Since 1980, when council tenants were first given the right-to-buy, 1,500,000 council houses and flats have passed into private ownership. Many mortgage advisers believe the right-to-buy market has now reached saturation point and I can understand this view, as the sale of council homes has declined from a peak of 167,000 in 1982/1983 to between 30,000-50,000 a year for the last eight or nine years. However, as a packager with specialist capabilities in this field, my view is that there is still a lot of mileage in right-to-buy business but mortgage advisers have got to be prepared to put some extra effort into it and learn not to be discouraged by initial disappointments.
Latest figures from the DTLR show that, of the 24,500,000 total dwellings in the UK, 3,800,000 are in the public rented sector. In theory, there are still twice as many council houses and flats still waiting to be bought under right-to-buy than have already been bought by their sitting tenants, so there should be plenty of room to move into this market successfully.
Apart from the current threat that the statutory right may be suspended, to save public money to create affordable social housing' the amount of housing stock passing into the housing association sector also creates a very powerful reason for advisers to market themselves in the right-to-buy sector. Last year alone, 140,000 council houses passed into the ownership of housing associations or other registered social landlords. Many of these newly-acquired housing association tenants will not realise that having a housing association as their landlord now means that they retain their right-to-buy for only 12 months. After this, they have a right-to-acquire the property – a right that has a top discount of £16,000 compared with a top discount of £38,000 for properties under right-to-buy. The mortgage adviser that understands the significance of this potential drop in discount values – and who is able to truly help clients through the sometimes tricky process of buying their council house – will be able to maximise business in this mortgage market sector.
So, why is right-to-buy avoided by many mortgage advisers, as being too difficult'? After all, there are around 130 lenders (according to MoneyFacts) that offer right-to-buy and ex-local authority mortgages, so sourcing products should be no problem.
I believe that a number of factors combine to make right-to-buy a no-go area for many advisers, but all of the initial difficulties can be overcome with a little perseverance. Taking the lenders first: although many state that they will lend to right-to-buy customers, the vast majority do not handle this sort of business regularly, and do not have the expertise to overcome the obstacles often put forward by some local authorities.
Furthermore (if we are realistic about right-to-buy applicants) there will tend to be a higher proportion of irregular earnings profiles and non-conforming credit histories than with purchasers of standard properties. So advisers need to get a feel for the lenders that not only understand the right-to-buy process, but also offer a self-certification option and for whom DSS income will not be a barrier. They will also need to cater for borrowers with some arrears, CCJs or even bankruptcy or IVA in their recent credit history. In addition, when the ceiling for regulated loans rose from £15,000 to £25,000 on May 1 1998, a huge amount of right-to-buy mortgage transactions (at heavily discounted prices) started to fall within the regulated loans sector. Many lenders will not lend less than £25,001, to avoid all the extra paperwork that regulated lending entails, so advisers need to know which lenders will be able to accommodate the smaller loan values.
Another factor that often proves problematic has its origins in the deeply discounted purchase prices that right-to-buy clients are often paying. Many purchasers see this as an opportunity to borrow more than the discounted purchase price – either for home improvements or for a new car, going on the holiday of a lifetime, etc. – and still keep within a reasonably low LTV.
The problem here is that the discounted amount (the difference between market value and actual purchase price) is repayable to the local authority, should the new owner sell the property again within three years. This applies to the whole discount if the property is re-sold in the first year, two-thirds if resold in the second year and one third if resold in the third year. Naturally enough, the local authority will want to safeguard its financial position and keep enough of a charge over the property to cover the discount value. Equally naturally, the mortgage lender wants a charge over the property to cover the loan.
A simple solution to this dilemma exists in the form of Title Insurance, which both allows the local authority to have its charge and gives the lender confidence that their title to the property will hold good should any disputes arise. Again, advisers must not only be familiar with experienced right-to-buy lenders that use Title Insurance but they must also be able to guide applicants towards using solicitors who are also familiar with it, so that the process does not get bogged down with delays.
These are just a few of the challenges that are inherent in right-to-buy business. However, the added value that broker expertise brings to customers has good fee-earning potential and, as with all mortgage introduction, the opportunity is created to advise on insurance and investment products. Finally, individual advisers can also access the expertise of experienced right-to-buy packagers, who should be able to suggest successful ways of reaching completion on the majority of deals.