Agenda Item No 16 Report No: CD79/13

Eden District Council Executive 30 July 2013

Proposed Mortgage Indemnity Pilot Scheme

Reporting Officer: Communities Director

Responsible Portfolio: Housing

1 Purpose of Report

1.1 The report sets out a proposal to help to stimulate the local property market, through introducing a £30,000 pilot scheme, working in partnership with the Penrith , to provide mortgage indemnities, enabling local people struggling to save up large deposits to buy their own home, up to a property value of £150,000.

2 Recommendation:

That Executive approves the mortgage indemnity pilot in respect of the proposals set out in Section 3 of this report.

3 Report Details

3.1 The Council’s Housing Services team contacted local lenders a number of months ago to gauge whether there would be any interest in a scheme based on ‘LAMS’ (Local Authority Mortgage Scheme) which has been operated by a number of other Local Authorities across the country to try and get the property market moving. The scheme is designed to assist people struggling to raise a 25% deposit, but who could afford to meet the mortgage repayments. Mortgages between 75% and 95% of loan to value attract a higher lending charge. This is based on the percentage of the difference between the 75% and the amount advanced against the property.

The disadvantage with LAMS is that it requires Local Authorities to deposit large amounts of money (typically equivalent to 20% of the cost of the property) for several years in case of the borrower defaulting. As an alternative, Penrith Building Society recommended an indemnity model, detailed in Appendix 1. The example shown, based on the £150,000 maximum property value, would involve the Council providing a grant of £2,226 to cover an indemnity covering 20% of the mortgage for a period of 7 years, based on the borrower providing a 5% deposit.

1 Following a number of meetings with Council Officers, Penrith Building Society’s Board confirmed on 19 June that they were supportive of the indemnity scheme progressing. The Eden Community Housing Advisory Board recommended at its last meeting on 21 June that a report should be prepared for Executive, recommending approval of the Mortgage Indemnity Scheme. 3.2 The Council has money available in a Homelessness Assistance Fund accumulated from unused Central Government Homelessness Prevention Funding which could be used to resource the scheme - this would be an appropriate use of the funding, as the scheme would help homeless households by freeing up accommodation in the private rented sector by providing a ‘hand up’ to people who would traditionally have become first- time buyers, but have been unable to save up for a large deposit. It is suggested that £30,000 is allocated to the scheme in the first year as a pilot (enough for approximately 15 grants based on a £150,000 property). If the scheme proves successful it could then be continued, subject to an annual review.

Penrith Building Society’s Chief Executive has confirmed that they would be willing to make a contribution through extending their ‘Fees Paid’ scheme to a maximum 95% loan to value. Under this scheme the Penrith would pay the standard valuation fee (typically around £210) and application fee (£75) as well as legal fees (excluding stamp duty) where customers use the Society’s solicitor, for participating customers (as detailed in Appendix 1).

3.3 The mortgage indemnity scheme would provide a number of potential advantages, through helping to stimulate the local housing market in Eden. It is anticipated the scheme would deliver the following benefits: Encouraging young people, including graduates, to stay in the Eden area; Assisting people into owner-occupation would free up properties in the private rented sector for those unable to buy, including homeless households; Helping to get the housing market moving: a fluid housing market typically requires at least 40% first-time buyers to avoid sellers being stuck in property chains - since the ‘credit crunch’ it has been estimated the number of first-time buyers has fallen to around half of this figure. Home owners being unable to sell has wide reaching implications for the housing market (as well as social consequences), as it impacts on: labour mobility; people needing a larger home as their families grow; older people wishing to downsize; people needing alternative accommodation on health grounds; and people needing to sell due to changing financial circumstances (e.g. redundancy). 3.4 The scheme would also represent significant potential benefits in terms of assisting local people, particularly younger people, who have been priced out of the property market by high deposits required by lenders (interest rates are much less competitive where lenders are prepared to give mortgages on smaller deposits - this is illustrated under scale of rates, at the bottom of

2 Appendix 1, with the rate at 75-85% mortgages being 3.869% but rising to 5.247% on 85 to 90% mortgages). The following statistics were included in a report produced by housing charity Shelter, in June 2012, entitled ‘Generation Rent locked out of the property market for more than a decade’: Nationally, couples starting a family in their twenties could typically be saving for a deposit for 12 years; Couples without a child still face an average of six-and-a-half years saving for a deposit; Single people may need over 14 years to save enough for a deposit. This situation reinforces social polarisation, as often only those young people able to access ‘the of Mum and Dad’ are in a position to pay a large deposit. 3.5 Applicants for the Mortgage Indemnity Scheme would need to meet the following criteria:

The maximum property price would be £150,000 - this figure was selected as this is the approximate ‘lower quartile’ (or typical entry level) property price in Eden District.1 Penrith Building Society would assess the ability of applicants to meet the mortgage repayments; The applicant would be required to confirm that this is their only residence (second homes would not qualify);

The applicant would need to meet the local connection criteria set in Policy CS7 ‘Principles for Housing’ of Eden’s Core Strategy (detailed in Appendix 2). This information would be checked by Eden’s Housing Services team.

The qualification criteria would be reviewed at regular partnership meetings between Eden’s Housing Services team and the Penrith Building Society, to ensure the scheme was operating effectively.

3.6 The proposed Mortgage Indemnity Pilot differs in a number of ways from Central Government initiatives into assisting people into home ownership. The Government’s ‘Help to Buy’ scheme is open to both first-time buyers and home movers on homes worth up to £600,000 - but only applies to new-build homes. Equity loan fees (initially 1.75% of the loan value then rising every year) are charged after the first five years. From January 2014 a new ‘Help to Buy’ mortgage guarantee will also come into operation, which is open to existing as well as newly built properties, but full details are not available yet. What is proposed here is a local initiative to help people on moderate incomes into home ownership, including purchasing existing properties, while simultaneously stimulating the local housing market.

1 Source: CACI Paycheck property price data.

3 3.7 The scheme would not contravene the Council’s Procurement Rules as long as it is also open to other lenders. Assuming the applicant(s) are accepted by the Building Society and the Council as being eligible under the scheme, the Council would make a grant to the applicant(s) of the mortgage indemnity premium (to a maximum of £2,226 based on the example in Appendix 1). This would be the Council’s only input into the scheme and the relationship would be specifically between the borrower and the Building Society thereafter. The payment of the indemnity premium would be treated solely as a grant and the Council would never seek to recover this. The Penrith Building Society has its own insurer who would provide the . The purpose of this is that, if the borrower defaults, the insurance gives the Building Society the difference between the 75% and the amount advanced. The Council can offer the scheme to other lenders, if they were looking to offer mortgages on a similar basis. There would be no reason why, if the mortgage applicant(s) met the Council’s agreed criteria, that a grant could not be made available to them to borrow from another lender. Therefore, the Council would not fall foul of its Procurement Rules. 3.8 Executive may decide not to proceed with the Mortgage Indemnity Scheme pilot, but the scheme would have benefits for the local housing market, through helping local people, typically first-time buyers struggling to save large deposits, to get a foot on the housing ladder, while simultaneously freeing up much needed private rented accommodation, which could accommodate people in housing need, including homeless households. 4 Policy Framework

4.1 The Council has four corporate priorities which are: Housing Quality Environment Economic Vitality Quality Council.

4.2 This report meets Housing corporate priority.

4.3 This report addresses strategic action H3 in the Corporate Plan, to increase housing affordability and availability to meet current and future housing needs.

4.4 This report helps to meet Policy CS7 Principles for Housing of the Council’s adopted Core Strategy, in respect of providing for a full range and choice of housing types to meet the needs of the whole community.

5 Implications 5.1 Legal 5.1.1 The Council has a general power of competence under the Localism Act. This power enables an Authority to do anything that individuals generally may do.

4 5.1.2 The Council has a power to promote the social, economic or environmental wellbeing of its area. This power may be exercised for all or any persons resident in the District. The power enables the giving of financial assistance and entering into arrangements with another person.

5.1.3 Under the Housing Act 1985 (Section 442) a Local Authority can provide an indemnity to a mortgagee in the circumstances and subject to the conditions set out in the agreement.

5.1.4 The proposal is aimed at assisting people obtain a mortgage. The scheme should be open to other partners, particularly should the pilot be successful and a further scheme applied. The arrangement with the Building Society will require to be set out formally to identify its terms and application.

5.2 Financial

5.2.1 Any decision to reduce or increase resources must be made within the context of the Council’s stated priorities, as set out in its refreshed corporate plan.

5.2.2 As stated at paragraph 3.2, a budget of £30,000 is proposed as an initial sum to introduce the scheme. If all applications were for the expected maximum of £2,226 then 13 grants could be made. A specific budget will be set up to make payment of the grants. The grant will be payable to the Lender.

5.2.3 The scheme will be funded from the accumulated balance in a homelessness grant fund which has been funded from unused central government homelessness grant funding. At 31 March 2013, £287,000 was in this fund. Further grants and funding will be assessed depending on interest in the scheme.

5.3 Equality and Diversity

5.3.1 The Council has to have regard to the elimination of unlawful discrimination and harassment and the promotion of equality under the Equality Act 2010 and related statutes.

5.3.2 Applicants for the Mortgage Indemnity Scheme would need to have a recognised local connection, but this is as defined in the Council’s Core Strategy.

5.4 Environmental

5.4.1 The Council has to have due regard to conserving bio-diversity under the Natural Environment and Rural Communities Act 2006.

5.4.2 There are no bio-diversity issues relating to this report.

5.5 Crime and Disorder

5.5.1 Under the Crime and Disorder Act 1998 the Council has to have regard to the need to reduce crime and disorder in exercising any of its functions.

5 5.5.2 The report contains no direct crime and disorder implications.

5.6 Children

5.6.1 Under the Children Act 2004 the Council has to have regard to the need to safeguard and promote the welfare of children in the exercise of any of its functions.

5.6.2 The report contains no direct implications relating to children.

5.7 Risk Management

5.7.1 It is not considered the scheme constitutes any significant risk to the Council, as the Council would be administering non-refundable grants to indemnify mortgages for local people, and thereafter no liability would fall on the Council in the event of anyone defaulting on their mortgage.

5.7.2 The key potential risks are summarised below:

Legal - the Mortgage Indemnity scheme meets the Council’s Procurement Rules, as grants could also be offered to customers securing mortgages through other lenders offering a similar scheme.

Financial - a fixed amount of £30,000 would be allocated to the scheme as a pilot in the first year, with a maximum grant to each applicant of £2,226, based on the example in Appendix 1.

Reputation - the possibility of someone qualifying for the Mortgage Indemnity Scheme defaulting on their mortgage, therefore putting their home at risk exists. This could happen to anyone taking out a mortgage, and Penrith Building Society carry out rigorous financial checks to satisfy themselves that only those people capable of meeting the repayments are eligible for a mortgage.

Operational - only people meeting the Penrith Building Society’s lending criteria, and being accepted by the Council as having a local connection to Eden District, would qualify for the Mortgage Indemnity Scheme. It has been agreed that regular meetings would be held between Council staff and the Penrith Building Society to monitor the running of the scheme.

Regulatory - mortgages would be administered through the Penrith Building Society, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

6 Reasons for Decision/Recommendation

6.1 The Mortgage Indemnity Scheme offers an opportunity to help local people, typically first-time buyers, onto the property ladder, which would in turn free up private rented properties for people in housing need, and simultaneously help to stimulate the local property market.

6 Ruth Atkinson Communities Director Governance Checks: Checked by or on behalf of the Chief Finance Officer ✓ Checked by or on behalf of the Monitoring Officer ✓ Background Papers: Contact Officer: Jeremy Hewitson Telephone Number: 01768 212393

7 Appendix 1: Financial Appraisal Provided by Penrith Building Society

This document has been prepared to provide information on the following scenario:

PURCHASE PRICE: £150,000.00

MORTGAGE AMOUNT: £142,500.00 95% LTV (not currently offered by PBS)

TERM: 25 years

BASIS: Repayment

INTEREST RATE: PBS Standard Variable rate 4.15%

MONTLY REPAYMENT: £764.02

The Society’s lending limit is 75% LTV (in this scenario £112,500.00) however this amount can be exceeded in some cases subject to a higher lending charge being paid by the applicant. This charge is calculated on the difference between the mortgage amount and the 75% figure ie

£142,500.00 - £112,500.00 = £30,000.00

There is a scale of rates applicable to calculate the charge made depending on the LTV. *

For a 95% mortgage the rate would be 7.42%

So the higher lending charge in this case would be calculated as follows:

£30,000.00 x 7.42% = £2,226.00

FEES Valuation Fee £210.00 Standard Mortgage Valuation OR £410.00 Homebuyers report and mortgage valuation combined Application Fee £75.00

Higher Lending £2,226.00 Charge

Based on current income multiples a sole applicant would have to be earning approximately £35,625 gross (4x GAI), joint applicants £40,715.00 gross (3.5 x joint gross income) to be eligible to take out the mortgage and this assumes there are no other outgoings (loans credit cards etc)

*Scale of rates 75.01% to 80% 3.869% 80.01% to 85% 4.505% 85.01% to 90% 5.247%

1 Appendix 2 - Local Connection Criteria, set in Policy CS7 ‘Principles for Housing’ of Eden’s Core Strategy

The local connection criteria set out in Policy CS7 of the Council’s Core Strategy are as follows: 1. A person or household who currently lives in Eden District and has done so for a continuous period of at least three years; and/or 2. A person or household who works in Eden District and has done so for a continuous period of at least three years; and/ or 3. Who has moved away but has strong established and continuous links with Eden District by reason of birth or long-term immediate family connections; and/or 4. Who has an essential need through age or disability to live close to those who have lived in the relevant locality for at least three years. 5. For market led housing a local connection to the area will also apply to a person or household who has secured work in the relevant locality.

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