Recommendation 4

HM Government Accepted in Part

13. As Home England’s Capital Funding Guide makes clear, whilst an affordability calculator is available currently, its use is only intended to provide an initial indication of what may prove affordable for households. It is not intended to replace, or override, the outcome of a more detailed affordability assessment, that must be carried out by a suitably qualified, accredited, and experienced mortgage adviser. It is the outcome of this assessment that must be used to determine the size of share purchased. 14. We recognise that it is essential for households to purchase a share that is affordable for them, both initially and over the longer term. That is why Homes England has been working with registered providers, mortgage advisers, and the Financial Conduct Authority to proactively its affordability guidance. The new guidance is due to be published in Quarter 1 of 2024 and is more closely aligned with the approach taken by mortgage lenders in their affordability assessments for mortgage applicants. The new guidance removes the affordability calculator as part of its methodology. 15. As with the current approach, households will continue to undergo an affordability assessment with a mortgage adviser to identify a suitable mortgage product that they are comfortably able to afford. The new guidance will also mandate that registered providers adopt a minimum surplus income policy to ensure that their shared owners have a certain amount of income available at the end of each month once their housing costs and other regular expenses have been accounted for. This change is intended to reinforce Homes England’s existing approach that households must not be required to purchase an initial share in a home that leaves them unable to adapt to financial emergencies or make allowance for known, future financial commitments, such as annual increases to their rent. 16. The new affordability guidance incorporates an element of stress testing for shared ownership rents, based on projections over a five-year period. This represents a reasonable timeframe based on the buyer’s financial circumstances at the time of their initial purchase. By contrast projections over a longer period are likely to be less accurate due to the greater potential for changes in relevant circumstances (a change in employment, or job role, for example). 17. The guidance does not include an element of stress testing for service charges. This is because, unlike rents, service charge costs are not set according to a formula and are instead set according to the cost of the services provided. This reduces the accuracy of any stress testing that might be performed and, if incorporated, could result in households being provided with inaccurate information. We will, however, keep this option under review. 18. There are many factors that are relevant to a shared owner’s ability to staircase. These factors include: future income; future outgoings; changes to personal circumstances (the birth of a child, for example); house price inflation; future mortgage rates and eligibility; and the rate of inflation. Over time, the use of compound variables to predict future behaviour is unreliable. As a result, it would not be helpful or representative to incorporate assumptions relating to staircasing into Homes England’s affordability guidance at this time.