Published: 7 Nov 2016 by Pete Jefferys

‘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.