Mortgage to shared equity

The MSE scheme aims to help home owners who are struggling to meet their mortgage repayments reduce their level of debt to an affordable level. If a home owner makes a successful application to the scheme, the Scottish Government will purchase a stake in her/his home. The applicant will remain the owner of the home, with full responsibility for maintaining and insuring it, and for paying council tax and any common maintenance or service charges. However, her/his mortgage will be reduced, to reflect the smaller stake s/he now possesses.

S/he will not be required to pay rent to the Scottish Government. However, s/he will not be able to sublet or let the property, or take out any further loans secured against the property without the Scottish Government's permission.[1]

After two years, the applicant will have the opportunity to repurchase the stake from the  Scottish Government, when her/his finances allow for this.

At present, applications will be dealt with on a 'first come, first served' basis. However, if funding runs short, the Scottish Government may decide to prioritise applications.[2]

Before a home owner can apply to the scheme, s/he must first have discussed her/his situation with both her/his lender and an independent money adviser (for example, at a Citizens Advice Bureau or money advice centre) and explored alternative means of reducing her/his arrears and making the mortgage more affordable (for example, by taking a payment holiday, increasing the term of the mortgage and/or making a repayment arrangement).

In addition, in order to be considered for the scheme, home owners must meet the following criteria:[3]

• They must have been unable to make full payments on their mortgage, or any other loan secured on their home, for three months, and have accumulative arrears of at least one month.

• They must be unable to reach a suitable repayment arrangement with their lender.

• They must have a capital and interest mortgage, and must not have a trustee appointed to the estate.

• They must be ineligible for support through any other UK Government scheme, for example, they must be unable to claim support for mortgage interest.

• They must not own a home anywhere else (although in exceptional circumstances, this condition may be waived).

• At least one of the owners or the owner's husband, wife, civil partner or co-habitee must have lived in the property for at least 12 months, and must be intending to stay there.

• If they are under 60, they must not have capital of more than £2,000. If they are 60 or over, they must not have capital of more than £4,000. Capital includes:

  - cash and money in bank and building society accounts, premium bonds, stocks and shares and other investments

  - life insurance or endowment policies not linked to the mortgage (unless the financial difficulties are caused by ill health, the policy holder is terminally ill and the policy is providing life cover)

  - equity in any property

  - redundancy and pension lump sum payments.[4]

• The lender must agree to reduce the home owner's mortgage if her/his MSE application is successful.

• The home must not be valued above a set level, set by the Scottish Government. However, this level may be negotiable if the applicant is disabled and has particular housing needs. If the applicant is disabled and has particular needs, s/he may still be eligible if her/his home is valued at a higher price.

• The home must be above the tolerable standard.

• The home must be adequately insured and maintained.

Shared owners or shared equity owners who purchased their homes through the Scottish Government's LIFT (New Supply Shared Equity and Open Market Shared Equity) or Homestake programmes are not eligible to apply. However, they may apply for the mortgage to rent scheme.[5]

An application form for the scheme can be downloaded from the Scottish Government website. Forms are also available from Citizens Advice Bureaux and money advice centres, and advisers can help applicants fill in the form.

The form and any supporting documents (such as a letter from a money adviser confirming that the applicant has taken advice, mortgage statements and letters from the lender) should then be sent to the Home Owners' Support Fund. The entire application process is expected to take no more than 15 weeks.[6]

On receipt of the application, the Scottish Government will commission a survey of the property to assess its value and whether any repairs are required, and establish the amount of debt secured against the property. If the home owner has at least 25 per cent equity in the property and the property is valued below the maximum price for its size, her/his application will be passed to an independent financial adviser acting on behalf of the Scottish Government.

Ineligible applicants will be sent a letter explaining why they have been rejected for the scheme, and can request a review of the decision.

The adviser will work out the amount of equity the Scottish Government will need to take in the property to reduce the home owner's debt to a manageable level, taking into account her/his income and outgoings. An offer will then be made to the home owner. If at this point it becomes clear that the MSE scheme will not meet the applicant's needs, s/he may be referred to the mortgage to rent scheme.

The home owner must then decide whether this offer will allow her/him to manage her/his debt adequately. In reaching this decision, s/he should consult an independent money adviser, and discuss the situation with her/his lender. S/he should also take legal advice and ensure s/he understands the full implications of the scheme.

If the home owner feels the offer will not sufficiently reduce her/his debt, s/he can turn it down. S/he then has the option of applying to the mortgage to rent scheme.

If the home owner accepts the offer, her/his solicitor will work with Scottish Government lawyers to draw up the legal documentation required. The home owner is responsible for paying her/his legal fees.[7] The Scottish Government will pay its stake to the mortgage lender, and the home owner must arrange a new mortgage for the smaller stake in the property. Again, s/he will be responsible for paying any fees or charges imposed by the lender.

If a home owner's application is successful, s/he cannot apply to the scheme again.

After two years, the home owner will be able to buy back all or part of the stake owned by the Scottish Government. Again, s/he will be responsible for the legal costs, including those incurred by the Scottish Government.[8]

The Scottish Government expects the home owner to buy back the full stake within 10 years, providing s/he is in a financial position to do so.[9]

If the home owner decides to sell the property, the Scottish Government will take a share of the sale price, based on the percentage held.

For further information on the scheme, visit the Scottish Government website or contact the Home Owners' Support Fund on 0845 279 9999.