Discounted for Sale - who will lend?

cmma01

[FONT=&quot]My son is interested in a certain type of affordable housing. It’s called “Discounted for Sale” or “Discounted Covenant Scheme”[/FONT]

[FONT=&quot]Our local council agreed with the builders that a percentage of the properties that they were building should be offered at a cheaper price – 70% of the open market value. Into the title deeds of those few houses was written a clause that in perpetuity, those houses could not be bought or sold for more than 70% of the open market value. In this way, the houses retain their affordable housing status.[/FONT]

[FONT=&quot]With this particular house ( a resale one being sold on the open market through an estate agent), the price is, as expected, 70% of the open market value.[/FONT]

[FONT=&quot]The key difference in this scheme between 'Shared Ownership' and 'Shared Equity', is that the buyer of any of these houses has outright ownership of 100% of the property, but only pays for 70% of its value. There is no rent payable to any other party.[/FONT]

[FONT=&quot]So to recap, there is -[/FONT]
[FONT=&quot]NO CHARGE ON THE PROPERTY[/FONT]
[FONT=&quot]NO SHARED OWNERSHIP[/FONT]
[FONT=&quot]NO SHARED EQUITY[/FONT]
[FONT=&quot]NO RENT[/FONT]
[FONT=&quot]THE HOUSE IS 100% THE PROPERTY OF THE BUYER[/FONT]

[FONT=&quot]The way I see it, the only risk to a mortgage lender is the normal risk any lender takes– that the mortgagee doesn’t pay! In the event of repossession, the mortgage company also can only sell on at 70% but then they only lent at 70% value to start with.[/FONT]

[FONT=&quot]I have phoned round lenders and have assured them that the loan application ‘valuation’ for mortgage purposes would be 70% of the open market value figure and that even then, on that valuation, my son only requires a loan at 60% LTV.

They can’t get their heads around there not being any 3rd party interest in the property and [/FONT][FONT=&quot]no-one will touch it.

Why?[/FONT]

GMS

If the lender can only sell based on 70% in the event of a repossession then they might as well lend 100% of the open market value. Either way it is the same outcome.

Lend at 70% but can only repossess at 70%.

The 70% becomes irrlevant when the value of it is the maximum that can be achieved. There is no 30% buffer zone.

The 30% value of the property will remain as part of the scheme so if a lender were to repossess they would need to sell to a qualifying purchaser. Too restrictive for a lender.

cmma01

GMS wrote: »

If the lender can only sell based on 70% in the event of a repossession then they might as well lend 100% of the open market value. Either way it is the same outcome.

Lend at 70% but can only repossess at 70%.

The 70% becomes irrlevant when the value of it is the maximum that can be achieved. There is no 30% buffer zone.

The 30% value of the property will remain as part of the scheme so if a lender were to repossess they would need to sell to a qualifying purchaser. Too restrictive for a lender.

Not sure what your answer means in the first 3 sentences. You seem to be reinforcing my thought that it makes no difference. It's just a price at a percentage value. At the end of the day it's no greater risk.

The restrictive aspect you mention only actually applies for the first 4 months of being on the market. After that time, there's no qualification requirement. Anyone can buy it, no matter their circumstances are, but still on the understanding that the 70% rule remains.

GMS

cmma01 wrote: »

Not sure what your answer means in the first 3 sentences. You seem to be reinforcing my thought that it makes no difference. It's just a price at a percentage value. At the end of the day it's no greater risk.

The restrictive aspect you mention only actually applies for the first 4 months of being on the market. After that time, there's no qualification requirement. Anyone can buy it, no matter their circumstances are, but still on the understanding that the 70% rule remains.

The 70% of open market value is irrelevant as the house will never have an open market value. It will always be at 70% of the OMV.

Assume an OMV of 100k. Purchase price 70% which is £70,000. You say your son only wants 60% of OMV which assuming a £10,000 deposit would be an 86% LTV mortgage.

You could not base lending against the open market value as the purchase price is lower, and the OMV will NEVER be achievable.

If the lender were to repossess (in this scenario) they would have a £60,000 plus fees liability on a £70,000 property. Added in to this is a 4 month period were a qualifying purchaser needs to be found meaning any sale could take 5 months as a minimum to complete by which time fees and interest would wipe out the equity.

Next problem is finding another lender to allow a purchase to go through on the same terms.

Shared ownership may be a better option ironically.

cmma01

cmma01 wrote: »

[FONT=&quot]I have phoned round lenders and have assured them that the loan application ‘valuation’ for mortgage purposes would be 70% of the open market value figure and that even then, on that valuation, my son only requires a loan at 60% LTV. [/FONT]

GMS wrote: »

Assume an OMV of 100k. Purchase price 70% which is £70,000. You say your son only wants 60% of OMV which assuming a £10,000 deposit would be an 86% LTV mortgage.

Ah no - I said my son wanted a 60 LTV on the 70% valuation so it's a good deal for them.

luckyfool

cmma01 wrote: »

Ah no - I said my son wanted a 60 LTV on the 70% valuation so it's a good deal for them.

eh, so he is putting down 40% of the 70% valuation as a cash deposit.... or he is putting down 10% of the OMV so that they are lending on 60% of the OMV?

If it's the latter then they are actually lending over 85% of the value of their security. These covenants are complicating the deal substantially and make it more trouble than it is worth for most lenders. Its not as if they are struggling to lend out the money they have available at the moment, they can afford to be picky.

GMS

Apologies.

On the basis that he has a decent deposit could he not look for a 'standard' property?

Restrictive covenants will always cause an issue for a lender. If it was a 60% LTV deal on a normal transaction then there would be much much less of an issue.

cmma01

Yes luckyfool, the first is correct. He has a 40% cash deposit to put down on the 70% valuation so to me it's a no-brainer.

We're dealing with virtual worth here and what's restrictive really about the covenant apart from a 4-month initial period when it must be offered to affordable housing applicants? After that it's a free-for-all.

Using the £100k house example to represent this house, instead of being worth a 'real' £100k, it has a 'virtual' worth of £70k and they lend just £42k on it. He pays cash for the rest.

GMS - he could look for a standard property but in the area he likes they're all too expensive or need a complete refurb (old terraced). There's repo that needs gutting that he's interested in but a builder's after it and thus begins the offer war which with repos can continue on until exchange, as the bank seeks to better the offer. The builders win here because they don't have to pay a builder to fix it !!!!

GMS

Have you tried speaking to a lender who does shared ownership? Although this is not, a shared ownership would be the closest thing to it and a lender who deals with these may have a better understanding of it.

To me this sounds like somewhere in between shared ownership and Right to Buy.

I see your point of view but the lender needs to make sure that they can sell in the event of a repossession.

May even be worth offering to pay 12 months mortgage payments upon completion so as to give a buffer zone in the event of the 4 month rule ever coming in to play.

It's a long shot but worth a try.

cmma01

I've spoken to two lenders who do shared ownership. The first said that applications for mortgages for these properties were closed for now. Even when I said it wasn't shared ownership, they just said no anyway.

The second offered an interest rate of 5.29% to start with.

When I said to them it's not Shared Ownership, they said that it was the only pigeon hole that could accept the property. Maybe they could try thinking outside the box a little! This is an unusual ownership. I think they do this sort of thing much more overseas than here.

The last house my son went for on the open market, he was accepted for a 2.19% tracker at 70% LTV (open market). Sadly it fell through as seller's deal fell through. But I think you'd understand his reluctance to proceed a 5.29% deal after that!

CloudCuckooLand

The council who came up with this bright idea should be providing some suggestions as to Lenders that they have lined up who understand and participate in the scheme.