How will the First Homes scheme impact registered providers? Sarah Waite, Suzanne Smith and Jennifer Eng explain.
The First Homes scheme came into effect on 28 June 2021 and is the Government’s new preferred tenure ahead of social rent. The scheme requires a minimum of 25% of all affordable housing units to be First Homes.
While it is clear that the First Homes scheme will have an impact upon registered providers of social housing (RPs), the extent and significance of that impact is yet to become clear. In this insight, we examine the First Homes scheme and set out the issues RPs need to be aware of.
What is the First Homes scheme?
First Homes are a type of discounted housing, which can only be sold to persons meeting specific eligibility criteria. They must be discounted by a minimum of 30% against market value, with a maximum cap on the first sale after the discount is applied of £250,000 (or £420,000 in Greater London). The discount can be increased by 40% or 50% by local authorities, and they can also impose lower caps if it can be justified.
In addition, First Homes must have a legal restriction entered on their respective titles so as to ensure the discount is maintained at all onward sales. The obligations will be secured within a Section 106 Agreement.
Template planning obligations
The Government has published template planning obligations which local authorities can use as a basis for any agreements prepared locally. The template includes model wording for both the restriction to be entered on the First Home’s title and for a mortgagee exclusion clause, which allows lenders to waive the discount on market value upon onward sale.
The Government has strongly encouraged local authorities to use the model wording within the template planning obligations to attain consistency in the implementation of First Homes. The content of these obligations will therefore be fundamental in the operation and application of the scheme going forwards.
How will the scheme work?
The scheme will be administered and controlled by local authorities through planning obligations. Model section 106 clauses have been published which require a restriction on title to be entered onto the registered title of the relevant First Home.
This means that a future purchaser will need to obtain a consent from the local authority in order to proceed with the purchase and to ensure that the discount is maintained in perpetuity (subject to the mortgagee exclusion clause).
In order for the relevant authority to proceed with the transaction, the local authority will assess the valuation of the First Homes to ensure that the correct level of discount is being secured. This process will require the local authority to draw on already limited resource to support and administer approvals. There is no formal policy position as to whether the local authority will be able to seek additional contributions from the developer in respect of this but it is anticipated that an admin fee of £150 - £200 will be recommended per First Home. Homes England is expected to publish further guidance and materials in order to support local authorities in the administration of the First Homes scheme.
Potential impact of the First Homes scheme
The First Homes scheme will inevitably reduce other forms of affordable housing funded through section 106, with 25% of developer contributions reserved for First Homes. The Government claims it will ring-fence homes for social rent so that the main impact could fall on shared ownership and affordable rent. Naturally this will result in a reduction of the number of units offered in the section 106 agreement for affordable rented or shared ownership tenures.
The requirement for the First Homes to be at a price no higher than the caps, as well as physically indistinguishable in quality and size from equivalent market homes could be difficult to reconcile. This could defy the purpose of the scheme, as the local authority would have to enforce an even greater discount to bring the price of those homes below the cap.
The implementation of the First Homes scheme has potential to cause far-reaching effects across the housing sector.
We will have to wait and see how successful the First Homes scheme is in the market but there is no doubt that there is work to do for local authorities and RPs alike to be ready for the impact of this scheme and to consider the financial impact and viability of developments and cashflow.