Falling demand for new mortgages is likely to speed up broker attempts to drill for alternative sources of income, renewing interest in previously neglected fields such as Right to Buy.
The scheme's forgotten potential was recently highlighted by Monty Burn in Mortgage Strategy. He said there is top money to be made at the bottom end of the market if brokers have the will to look for it.
This raised eyebrows among many who considered the scheme's glory days lay in the dim and distant 1980s and faded along with its creator, Margaret Thatcher. Many also assumed that New Labour was happy to watch this embarrassing relic from the Thatcher era wither and die.
Both impressions are false. Tens of thousands of council house dwellers still buy their homes at discounted rates under Right to Buy each year, joining the 1.5 million who have bought property since the scheme was introduced in 1980. In fact, this accounts for one in three of the extra 4.5 million owner-occupiers in the UK over the past 20 years – quite a legacy.
Anybody who suggests the current administration is trying to bury Right to Buy will receive a swift verbal clout from Deputy Prime Minister John Prescott's office, which insists the government is still deeply committed to the scheme.
The forthcoming Housing Bill, still awaiting its third reading in the House of Commons, will tighten rules on qualifying for Right to Buy but won't kill it off.
The government hopes to tackle profiteering and reduce the scheme's impact on the availability of social housing, which has aggravated problems facing low-paid workers in areas of costly housing (which these days means most of the country).
Proposed changes include:
Council tenants will have to wait longer before they can buy their properties – five years instead of the original two – but will continue to receive the same discount as at present, starting at 35% for a house and 50% for a flat.
Owners will have to repay some or all of their discount if they sell within five years, rather than the current three. Repayment will be based on a percentage of the current property value less any money spent on home improvements, rather than the current flat rate.
If they sell within 10 years, owners must offer the property to a social landlord at market value.
Dwellings scheduled for demolition will no longer be eligible for Right to Buy, to stop the current practice of tenants in areas targeted for regeneration making windfall profits.
Brokers interested in this market will find details of other changes on the website of the Office of the Deputy Prime Minister (www.odpm.gov.uk). But exactly how interested should they be?
A quick glance at the figures for sales of local authority housing stock in England suggests Right to Buy is enjoying a remarkable revival. As Monty Burn notes, transfers of council properties into the private sector increased dramatically from 88,000 in 2001-02 to 230,000 in 2002-03.
But on closer inspection, these figures don't just cover Right to Buy sales; they also include transfers to registered social landlords.
Strip these figures out and you see Right to Buy sales grew by a still impressive 22% from 52,000 to 63,000 in 2002-03. The remainder, more than 165,000 dwellings, were transferred to housing associations – up from 35,000 in the previous year. That's where most of the dramatic leap is to be found.
There were, however, a further 51,500 Right to Buy sales in the nine months to the end of December 2003, which suggests that the 2003-04 total will hover around the 70,000 mark, an annual increase of just over 11%.
This would still make 2003-04 the best year for Right to Buy sales since 1990-91, when 76,000 homes passed into private hands, though it falls some way short of Margaret Thatcher's 1982-83 peak sales year when 167,000 properties changed hands.
There's nothing revolutionary happening here, but it's just that the market isn't as moribund as many brokers assume.
So is Monty Burn's suggestion likely to fall on deaf ears? In many cases, the answer will be yes.
David Bitner, head of operations at Marketplace, is still convinced that Right to Buy's glory days are gone. “Mortgage brokers should be able to help any Right to Buy client who approaches them, just as they can advise on buy-to-let, shared ownership and properties of unusual construction, but this isn't a market I would encourage anybody to chase.”
And Neil Thomas, director of IFAs Simpsons of Brighton, says it's six years since he's done a Right to Buy – and he isn't feeling nostalgic. “I didn't enjoy it much or feel I did a particularly good job and no further similar business has come my way since, which is fine by me.”
David Hollingworth, mortgage specialist at London & Country Mortgages, would not turn Right to Buy clients away, but he wouldn't target them either. “You should never close your mind to any type of business – intermediaries should be able to service all types of clients – but I can't see many brokers shifting their emphasis to Right to Buy.”
Rod Murdison, a broker at south-east London-based Murdison & Browning, shares the widespread perception that brokers who specialise in this area can be a little, well, dodgy. “Right to Buy clients have a higher than average need for non-conforming mortgages because they can't raise the deposit, have impaired credit records or CCJs against their name, or live in high-rise flats that standard lenders won't touch. This means higher margins for brokers, which attracts the wrong element.”
The average Right to Buy loan is well below the market average, but unscrupulous operators compensate by charging relatively higher fees. “I've heard stories of brokers in East London and Essex charging minimum fees of between 5% and 10%,” Murdison says.
Intermediaries cash in further by selling single premium accident, sickness and unemployment cover. Sales of this poor value, high profit product are largely focussed in the Right to Buy market.
There have been several recent cases of questionable practices in the sector. In August, the OFT took action against Staffordshire-based independent mortgage consultant Mike Cooke, whose advertising suggested Right to Buy was about to be axed and would-be council house purchasers should act fast.
In April, BBC TV consumer programme Watchdog attacked specialist Right to Buy broker Nationwide Mortgage Services, which ripped-off clients by claiming it was a complex procedure and making them sign contracts unwittingly. Buyers were also surprised to discover they had also been made to take out a home improvement loan that tied them to high-charging builders.
Ray Boulger, senior technical manager at broker Charcol and media pundit on the Watchdog programme, says many Right to Buy clients with a little adverse to their name wrongly assume they will struggle to get a mortgage from a mainstream lender. “Unscrupulous brokers profit by directing vulnerable clients to the sub-prime market where they can earn higher proc fees, and also load them with single premium ASU and costly life insurance.”
He hopes FSA regulation will scare most of the shady operators away, particularly once they see the hoops they have to jump through.
The dodgy reputation of specialist Right to Buy brokers may be another factor deterring more scrupulous operators from targeting this area of the market. This is bad news for buyers because a Monty Burn-inspired influx of honest brokers into the sector would be a good thing.
Brokers who do return to the market will see a changing demo-graphic, with buyers generally much younger than in the early 1980s – mostly between 35 and 45 – and more are likely to have credit problems.
Only about one in 10 are now above retirement age, with almost half the purchases in this age group being funded by relatives. Brokers should watch out for exploitation by family members. A report recently commissioned by the ODPM warned that children may be looking to cash in on a housing asset, forcing their parents to fall back on social housing after the sale has gone through. Nice people.
At least brokers have a good choice of prime mortgage lenders, with the likes of Abbey, Halifax, Nationwide, NatWest and Royal Bank of Scotland happy to open their standard mortgage books to Right to Buy clients.
But the big boys aren't getting too excited. “We are in the Right to Buy market,” says a NatWest spokesperson. “But we don't offer any specific products – most will go on first-time buyer products. This is a tiny part of our business and we don't expect that to change.”
The Chelsea building society has shown a bit more oomph, introducing a targeted Right to Buy adverse product under its Prospect banner last October. Jeremy Hicks, corporate affairs controller, says the society has a long-standing commitment to this market, which also presents opportunities for brokers.
He says many brokers mistakenly believe Right to Buy has a double disadvantage: a greater administrative burden for a smaller than average loan size. “The average case size may be smaller, but you can more than compensate for that by getting a good volume of customers. The additional workload is negligible as clients can get most of the information that is needed from the local authority themselves.”
Hicks also dismisses suggestions that Right to Buy means problem clients. “We have found the quality of the cases to be better than is commonly thought. Many buyers can easily service their mortgages because discounts mean they are paying less each month than they were in rent. We have found this a buoyant and safe market during the past 10 years.”
Many lenders restrict borrowers to 95% or 100% of the local authority discounted purchase price but Chelsea lets them borrow up to 80% of the open market valuation. “This is a nice facility that allows buyers a little extra money to make home improvements, clear credit card debts or buy a car.
Some local authorities want to know why they are raising money beyond the discounted price, but this piece of administration is usually quickly dealt with.”
The risk is amply covered by the buyer's 20% equity in the property. “If standard mortgage business dries up, Right to Buy should still flourish because tenants will be getting local authority discounts on a lower market valuation. Many brokers have forgotten about Right to Buy, but this means it has become a good little niche for those who make the effort,” Hicks adds.
Like many brokers targeting the higher reaches of the mortgage market, Simon Tyler, managing director at Chase de Vere Mortgage Management, does little standard Right to Buy business except where clients buy properties as rental investments. “Contrary to popular belief, you can rent out your former council property as soon as you have bought it,” he says. “Many lenders wrongly believe rules prevent council tenants from doing this.”
Lenders may also be reluctant to offer mortgages within three years of purchase. The council still retains an interest in the property during this time and can force the owner to repay some of the discount they received on the purchase price (this period will be extended to five years under proposed rules).
“This is a real sticking point because lenders like to be the only ones with a claim to a property if things go wrong. But the DTI has authorised some sub-prime lenders, including First National, to claw back their money then pay the council anything that is due to them. Interest on these loans is usually loaded by about 0.5%, which isn't too bad.”
Specialist sub-prime brokers will charge up to a hefty £2,000 for Right to Buy cases, but Tyler says traditional brokers such as Chase de Vere can still find willing lenders charging smaller fees.
Despite John Prescott's protests, rumours persist that Right to Buy's days are numbered with sources close to the FSA suggesting shifts in government policy mean the scheme could soon be phased out regardless.
At least the Tories are still committed to expanding their old vote winner. In August they announced plans to extend the scheme to the private sector by granting rights to tenants in housing association properties.
Still unconvinced that Right to Buy is a serious opportunity? Don't worry, you're not alone. Many mainstream brokers are still doing very nicely from standard mortgages and can afford to ignore this niche. Hopefully, things will stay that way. Even if Right to Buy continues its steady recent growth, it's unlikely to provide that much of a cushion for a slowing mortgage market.
Once-flagging sector has started to blossom again
John Prust, sales and marketing director, SPML. Since Right to Buy was introduced in 1980, some two million homes have been purchased by local authority tenants taking advantage of the generous discounts allowed on the valuation price, which are central to the scheme. There have recently been regional limitations to the cash ceilings on discounts both to reduce the burden of discounts on taxpayers and to discourage any misuse of the scheme.
Some believe the Right to Buy market is both declining and also under threat of being abolished altogether. However, the government says that it is fully committed to the scheme and Right to Buy sales are still buoyant across the UK, with about 79,000 sales in 2002/2003.
Annual Right to Buy sales were naturally highest during the first 10 years of the scheme between 1980 and 1990, peaking in 1982 (197,000) and 1989 (181,000). Despite sales sinking to their lowest level of 45,000 in 1996, the Right to Buy market has started to blossom again in recent years, with the 2002/3 total being the highest since 1990. The recent reductions in discounts could well be acting as a stimulus to a once-flagging market and the declared intention of the government to raise the qualifying period for Right to Buy to five years, which was announced at the end of 2003, could prompt a further increase in activity once it is more widely known.
However, mortgage intermediaries should beware of trying to distort this situation to promote sales. The Office of Fair Trading is actively stepping in to stop mortgage brokers from issuing advertisements that falsely claim the scheme is about to be scrapped in order to boost their Right to Buy business.
Despite healthy sales levels, there is considerable substance left in the market. Local authorities still own 3.4 million dwellings – well above the number that have already been purchased under the scheme.
Regional variations in England show that more than 500,000 local authority properties remain in London, 405,000 remain in the North West, and 386,000 in Yorkshire and Humberside. The areas with the lowest levels of local authority stock are the North East at 227,000 and the South West at 153,000.
There will always be a number of these properties that lenders prefer not to handle – and tenants don't want to buy – but this is still a market with plenty of mileage left in it, and plenty of opportunities for brokers to increase their incomes.
Specialist advisers who are experienced in Right to Buy can offer a complete service to borrowers in which they steer the whole matter through from start to finish. This can include dealing with the local authority landlord, completing all the paperwork to establish the tenant's right to buy and then sourcing the lender and mortgage product. Many potential Right to Buy borrowers will be happy to pay a reasonable fee for such help, which the adviser can earn on top of the procuration fee paid by the lender.
Target the crooks operating in this market
Kevin Paterson, managing director, Park Row Independent Mortgages. There are a number of brokers operating exclusively in the Right to Buy sector who are exploiting the vulnerability of naïve buyers. In the same way that the FSA will take a closer look at non-conforming lending post-Mortgage Day, I am sure the Right to Buy market will also be singled out for additional scrutiny.
Introduced in the early 1980s to enable council tenants to get on the property ladder by rewarding them for paying years of rent, the Right to Buy option has been successful, much to the annoyance of the Labour Party. In fact, Labour has mooted the idea that it would like to see an end to Right to Buy on several occasions, but there is so much opposition to this proposal that the party has always backed down.
However, the government is currently considering revisions to the rules that will make it harder for people to qualify or profit too quickly from their Right to Buy purchase.
Unfortunately, the very people the scheme was intended to help are increasingly being ripped off by unscrupulous brokers who specialise in this market and in exploiting the vulnerable.
As we all know, there is not much in the way of procuration fee income in the Right to Buy sector as loans are typically quite small. But some firms charge huge fees that are often camouflaged by rolling up legal fees and survey fees under the same banner – often totalling thousands of pounds – which are then added to the loan.
These brokers would have us believe that they are doing the client a service and do a lot more than pay the survey fee and legal fees to justify their huge fees. I am not against charging a reasonable fee, say a few hundred pounds, but have seen many examples of fees in the thousands which simply cannot be justified.
These brokers often beef up their procuration fees by pushing the mortgage through a sub-prime lender when there is no need to do so.
And it is often the case that they aggressively target tenants who have not yet bought their homes, persuading them to do so by holding out the lure of a quick profit.
This is an area where regulation will catch up with those firms who don't clean up their act. And not before time.
We won't see the end of council housing
Sally Laker, managing director, Mortgage Intelligence. Since the introduction of Right to Buy in 1980, more than £25bn has been generated by sales of local authority dwellings. These funds have been used for repaying debt and financing further capital expenditure. Sales peaked at more than 100,000 a year in the early 1980s and again in 1988-9 following the housing market boom. Sales have since declined and are now about 60,000 a year, earning £2.2bn in capital receipts. In December 1998, the government announced a cut in the maximum cash limit on the Right to Buy discount from £50,000 per sale to £38,000 in London and the South East, and to £22,000 in the North East. In March 2003, the maximum discounts in 41 areas in London and the South East under the greatest housing pressure were further reduced to £16,000.
A number of measures affecting the Right to Buy are included in the current Housing Bill, including:
Extending from two years to five years the period that a tenant must spend qualifying for the Right to Buy
Extending from three years to five years the period during which owners must repay their discount if the choose to resell their home
Exempting dwellings scheduled for demolition from the Right to Buy
Requiring owners who wish to resell within 10 years of exercising their Right to Buy to offer their homes back to their local social landlord
Ending 'deferred resale' deals whereby inducements are offered to tenants by private companies who obtain possession of properties and let them out at market rents, and ending the little used Rent to Mortgage scheme.
It is unlikely that we will see the end of council housing as a result of Right to Buy. Most landlords believe that the limit will be reached when the remaining tenants cannot afford to purchase and the relatively unattractive nature of remaining properties means that they may not want to. However, in higher priced areas sales may taper off before that point is reached because rising prices will mean that buying is beyond the reach of many households who are potential purchasers. Furthermore, access to the Right to Acquire scheme may be sufficient incentive for subsequent tenants to purchase, but the fact that it is less generous than the Right to Buy means that in some areas of the country it will not be sufficient to facilitate purchase for lower income households.