 months after the end of the calendar year the information was received, unless the individual has given express permission for it to be used in publicity materials.

All shared equity information stored by grant recipients acting as administering agents on behalf of the Scottish Government must be stored in electronic form.

After sales

Further detailed guidance on the handling of common after sales enquiries such as those below can be found in the After Sale Shared Equity Procedures:

• owners wishing to increase their equity stake
• owners wishing to re-mortgage
• owners wishing to sell
• adding or removing someone from the shared equity documentation, and
• buy back and re-sale.