Pete Jefferys
Pete Jefferys

By Pete Jefferys

‘Buy as you go’ homes

‘Buy as you go’ homes are a new idea for affordable housing which is being worked up by the National Housing Federation (NHF), with the government already showing an interest. While more detailed plans may be launched later in the year, there’s enough already for us to get a sense of what it might be.

The concept is quite simple: you pay a monthly rent with no huge upfront deposit and, over time, some of your rent goes towards buying the home. Eventually (after 25 or 30 years of full payments) you own the home outright. This will sound great to many people struggling to save a deposit because of their high rents.

The idea certainly addresses people’s desire to own, which is important. Owning housing equity reduces the rent you have to pay to house yourself. This is a massive long-term financial benefit for the individual, and for taxpayers too over the long term. However the existing routes into owning, such as shared ownership, usually require an upfront deposit and a mortgage – which are hard to save and to access for lower earners.

We think that this idea has a lot of potential, but there are three areas in particular that we’ll be scrutinising as the details emerge.

1. Are the rents affordable to low earners?

It has been reported in several papers that rents will be around 90% of the local market. What this probably reflects is the rent being subsidised by the government to 80% of market levels, with the additional 10% on top being the payment towards ownership. Over time, this balance of rent and payments towards ownership will shift – you’ll only pay rent on the bit you don’t own.

However in much of England, 90% rents are too high for many lower earners. The map below shows that for a double earner family, with one person full time on the National Living Wage and a second earner part time, this level of rent is just too high. In more than 60% of local authority areas it would be unaffordable. As you’d expect these are also the areas with the biggest housing affordability problems.

To make the product work for lower earners – what the government is calling the “just about managing” class – it will need to have very low rents before the top up payment is added. We understand that this means more upfront subsidy, whether in government cash or through the planning system in lower prices paid to landowners. However producing another type of “affordable housing” which isn’t affordable to low earners will just build resentment and frustration.

How to make it better: to make the product work for the just about managing class the government should link the base rent (before the ‘buy as you go’ payments) to local low earnings – not to market rents. The trade-off is that this will cost more to subsidise. One option is to pass that cost on to landowners through the planning system.

2. Is it flexible to life’s bumps in the road?

A second detail will be how flexible the contract is for the buyers. With “pay as you go” in a phone contract, the attraction is that you are not being locked into something that you may not be able to afford in the future. Similarly, ‘Buy as you go’ homes mustn’t be based on punitive contracts which require you to pay the “top ups” or be evicted. Lots of people’s income is variable, with some months seeing more coming in the door than others. A truly modern type of housing would respect this.

Again, what this flexibility would mean is that the homes would work a lot better for the “just about managing” in society. One of the things that we are seeing more and more at Shelter is families forced to cut back on essentials – like heating or eating – to pay their rent. Housing costs shouldn’t be forcing these choices on families.

How to make it better: the “buy as you go” payments should be flexible so that you can pay in when you can, but not be forced to pay when you can’t. The trade-off is that this will make it less likely that people will fully staircase up to 100% ownership. However for that individual household, it’s a much better deal than being evicted if the product is inflexible

3. What if it goes wrong?

The third area of scrutiny for us will be the details of the contract, especially what happens if the buyer gets into difficulty. This will include the interaction of the product with housing benefit – if somebody loses their job, they shouldn’t lose their home. Equally, what happens if people build up rent arrears and face eviction? Will they be able to take the equity that they’ve built up with them or will it be claimed by the landlord? There have been serious issues in this area with other ownership schemes in the past.

If somebody doesn’t staircase up to full ownership after 25 years, or indeed any period, they shouldn’t be forced out the home. Security of tenure should be strong, combined with flexibility to enter and exit the product easily if you choose to do so.

How to make it better: the contracts haven’t yet had any detail announced, but the crucial element for us is a combination of flexibility and security. The contract should protect people if they hit a bump in the road, but also be flexible should they want to move on. The trade-off is that this potentially will be less attractive to landlords and investors.

 

In summary these homes should do what they say on the tin: you should be able to “buy as you go”. They should provide a decent and secure home that you can genuinely afford month by month, combined with an easy and flexible option to acquire equity and reduce your rent over time – including going all the way to full ownership if you are able. That would be a truly revolutionary type of housing, and one that would be very popular.

 

5 Responses to ‘Buy as you go’ homes

  1. Alan Keers says:

    As far as the current scheme is concerned, my understanding is that it is not eligible for Housing Benefit and therefore will only be an option for those that are in work and not currently able to access social housing. The scheme would be as formal as a mortgage and the occupier/owner would be responsible for maintenance.

  2. Great article, we like your analysis and also the additional ideas and solutions you offer for dealing with the few (but still serious) issues of the “buy as you go” housing. If we want to see this system fully functioning, we have to think of how to find the right balance between what is the best for the soon-to-be homeowners, the landlords and, of course, the market.

  3. Nicholas Windrum says:

    I came up with this idea over two years ago. It’s really simple. Buy to let landlords expect their tenant’s rent to pay for the cost of buying the property.

    My plan was to raise funds via crowdfunding to buy property to rent with the tenants then sharing in that profit to enable them to build up equity in the property. Tenant’s rent would then pay interest on the crowdfunding loans as well as actually paying off the loans – just like a mortgage.

    This rent rebate would be calculated year by year and the tenant would be free to stay as little time or as long as they would like and at whatever time they moved from the property they would receive a cash lump of equity to help them buy or rent a different property. Or they could continue to remain in the same property & end up wholly owning it.

    The whole point of my idea was to enfranchise all those people who have been dis-enfranchised by the banks driving up property prices from the average of three or four times people’s annual salaries – which is what property used to cost in the 1950’s & 1960’s – to the about ten or eleven times times average salary which property now costs.

    I have been exploring setting this up as a co-operative to do this, but so far nobody seems to have the slightest interest in joining with me in setting it up and all my efforts to get help from the existing co-op movement have so far been fruitless.

    When I then thought of just setting it up as a private limited company instead, just entirely by myself, and tried to speak to the Financial Conduct Authority about the required FCA regulation issues they refused to speak to me at all. They said they would only speak to me after I had paid a fee of about £1500 to fill out their application forms for regulatory approval & which are so complex that I would almost certainly need to also pay a specialist lawyer hundreds or even thousands of pounds for help.

    Quite extra-ordinary !

    I’m more determined that ever now to set this up either as a co-op or private company and am still looking for people to join me. And what I am planning will be more flexible and work infinitely better than the bureacratic nonsense any government is likely to produce.

  4. renter 23 says:

    There is only one problem with this scheme, you will not be able to sell your property after 6 years, or will you? Suppose you are 50 years old how will this scheme work if you have been a tenant foe 25 yesrs?

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