The Evaluation of Low Cost Initiative for First Time Buyers (LIFT)

APPENDIX 1 - THE OPERATION OF THE FOUR LIFT SCHEMES

Introduction

The Scottish Government established LIFT in October 2007. The aim of the programme is to help people on low to moderate incomes to buy a home, where this is sustainable for them.

LIFT includes five different initiatives:

• Shared Ownership - where people buy a share of a property, and make an occupancy payment to a Registered Social Landlord ( RSL) on the remaining portion;
• GRO grants - grants to private developers to build affordable houses for sale, in areas with little or no private housing or to help meet local shortages;
• New Supply Shared Equity ( NSSE) - to allow first time buyers to buy a new build property from either a housing association, or a private housebuilder (currently being trialled);
• Open Market Shared Equity ( OMSEP) - to allow first time buyers to buy a property on the open market; and
• Rural Home Ownership Grants ( RHOGs) - grants to help towards buying, building or renovating a home for people in rural areas who could not otherwise afford to buy.

The funding for all LIFT schemes is administered by the Scottish Government, in all parts of Scotland except Edinburgh and Glasgow. In Edinburgh and Glasgow, the local authority has responsibility for administering grant funding schemes of shared ownership, NSSE and GRO schemes. The administration of OMSEP remains the responsibility of the Scottish Government.

RSLs also have an important role in managing the application and assessment process for some of the schemes, and acting as a local contact point, funding conduit and information and advice source.

Four of the five schemes are included within the scope of this evaluation. The RHOG scheme is excluded as it was subject to a full evaluation in 2006. The New Supply Shared Equity Trial with developers is also excluded, as it had been in operation for a short time at the time of this evaluation.

Shared Ownership

Aims

Shared ownership was first introduced in Scotland in 1983. RSLs can build or buy new homes for shared ownership, with a grant from the Scottish Government. The RSL markets the properties to priority purchasers who would otherwise be unable to afford to buy a home. The household can acquire an equity stake (of 25, 50 or 75 per cent). The purchaser pays their mortgage costs and a reduced occupancy charge to the RSL.

Shared ownership is a way of fulfilling people's aspirations to home ownership. It assists buyers in pressured market areas, and helps to introduce mixed tenure in areas with low levels of owner occupation.

Application and Targeting

People can apply for a shared ownership property by completing a shared ownership application and returning it to a participating RSL. Associations then assess eligibility and prioritise applicants. This normally takes into account:

• income - ensuring a minimum income level is exceeded to ensure affordability;
• tenure - priority is normally given to applicants in social rented housing;
• stage - priority is normally given to first time buyers.

National guidance on shared ownership suggests that priority target groups should include:

• first time buyers;
• owners facing difficulties and unable to sustain or move back into full owner occupation;
• social rented housing tenants or applicants;
• older people and families on low incomes;
• those with special needs unable to purchase a suitable house; and
• (since March 2010) armed forces personnel, veterans and widows/ widowers.

Where shared ownership is used for area regeneration or tenure diversification, the target group does not need to be strictly defined.

People who could afford to buy a house outright on the open market are not eligible for shared ownership housing. Neither are those who could not afford to purchase a 25 per cent share (or 50 per cent depending on the locally set minimum). The application procedure therefore includes an assessment of financial circumstances, to ensure that applicants can truly afford the costs involved.

Level of Funding

The Scottish Government applies a cost value calculation when it considers potential shared ownership developments. The calculation means that the maximum subsidy level is 41 per cent as the market value of the properties must be at least 59 per cent of the total cost of provision. However, in many regeneration areas, the cost of provision will be lower than the market value and no subsidy will be required.

Social landlords building new shared ownership properties are allocated a development allowance to cover the cost of devising and implementing shared ownership projects, as well as an allowance per unit. An initial development allowance is provided at the same level as for all standard developments. In 2009/10 the allowance was £13,827 per project, plus £691 per unit. This development allowance is not provided for shared ownership 'off the shelf' acquisitions. In all cases an additional allowance of £1,659 is provided for each shared ownership unit, to allow for 'complexity factors'.

Occupancy Charges

Sharing owners also pay an occupancy payment which includes a rental charge, a management fee (including insurance) and a service charge (where applicable) for any maintenance or other services provided by the RSL. The guidance on shared ownership states that this occupancy payment should reflect that the sharing owner is responsible for meeting the cost of all repairs and maintenance to the property.

Shared owners sign an Exclusive Occupancy Agreement rather than a lease. However, shared ownership properties are subject to the leasing rules set out in the Land Tenure Reform (Scotland) Act 1974. This states that, in general, a private dwelling cannot be subject to a 'long lease' (more than 20 years in duration). The Occupancy Agreements therefore generally state that by the 20 year deadline, the owner could buy the property outright; the RSL could buy the property outright; or the owner and RSL could sell the property jointly. Another option, not currently stated in the Occupancy Agreement, is that the RSL and sharing owner could agree to enter into a new Occupancy Agreement.

Increasing Share and Future Sales

Shared ownership occupiers have the right to buy further 25 per cent tranches of the property, up to and including 100 per cent, which means that they then become the sole owner of the house. They can buy a maximum of one tranche each year, but there is no obligation on a sharing owner to purchase further shares.

If the sharing owner wishes to sell the property at any time, the RSL has the option to purchase the property. Originally this was only possible if the property was to be re-sold on a shared ownership basis. However, in May 2009 the Scottish Government issued guidance stating that an RSL can purchase the property and make it available for rent (either to the existing sharing owner or a new tenant), provided that no additional grant is required.

If the RSL does not wish to repurchase the property, it can help to facilitate a direct sale from one sharing owner to another; or can agree to jointly sell the property on the open market.

GRO

Aims

The Scottish Government (or local authority in the case of Glasgow and Edinburgh) provides ' GRO grants' to private developers, housing trusts or non-registered housing associations, with the aim of providing low cost owner occupied housing. They were first introduced in 1990. The aim is to allow developers to build property to stimulate the private housing market, create mixed communities, or address local shortages in supply. There are three main types of GRO funded project:

• projects to diversify the tenure of neighbourhoods;
• projects to regenerate older urban communities; and
• projects to provide affordable housing for owner occupation in pressured market areas, often rural communities.

Guidance is currently being updated to comply with State Aid 239/2002 and a revised version is expected towards the end of the year.

Application and Targeting

GRO grants are only available where the properties are offered to prioritised groups of people - such as people unable to obtain social rented housing; local residents living in rented accommodation; first time buyers; or people with connections to the area. The developer is responsible for recording information about the purchaser, and returning this to the grant provider within 28 days. However, in areas where the owner occupied market is limited, selling homes to specific client groups may be of secondary importance to simply successfully selling the homes.

Level of Funding

The Government provides grants at the minimum level required to meet the difference between the production costs and sales value of the property on completion. There is an upper public funding limit of 40 per cent of costs in deprived areas, and a third of costs in other areas. To ensure optimum value for money, wherever possible potential projects are subject to open competition between prospective developers.

Property Sales

The completed homes are then sold either at or below market value. The developers receive a defined, limited return on the sale of the houses. Although the vast majority of properties are sold at market value, properties can be sold at below market value in pressured areas. If properties are sold below market value, there will be arrangements in place to claw back the surplus profit made from re-sale of the property, if it is sold or leased within a certain time period. This is normally a minimum of five and a maximum of ten years. A condition of sale is that purchaser must occupy the property as their sole residence.

New Supply Shared Equity ( NSSE)

Aims

The New Supply Shared Equity scheme (originally known as Homestake) was set up in September 2005. It was rebranded as part of LIFT in October 2007. It allows RSLs to build or buy new homes for sale on a shared equity basis. This means that purchasers can (generally) buy a majority stake of the equity, depending on their income. The remaining equity is held by the Scottish Government. The purchaser owns the property outright, but the interests of the Scottish Government are secured by a mortgage (or standard security) on the property.

There are three types of NSSE scheme:

• RSLs build new properties for sale on a shared equity basis;
• RSLs purchase properties from private developers (at an appropriate discount) for onward sale to shared equity purchasers; and
• RSLs develop new properties for sale on a shared equity basis to existing owners whose homes are scheduled for demolition.

Application and Targeting

The scheme is targeted at people who may experience barriers to owner occupation, including first time buyers; people with a disability; and households affected by demolition in regeneration areas. It is also used to deliver mixed communities in regeneration areas where there is not an established owner occupier market.

The RSL is responsible for administering, assessing and prioritising applicants. The RSL agrees a local set of criteria for assessing applications, to ensure that low to moderate income households are targeted. In January 2010, the Scottish Government issued an amendment to existing guidance, specifying that priority should be given to:

• social renters;
• armed forces personnel;
• veterans who left the armed forces in the past year; and
• widows, widowers and other partners of service personnel killed in action in the past year.

Level of Funding

When NSSE was set up, the equity loan provided by the Scottish Government ranged from 20 to 40 per cent in normal circumstances. This meant that the purchaser generally bought 60 to 80 per cent of the equity. However, in exceptional circumstances the purchaser can buy a stake of less than 60 per cent - but generally not less than 51 per cent. This may apply where people have particular housing needs related to a disability, or in areas where house prices are particularly high.

Where existing owner occupiers are affected by demolition, they are expected to invest, as a minimum the value of their existing property in an equity stake in the new property. This may result in them purchasing less than a 51 per cent equity stake. However, the maximum equity stake they can purchase remains 80 per cent of the market value of the property.

The purchaser is responsible for legal costs, survey fees, stamp duty (if applicable) and other costs associated with the purchase - including the documenting and securing of the Scottish Government's interest in the property.

Social landlords building NSSE properties are allocated a development allowance to cover the cost of devising and implementing shared equity projects, as well as an allowance per unit. An initial development allowance is provided at the same level as for all standard developments. In 2009/10 this was £13,827 per project, plus £691 per unit. This development allowance is not normally provided for NSSE 'off the shelf' acquisitions which are smaller than five units. An additional allowance of £1,659 was provided for each NSSE unit, to allow for 'complexity factors'. However, this was reduced to £1,559 in May 2009 to reflect new central conveyancing arrangements.

Increasing Stake and Future Sales

Over time the purchaser can acquire the remaining equity in full, if and when they can afford it. Purchasers must wait at least two years before increasing their initial stake. The first increase must take the purchaser's equity stake to 80 per cent. After another year (or more), purchasers can increase their stake again - this time to 100 per cent.

The exception is where the Scottish Government holds a 'golden share' of 10 or 20 per cent of the equity depending on the circumstances, meaning that the purchaser cannot own the property outright. This is to ensure that the property remains in the affordable housing market. This mechanism is often used in pressured areas, or where the home has been adapted for particular needs.

If households wish to sell a shared equity property, they receive the percentage of the sale value which relates to their equity share. The household is responsible for marketing the property.

Shared equity owners are also affected by The Land Tenure Reform (Scotland) Act 1974. After 20 years a purchaser could redeem their standard security over a property on payment of the sums advanced by the Scottish Government to purchase the property without any capital appreciation. Where a golden share is applied, the right of pre-emption could fall. For this reason shared equity purchasers are required to enter into an agreement with the Scottish Government to either purchase an additional tranche or the property outright (assuming there is no 'golden share') within 19 years if they retain ownership of the property .

Open Market Shared Equity Pilot ( OMSEP)

Aims

The Open Market Shared Equity Pilot is a pilot scheme. It was originally set up in September 2005, covering Edinburgh and the Lothians. The pilot was subject to an interim evaluation in 2007 ²⁰. In January 2008, the pilot was extended to a further six local authority areas. In response to the worsening economic conditions, the Scottish Government announced that it would extend the pilot throughout Scotland from March 2009 for a one year period.

The scheme operates on the same principles as the New Supply Shared Equity scheme. It allows eligible purchasers to acquire a property on the open market rather than through an RSL's newly built properties.

The scheme is administered locally by five RSLs- each with responsibility for certain parts of Scotland. Scottish Ministers hold the equity stake, but the RSLs enter into an agreement to enable them to act for the Scottish Ministers. Owners then enter into an agreement with Scottish Ministers.

Application and Targeting

There is a standard application form, and RSLs must use standard national processes for assessing eligibility. If the potential purchaser is eligible, a 'passport' is issued. This 'passport' gives applicants 12 weeks to find a suitable property and have their offer to purchase accepted. It will also set out a limit for the price of property, and an applicant cannot buy a shared equity property at higher than this limit. This price limit is slightly more flexible for applicants with particular housing needs.

Once a purchaser identifies a suitable property, the RSL has responsibilities in checking that the property meets the LIFT criteria in terms of price, size, equity stake and affordability. The purchase then progresses using standard legal documentation drawn up for OMSEP, to ensure that the Scottish Government's securities are adequately represented.

Level of Funding

Originally the equity loan provided by the Scottish Government ranged from 20 to 40 per cent in normal circumstances. This meant that the purchaser generally bought 60 to 80 per cent of the equity. However, there are two exceptions:

• In exceptional circumstances the purchaser can buy a stake of less than 60 per cent - but not less than 51 per cent. This may apply where people have particular housing needs related to a disability, or in areas where house prices are particularly high.
• For 2010/11 the Scottish Government has reduced its equity loan to range from 10 to 30 per cent, meaning that the purchaser should generally purchase between 70 and 90 per cent (unless there are exceptional circumstances). The aim is to use the funding more effectively, to help to meet high levels of demand for this scheme.

The Scottish Government sets limits on the price of homes that can be bought under the open market scheme (known as threshold prices). These limits are set out by house size and areas. The limits vary according to lower quartile house prices in different parts of Scotland, and are reviewed regularly.

Initially, social landlords participating in the OMSEP scheme received a payment of £1,559 for each completed purchase. When OMSEP was extended to a further six areas in 2008, RSLs administering the scheme in these areas were asked to submit separate bids setting out the amount that they could administer the scheme for. The lowest bid was applied across all areas and was £971. The Scottish Government also reimbursed administration costs for the administering RSLs for each applicant that reached passport stage, but failed to purchase a property - up to a maximum of £1,559. The administrative grant in 2009/10 was reduced to £702.

Increasing Stake and Future Sales

Once the purchaser has bought a property, they can acquire the remaining equity in full, if and when they can afford it. As with NSSE, purchasers must wait at least two years before increasing their initial stake. The first increase must take the purchaser's equity stake to 80 per cent. After another year (or more), purchasers can increase their stake again - this time to 100 per cent. As with NSSE, the Scottish Government can hold a 'golden share' of 10 or 20 per cent equity, (depending when the property was purchased) meaning that the purchaser cannot own the equity in the property outright. This is generally intended only to be used in areas where there are fewest opportunities for supply to be increased - particularly in rural areas.

If households wish to sell a shared equity property, they receive the percentage of the sale value which relates to their equity share. The household is responsible for marketing the property.

As with NSSE, the Land Tenure Reform (Scotland) Act 1974 applies and owners are required to enter into an agreement to either purchase an additional tranche or the property outright (assuming there is no 'golden share') within 19 years if they retain ownership of the property .

Changes in 2010/11

Due to high demand, the scheme was closed to new applicants in 2010/11. However, the Scottish Government allocated £20 million to help some of the existing applicants to buy a property during 2010/11. New application forms were first issued to priority applicants, on RSL waiting lists. Priority applicants were first time buyers currently living in social housing, Armed Forces personnel and veterans or partners of service personnel. Subsequently application forms were issued to other applicants on the waiting lists.

The Other LIFT Schemes

The four schemes outlined above - shared ownership, GRO, NSSE and OMSEP - are all included within the scope of this evaluation. The Scottish Government also runs two other LIFT schemes which are outwith the scope of the study. These are:

• Rural Home Ownership Grants ( RHOG) - These grants are intended to support home ownership in rural areas. It was launched in 1994 in recognition that some parts of rural Scotland have limited opportunities for local people to buy or build their own homes. This scheme has already been subject to a full evaluation in 2006 ²¹, and is not included within this review.
• NSSE with Developers Trial - This scheme was launched in March 2010. It operates in a similar way to NSSE with RSLs. The purchaser buys an equity stake of between 60 and 80 per cent, and the remaining equity stake is split evenly between the developer and the Scottish Government. Seven developers (which meet certain core criteria) have been selected to participate, providing 100 homes across Scotland. Developers will liaise with an RSL which has experience of the LIFT scheme. The Scottish Government invested £2.5 million in this scheme during 2010/11. As this trial has only recently been launched, it was not included in this evaluation.

Summary

	Shared Ownership	GRO	NSSE	OMSEP
Stated Aims	Meeting aspirations of home ownership	Stimulating the private housing market	Help first time buyers on low to moderate incomes into owner occupation	Help first time buyers on low to moderate incomes into owner occupation
	Assisting buyers in pressured market areas	Create mixed communities - through tenure diversification	To provide options for those whose homes are being demolished	To meet particular housing needs which cannot be met otherwise
	Introducing mixed tenure in areas with low owner occupation	Address shortages in supply	To meet particular housing needs which cannot be met otherwise
		Regenerate older urban communities
		Provide affordable housing for owner occupation in pressured areas
Target Group	First time buyers including: people living in social housing or applicants; armed forces, veterans, widows and widowers; people with special needs; and older people on low incomes.	First time buyers including: people unable to obtain social rented housing; and local residents living in rented housing due to lack of opportunities to purchase.	First time buyers including: people living in social housing or applicants; armed forces, veterans, widows and widowers; people living in private rented housing	First time buyers including: people living in social housing; armed forces, veterans, widows and widowers; and people living in private rented housing.
		People with connections to the area who wish to return	Disabled people	Disabled people
	Owners facing difficulties
	People with special needs
			People experiencing significant change	People experiencing significant change
			People whose homes are being demolished	People whose homes are being demolished
Level of Investment	Up to 41% subsidy of capital costs	Up to 40% subsidy in deprived areas	Project development subsidy and complexity factor payments to RSLs	Payments to RSLs to administer scheme
	Up to 75% equity share	Up to 33% subsidy in other areas	Up to 40% equity stake as standard	Previously up to 40% equity stake
			Up to 49% equity stake in exceptional cases	Up to 30% equity stake from 2010/11
			Potentially higher levels of subsidy in demolition areas	Up to 49% equity stake in exceptional cases for disabled applicants.
				Potentially higher levels of subsidy in demolition areas
Return on Investment	Equity share returned upon sale or if owner increases their share. Grant funding repaid to SG but any remainder kept by RSL Potential of increase or decrease in return due to market values	Surplus profit returned if properties are originally sold below market value and are resold within specified timescale (5 or 10 years)	Equity stake returned upon sale or if owner increases their stake Potential of increase or decrease in return due to market values	Equity stake returned upon sale or if owner increases their stake Potential of increase or decrease in return due to market values
Future Sustainability	20 year lease rule applies - leases last 20 years but can be renewed	20 year rule not relevant	20 year standard security rule applies - agreements last 19 years	20 year standard security rule applies - agreements last 19 years