Failed home improvement loan scheme highlights lessons for the future
Attempts to encourage more elderly and other low-income home owners to pay for major repairs and improvements by releasing the equity tied up in their properties cannot expect to succeed without changes in the law governing non-commercial loans.
This conclusion is reached by the Joseph Rowntree Foundation after the failure of its attempts to assist home owners in York whose applications for improvement grants had been turned down because of spending cutbacks. None of the 40 applicants who were offered the opportunity to pay for necessary repairs and improvements through a non-commercial equity loan were able to proceed. The main reasons for this were:
Older homeowners were deeply reluctant to take out loans secured on their property, even though the terms were part-subsidised and there would be no repayments until they died or sold their home.
Inspections of some properties found that the costs of improvement work was below the £5,000 threshold that the Foundation's housing association ' the Joseph Rowntree Housing Trust ' had chosen for the experimental loan scheme.
Although four owners were willing to take out loans that would be repayable as a percentage of the sale value of their property, it was discovered that legal and regulatory factors made it impossible for the scheme to proceed.
The analysis of what went wrong scheme is clear that the most popular mechanism for getting essential repairs and important improvements carried out by home owners would be a return to widely-available Improvement Grants. Even if grants covered only part of the building costs, they would be likely to encourage households to find matching money.
The report also underlines the limited role that commercial lenders can play. One 'market leader' in equity release schemes sets terms that require repayment of the original loan, plus three times capital appreciation. Many schemes also include eligibility criteria such as a minimum property value of £60,000 and minimum loan of £15,000.
Policy options for overcoming the problems exposed by the initiative would include an expansion of the work of home improvement agencies, which could administer loan schemes and act as intermediaries between homeowners and lenders.
Central and local government could also consider introducing a system of non-commercial Improvement Loans as a cheaper alternative to grants. To enable local authorities, housing association and home improvement agencies to offer loan schemes, the Government would need to amend the Consumer Credit Act. The Local Government Act 1985 would also have to be altered to remove a requirement on councils to charge regular repayments with interest.
Richard Best, Director of the Joseph Rowntree Foundation, said: 'Our intention was to demonstrate how equity loans could fund the costs of improvements and repairs for owner occupiers. But it has ended in failure.
'However, we can learn from our failures as well as from our achievements. So I am encouraged that this exercise has indicated ways in which current constraints might be eased, making it possible to unlock more of the substantial assets held by owners who are ‘capital rich but income poor’ and whose properties are in serious need of investment.'
