How to reduce the risks of home ownership
Ministers and market leaders are trying to reduce the risk of owning a home, but it doesn't all come down to money.
The vast majority of British households still aspire to own their own home, but, with the risk of borrowing too much and falling into negative equity or being priced out altogether, ownership options are at a premium.
Understandably, would-be homeowners do not want to take on too much risk or become over-indebted. Now the government and market entrants are looking to address these issues, notably through equity finance instruments that help limit risk, improve affordability and fund home purchase.
The government's latest set of housing policies plunged more money into First Buy, a scheme that helps first-time buyers acquire newly built homes through equity sharing. It provides a 20% equity mortgage, half funded by the government and half by the developer, so that the purchaser need put down only a 5% deposit and fund the rest by a 75% traditional mortgage.
In principle, everyone wins. For the buyers, they have lower monthly outgoings, lower deposits and shared risk (with the funders) of falling house prices (as well as shared benefit from any gains). For the government, households can buy into owner occupation with interest rates and prices relatively low, and can achieve their aspirations to own their own home. Moreover, there will be little or no cost to the public purse as long as house prices do not fall too much – and even that could potentially be managed.
Others are looking at market-based products with similar benefits. The first to come to market is a new partnership mortgage product that not only aims to give middle-income households a safer product but also allows savers to invest in housing through a fund that tracks the Halifax house price index. The mortgage product is based on a 20% deposit, together with a 60% traditional mortgage and a 20% equity stake injected by Castle Trust.
For this last element, Castle charges no interest or rent but takes up to 40% of any capital gain and shoulders up to 20% of any loss. This reduces mortgage costs and house price risks considerably – and, as long as price increases remain relatively limited, it will remain cheaper than a traditional mortgage.
These types of equity finance products help stabilise the market by reducing the immediate gains from trading up when prices rise, one of the most important reasons for price volatility in the last two recessions. What is unclear is whether the mixture of risk, price, debt and the target group of consumers is quite what people are looking for.
Over the past few months, as part of the Joseph Rowntree Foundation housing market taskforce programme, we have been examining a range of instruments with similar objectives to see how far they can reduce the risks of home ownership for borrowers and get the whole housing market moving again. Making home ownership a more stable proposition by sharing house price risk and reducing the initial financial outlay needs to be a crucial focus of policy.
First Buy and partnership mortgages are a start, and there are other products in the pipeline that could expand the market further. But the government needs to provide the leadership that will make the breakthrough big enough to have a significant impact on the market.
Professor Susan Smith and Professor Christine Whitehead are working on ideas around shared ownership and shared equity for the Joseph Rowntree Foundation. This content is brought to you by Guardian Professional.