What does ‘affordability’ mean? The ‘A’ in LILAC What does ‘affordability’ mean?

Summary What we wanted from our finance model What is affordability? Key concepts; how the model works Payment related to income Distribution of shares High earners policy The Lilac Equity Fund What happens when members leave? Modelling for future viability Dwell – our finance software Questions??

What features of a finance model would be desirable for your group??

Factors we considered… Affordability Fairness Attractiveness to prospective members Security / sustainability of Lilac Simplicity / replicability Incentives/disincentives (e.g. earning more or less, putting in AC or not, over/under occupancy) Others?

Limitations Affordable within certain parameters Dependency on incomes Complexity

Lilac as a solution to the UK housing crisis Intermediate housing market: (Rents above social housing but below market price) Demand: 40% households in the UK Supply: 0.5% of housing

Affordability Can Lilac meet the housing needs of people on low incomes? Can people with minimum savings live in Lilac? Can our members comfortably meet their housing costs and have enough money to live? Accessing shares: How easy is it to move into and out of Lilac? We need to consider financial ‘wealth’ - which includes income and capital How can we ensure it remains affordable in the future?

Scenarios Retired Working part-time First time buyers Families Single parents Adult dependents We wanted to ensure Lilac is financially accessible to as wide a group as possible;

So how does the model work. Basic principals here… So how does the model work? Basic principals here…. for full explanation see Ali and Chris

MHOS = Mutual Home Ownership Scheme All homes and land are owned by the MHOS rather than individual members MHOS is registered as a co-operative controlled by its members. Only lilac residents can be members of the MHOS Each member holds a lease giving the right to occupy a specified property owned by the MHOS

Equity shares The cost of buying the land and building the homes owned by the MHOS and financed by the mortgage is divided into EQUITY SHARES. The number of shares owned by each member depends on what they can afford and the build cost of their home. Under the terms of their lease, each member makes a monthly payment to the MHOS which pays off the interest and capital, and includes a deduction for maintenance, insurance and service costs.

Allocating shares The number of shares allocated to each member depends on what they can afford and the build cost of their home. To ensure sustainability of the project the value of the equity shares owned by a household must not differ more then + or – 10% of the build cost. Every member pays 35% net income each month The more they earn the more equity shares they can afford to finance We also consider capital as wealth; If members put in additional capital this may increase the number of overall shares they can afford to finance

Mortgage and loan on the house Members pay 35% of their net income every month until they have paid for their allocated shares. Net household income 35% of Net income Mortgage and loan on the house Everyone pays a deposit of 10% of their total payment These need to match !

Overall the project must meet 100% costs Households are allocated shares worth between 90-110% of the costs of their home, depending on what they can afford 35% 35% may be enough to cover 35% may be enough to cover 35% may be enough to cover 10% deposit £12,000 110% £128,000 Mortgage and loan 10% deposit 100% £116,000 Mortgage and loan 90% £104,000 Mortgage and loan Overall the project must meet 100% costs

How do we define net income? Gross income = all sources of income including rent on other properties and benefits less the following deductions: Tax National Insurance Pension contributions (up to a maximum of 10%) Student loan repayments We have considered other deductions….. Childcare costs Union membership fees Training expenses

Average earnings   % change Year (April) Earnings CPI 1998 4.5 1.8 1999 3.2 1.5 2000 3.9 0.6 2001 4.7 1.2 2002 4.0 1.4 2003 3.3 2004 1.1 2005 2.9 1.9 2006 3.5 2.0 2007 2.8 2008 3.0 2009 2.3 2010 2.1 3.7 2011 0.4 2012 1.6 2013 2.2 2.4 2013: Median gross annual earnings for full time employees = £27,000 This equates to a net income of £20,891

Initial Payment Minimum Net Income (everyone pays 35% net income to the scheme)   1bed 2bed 3bed 4bed £10,000 £9,203 £14,378 £12,000 £8,858 £14,033 £14,000 £8,513 £13,687 £16,000 £8,167 £13,342 £20,192 £18,000 £7,822 £12,997 £19,847 £23,934 £20,000 £7,477 £12,651 £19,501 £23,589 £25,000 £6,613 £11,788 £18,638 £22,726 £30,000 £5,750 £10,925 £17,775 £21,863 £35,000 £4,887 £10,062 £16,912 £20,999 £40,000 £4,023 £9,198 £16,048 £20,136 £45,000 £3,160 £8,335 £15,185 £19,273 £50,000 £2,297 £7,472 £14,322 £18,409 £55,000 £1,434 £6,608 £13,458 £17,546 £60,000 £570 £5,745 £12,595 £16,683 £65,000 £4,882 £11,732 £15,820 £70,000 £4,018 £10,869 £14,956 £75,000 £3,155 £10,005 £14,093 £80,000 £2,292 £9,142 £13,230 £85,000 £1,429 £8,279 £12,366 £90,000 £565 £7,415 £11,503 £95,000 £6,552 £10,640 £100,000 £5,689 £9,777

Snapshot of equity share allocations

High Earners Policy This applies if a member’s net income is higher than needed to finance their maximum share allocation (ie 110%) OR a member’s income increases and lilac cannot allocate them more shares They are still expected to pay 35% net income each month Of the excess: 50% goes towards paying off their shares faster, and 50% goes into a shared fund (the LEF or Lilac Equity Fund)

What is the LEF for? Temporarily meeting a shortfall in repayments if an members income dropped Financing an unexpected project cost e.g. roof needing fixing Financing further building e.g. common house extension To acquire equity shares To decrease loans from banks and other lenders The idea behind the LEF was to put aside some money to help Lilac through any difficult financial periods and with the aspiration that with time Lilac will be able to acquire significant equity instead rather then having loans from the Bank or other lenders. We felt that those on higher incomes or with lots of savings should contribute to the sustainability of the project.

Future viability Essential that Lilac is able to finance share withdrawals as members leave Modelling work by Steve Bendle – Community Finance Solutions Modelled for a wide variety of scenarios For all scenarios Lilac is able to refinance – ie we are viable! Lilac could refinance relying solely on the LEF by year 25, assuming an average household turnover of 12y and similar AC invested Joining members with less capital than exiting members Incomes within the project falling Joining members with different incomes Interest rates rising Members moving between properties as needs change Average household turnover from 8y up to 29y Turnover in owner occupied homes is on average 10-12 years and in shared ownership which is similar to MHOS it is 15-20years

Strengths of this model Lower income/deposits required compared with housing market Remains permanently affordable Not linked to conventional housing market but to average wages Robust Plenty of contingency built in (early project)

Strengths (cont.) All members have a say, for example how we use shared funds How we define net income How we reallocate shares finding solutions when members’ financial circumstances change As Lilac gains equity we can widen access, eg by lowering the minimum income threshold Reducing the capital needed for initial deposit

Other cost savings of MHOS Reduced transaction costs – homes are not bought or sold Easier to finance environmentally sustainable housing – and associated reduced energy bills Shared meals/bulk food buying Shared storage space Shared tools, garden, DIY, cleaning Shared childcare Car pooling Shared services (insurance, maintenance)

Our finance software

Our finance software.. Designed and developed by Maldaba in conjunction with Lilac members Enables us to manage Lilac’s internal finances; Calculates members share allocation and monthly payments Tracks individual members’ equity as well as households’ Produces members’ annual statements (debt, shares, exit value) Secure online store for member’s finance information Overview of project shares Reporting of maintenance issues Designed to be easily modified to suit other groups

Questions???