Open Market Shared Equity Scheme: administrative procedures

2) The Open Market Shared Equity Scheme

2.1 An introduction

The Open Market Shared Equity Scheme is part of the Low-Cost Initiative for First Time Buyers ('LIFT') scheme. It aims to help people on low to moderate incomes to become home owners where this is sustainable for them. The Scheme helps eligible buyers to buy a home within a certain price threshold that is for sale on the open market. Any amount over valuation must be cash funded and must still be within the price threshold. From 1 October 2017 Link Homes will act as administering agent across all administrative areas in Scotland.

The methodology for providing Open Market Shared Equity is set out in these procedures. The role of the Administering Agents is to act for the Scottish Ministers in the funding of part of the price of a property purchased by an eligible buyer under the scheme. In return, an eligible buyer will enter into a Shared Equity Agreement with the Scottish Ministers which is secured by an appropriately ranked standard security.

Administering Agents are therefore acting for the Scottish Ministers and, as such, must follow these administrative procedures and have due regard to the interests of the Scottish Ministers.

A central conveyancing contract has been established under the Scottish Government Framework Agreement for the Provision of Legal Services for the Administering Agents operating the Open Market Shared Equity Scheme. Scottish Government Solicitors have been appointed to carry out this work. There is no requirement for Administering Agents to appoint their own solicitors.

2.2 Target groups to be housed

Target groups for the Open Market Shared Equity Scheme must fit the objective of supporting households on low to moderate incomes to become home owners where ownership is affordable and sustainable for them. The Open Market Shared Equity Scheme provides priority access to certain priority groups which include social renters, i.e. people who currently rent from either a Registered Social Landlord or a local authority, serving members of the armed forces, veterans who have left the armed forces within the past two years, widows, widowers and other partners of service personnel who have been killed recently whilst serving in the armed forces, disabled people who are either first time buyers or who own a home that is not suitable to their particular needs, and persons aged 60 and over who demonstrate a housing need to move against the set criteria.

For the purposes of administering this scheme a First Time Buyer (FTB) 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)*

*Please note this applies whether title was taken either individually, jointly or in common pro indiviso (i.e. where ownership of a dwelling is/was held by two or more parties in individual shares) The definition of what constitutes a First Time Buyer is in line with the definition used for the purposes of Land and Buildings Transaction Tax and is set out in further detail on the Revenue Scotland Website

Where joint applications are received, unless all of the applicants fall within the definition of first time buyer, then the application cannot be processed.

The only exception to applicants having to be first time buyers is where an applicant or, in the case of joint applicants, at least one of the applicants, falls into one of the priority target groups set out above, in which case the fact that the applicant has previously owned a dwelling will not render the applicant or applicants ineligible to apply for support provided that they dispose of any interest in any other dwelling before or at the point when they complete the purchase of the dwelling which they receive financial support for through the Open Market Shared Equity Scheme.

Administering Agents must make sure that equality duties under the Equality Act 2010 and any codes of practice under that Act are met when targeting the Open Market Shared Equity Scheme.

Non-United Kingdom nationals are eligible for assistance under the Open Market Shared Equity Scheme so long as they do not have a home elsewhere and meet any other eligibility criteria set for the scheme.

2.3 Equity stakes

Applicants who purchase property through the Open Market Shared Equity Scheme generally need to take an equity stake of between 60 and 90 per cent of the value of a property (or purchase price whichever is lower), as set by an independent professionally qualified valuer who is registered with the Royal Institution of Chartered Surveyors (RICS). The Scottish Ministers will keep a financial stake in the property so the applicant does not have to fund all of it. In certain limited circumstances however, the Scottish Government may agree to reduce the minimum equity stake to as low as 51 per cent. This is likely to apply where a housing market is particularly pressured or where people with particular housing needs have identifiable additional housing costs (see Annex C, paragraph 12). In all cases, the maximum initial equity stake that any owner can take is 90 per cent of the value of a property or purchase price, whichever is lowest.

Applicants can pay over valuation for a property from their own funds, provided they do not pay more than the published threshold amount for that area and size. The Scottish Governments equity stake calculation will be based on the purchase price or valuation, whichever is the lowest, to two decimal points.

When the applicant decides to sell the property, the Scottish Government will be due the percentage stake back on the actual sale price at that time. For example:

Property price £105,000

Valuation £100,000

Applicants mortgage & deposit contribution £ 70,000

Applicants over value contribution £ 5,000

Scottish Governments stake £ 30,000

(based on the lower figure)

Scottish Governments % stake 30%

Sale price £115,000

Funds due to Scottish Government £ 34,500 – 30% of full sale price

Applicants should be aware that if the market value is lower than the amount they purchased for when they sell it, they may incur a loss.

The level of equity stake that the Scottish Ministers will have in a property depends on the level of equity stake taken by an owner. For example, if an owner has an equity stake amounting to 60 per cent in a property, the Scottish Ministers will have a 40 per cent equity stake in that property. Please note that if the owner has paid over valuation the Scottish Ministers equity stake calculation will be based on the purchase price or valuation, whichever is the lowest.

Valuations and Letters of Reliance

2.4 Valuations

Scottish Ministers must be able to rely on the valuation provided in the Home Report or valuation for the purpose of providing financial support through the Open Market Shared Equity Scheme. This will normally be done through an over-arching arrangement between Scottish Government and RICS members pursuant to which valuers agree to extend a duty of care to Scottish Ministers in relation to all valuations prepared by them for properties which come within the Open Market Shared Equity scheme.

Administering Agents must check the valuation report (which may form part of a Home Report) and ensure that it has been prepared by a surveying firm which is a member of the RICS. The property valuation must have been carried out within the past three months. The Administering Agent is required to check the property valuation against the full purchase price. It should be noted that, in the case of eligible applicants who are aged 60 and over and who do not intend to take out a mortgage to assist with the purchase of the property, a property valuation will still be required. Administering Agents should also note that valuations must only relate to the value of the property itself and not to any contents, moveable items etc.

Applicants to the Open Market Shared Equity Scheme must be means tested in order to establish eligibility and it should be noted that interest only mortgages are not permissible when purchasing a property with the assistance of Scottish Government Shared Equity. All mortgages must be capital repayment.

Administering Agents must inform applicants that they are expected to make payment of all sums due to Scottish Government under the Open Market Shared Equity Scheme when they sell their home. Administering Agents should note that the shared equity arrangements between Scottish Ministers and individual shared equity owners will run indefinitely but that owners will not be required to grant a replacement standard security in the nineteenth year after their purchase of their property in order to address the legal implications of the "20 year security rule", nor will they require to receive any form of notice to bring this matter to their attention. The Redemption of Heritable Securities (Excluded Securities) (Scotland) Order 2018 came into effect on 15 February 2019 and removed the right to redeem securities after 20 years for those participating in designated shared equity schemes including the Open Market Shared Equity scheme.

2.5 The responsibilities associated with buying a home

An applicant will be responsible for their own legal and, if necessary, valuation costs incurred in relation to the purchase, and will be responsible for all tax and registration costs. Unlike shared ownership, an owner will have full title to the property and will not make occupancy payments. Scottish Ministers hold a heritable security over the property which is discharged upon the open market sale of the property or purchase of the remaining equity stake by the shared equity owner.

An owner is expected to occupy the property as their sole and 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 any common maintenance or service charges. The scheme is not available to assist buy-to-let investors and upon completion, the property purchased with assistance from the scheme must be the only residential property owned by the buyer.

In so far as practicable, Administering Agents should encourage Open Market Shared Equity Scheme applicants to discuss common maintenance and/or service charges with their solicitor to find out how much these additional costs are before they proceed with buying a property.

An owner is not allowed to let or share possession of the property or any part of it and owners are expected to live in the property as their only place of residence.

Administering Agents should make sure that applicants are made aware of these obligations (and the associated financial responsibilities) when they apply to the Open Market Shared Equity Scheme. Administering Agents must also recommend to applicants that, in so far as they have not already done so, they appoint solicitors and fully discuss with them the obligations that come with being an owner of a Shared Equity property – and the associated costs – as well as the full terms of the Shared Equity documentation. Reference in this regard may be made to the Application Form - Part 8 Appointing a Solicitor (Annex B). Administering Agents should also recommend that applicants contact an independent financial advisor if they have not already done so.

The standard styles of legal documentation are set out in Annex A.

2.6 The golden share

In certain circumstances, such as in areas where there is a highly constrained supply of affordable housing and little or no scope for this supply to be increased, the Scottish Ministers may be allowed to retain a 10 per cent equity stake in a property, known as a 'golden share'. The golden share will only be used in areas where there are fewest opportunities for supply to be increased – in particular some rural areas. The Scottish Government will agree any areas for operation of the golden share with each local authority, and will communicate these to Administering Agents. The retention of a golden share is secured through the Shared Equity Agreement.

Where applicable, Administering Agents must (i) explain to applicants what it means to have a 'golden share' over a property and (ii) ensure that individual passport letters record where a golden share will apply (see Annex D).

2.7 Financial Conduct Authority (FCA) permits

Administering Agents must ensure that they have all appropriate licences and authorisations for consumer credit purposes in relation to their role in the administration of OMSE transactions. While Scottish Government cannot provide Administering Agents with advice on which FCA authorisations may be required, the detailed regulations on which activities are regulated by the FCA were amended with effect from 27 June 2014 to provide that "credit broking" is not a regulated activity for which FCA authorisation is required where the broking relates to a secured loan provided by either the Scottish Ministers or an Administering Agent, which means that Administering Agents should not require authorisation for "credit-broking" in relation to OMSE transactions. It is possible, however, that authorisation may still be required for Category F (debt collecting) and/or Category G (debt administration). Administering Agents may wish to consider guidance that has been provided to them by the Scottish Federation of Housing Associations on this particular issue.

2.8 Publicity

Administering Agents should ensure that any publicity material they produce for the Open Market Shared Equity Scheme meets all statutory requirements and is discussed in advance with the trading standards department of the relevant local authority. All publicity material produced by Administering Agents should also make clear that the scheme is funded by the Scottish Government as part of LIFT.