Could shared ownership rescue households who can’t afford their mortgages?

The arrival of the COVID-19 vaccines may well signal that the threats to health are receding but the damage to the economy and the desperate personal circumstances of many families left in its wake will take much longer to be resolve. A central concern of families, already or likely to become unemployed, will be to stay in their home until the economy and employment recover.

This proposal would enable some of those affected to achieve that.

I’m writing from personal experience of individual mortgage rescues which achieved much more than simply providing the families involved with somewhere to live.

Before the introduction of the national scheme which ended in 2014, Rushcliffe Borough Council had its own shared ownership scheme for new builds, and used this experience to help homeowners threatened with repossession – including where the income provider was seriously ill or injured without any prospect of employment.

Accepting the family as homeless and conventionally allocating a rental property would result in uprooting them from schools and support networks. As an alternative, if sufficient equity was held by the household, the shared ownership scheme was used to purchase the balance and redeem the mortgage. With the house secured the family were safe and in a better position to restructure their lives.

This had the advantage that the council did not have to allocate scarce rental properties or provide temporary accommodation. There was also the potential for the equity value to increase and provide a return.

The UK now faces a similar scenario as many thousands of the newly unemployed could potentially be in mortgage default. In December 2020 there were 130,000 mortgage deferrals and almost ten million employees furloughed from 1.2 million employers. The Social Market Foundation judges that some 770,000 households are at risk of repossession.

Unlike the Rushcliffe scheme, I propose one that should only be needed for a limited time. As the economy and employment expand and people return to work they will re-mortgage conventionally and redeem the shared ownership element.

How would it work? A scheme in the coming circumstances needs to be pragmatic, simple to operate and universal.

Here’s the deal. The council would buy the property, allowing the owner to pay the existing mortgage, any arrears, redemption and other costs with the sale proceeds. It would then grant a shared ownership lease to the former owners. A relevant service charge could be applied if considered appropriate. Shared owners would continue to be responsible for maintenance etc. The council would insure the property to protect its interest.

Currently government borrowing rates are very low and could finance such a shared ownership scheme economically. Essentially it would be an investment secured on property and potentially generating a surplus.

The scheme could be operated by local authorities and ring-fenced outside any existing housing account. Local authorities are the contact for people facing homelessness and they can best assess applicants for eligibility. The scheme would enable them to discharge their homelessness duties.

Councils would be financed by low-interest PWLB loans allowing the rental element to be as low as practical for benefit purposes. Eventual re-mortgaging would discharge the shared ownership and repay the PWLB.

If the scheme is to go ahead, there is some urgency as the stay on repossessions is due to end. It would be helpful if the government could arrange with the mortgage lenders and other potential stakeholders an agreed protocol for it to work and advise local authorities that such a scheme will be coming.

There would be many advantages. Families could stay in their own communities with children’s education uninterrupted and community links preserved.

Homelessness would be avoided by using existing equity in the property, compared with conventional resolutions which would require use of much greater resources from local authorities.

A shared ownership rescue scheme cannot help every potentially homeless owner but could at least ameliorate some of the problems while the economy re-builds. It would mean fewer repossessions and subsequent “distressed” sales, potentially resulting in reduced property values and negative equity. It makes sense for the owner, the local authority, the government and the housing market – everyone with a stake in the system.