What Is “Shared Equity” And How Does It Work ?
It’s no surprise given the current economic climate that the last few months has seen an increase both in the number of "shared equity" schemes being offered by house builders and also the marketing resources dedicated to these types of incentive. Open the local paper and they're all there: "Pay for 75% and get 25% free for up to 10 years!", "100% yours, only 75% cost", "Pay just 85% of the price now and the rest within 10 years!"
Obviously, it is hoped that giving buyers the opportunity to own 100% of their new home for as little as 75% of the price, will make it easier for hard-pressed buyers to get a foothold on the property ladder.
As you know, although these kind of incentive schemes are generally referred to in the house building industry as "shared equity", this is in fact a misnomer because the house builder does not take an equity stake in the title to the property as 100% of the equity is transferred to the buyer on day 1 – more correctly the schemes provide for equity related deferred payments.
Although house builders call their incentives by different names, most of the schemes operate in the same way: by way of example, let’s assume you are selling a £220,000 home and offering a 75% scheme. The buyer takes out a mortgage as normal for 75% of the purchase price - £165,000. You then provide the remaining £55,000 (the other 25%) via a second loan usually over 10 years. There is usually no rent or interest to pay on this second loan for at least 5 years. Some house builders charge a low rate of interest during years 5 – 10 but many of you don’t. A buyer can choose to pay off all or part of the second loan during the 10 year period. The payments will be based on the property’s "open market value" at the relevant time. Equally, a buyer can sell the property at any time and you as the house builder will be entitled to 25% (or whatever your share is at the time) of the open market value.
Are “Shared Equity” Sales Incentives Regulated?
Because “Shared Equity” is secured by a second legal charge it is not classed as a “regulated mortgage contract” for FSA purposes and is therefore not subject to FSA regulation.
At one time, a second legal charge securing monies in excess of £25,000 was also exempt from regulation by the OFT. However, as a result of changes to the Consumer Credit Act 1974 introduced by the Consumer Credit Act 2006 and which came into force in April 2008, this is no longer the case. The recent legislative changes abolished the financial qualifying criteria and brought all second legal charges within the ambit of the OFT’s regulation.
What Do The Recent Legislative Changes Mean For Me As A House Builder ?
Under current Consumer Credit legislation any house builder offering “shared equity” sales incentives must have a Consumer Credit licence issued by the OFT. In order to fully comply with the legislation the licence must be in place before you advertise or market the incentive and your licence number should appear in all promotional / marketing material.
What Are The Consequences Of Non-Compliance With The Legislation?
It is a criminal offence for companies to offer such second charge schemes without having a Consumer Credit licence. Directors of an offending house builder are also committing an offence and, upon conviction, will have a criminal record.
How Can Wright Hassall Help Me?
We have considerable experience of CCA licensing and can advise you on the CCA licence application process and can deal with an application to the OFT on your behalf.
For more information or advice on "shared equity", please contact Claire Waring on 01926 884 641.
