1. The Housing Corporation requires HomeBuy Agents and RSLs, to have in place a policy covering affordability assessment designed to ensure that purchasers maximise their borrowing potential sustainably from the outset.  RSLs and HBAs are therefore required to use either the HC affordability toolkit and calculator or a methodology of comparable standard.

Comparable standard methodologies use income multipliers as a basis for determining applicants' ability to sustain home ownership in the long term (most commercial lenders use a range of multipliers of between 3 and 6 times income).

2. This best practice note and accompanying calculator are designed for the use in calculating applicants’ affordability in accessing the low cost home ownership HomeBuy suite of products, including the First Time Buyer’s Initiative.  A sample version of the calculator, attached to this page, can be overwritten with HBAs and associations feeding in their own data.

3. This approach to affordability assessment produces results using both the standard income multipliers and a net income cap, which we recommend should have a range of 45 - 50% in most circumstances.  There may be certain situations whereby it would be advantageous to tailor (raise or lower) the net income cap according to individual circumstance.  The calculator does not imply using either income multipliers or the net income cap at the expense of the other.  This is a policy decision for HomeBuy Agents and RSLs to consider.  The calculator can be adapted to suit individual circumstance, whilst ensuring that long term sustainable home ownership remains the primary objective.  We assume that net income is equivalent to 74% of gross income (this takes account of tax and national insurance commitments.)  The calculator is published with the worked example set out below in long hand. 

4. An example of how this might work in practice.  An applicant for New Build HomeBuy has an income of £34,000 and also has a deposit of £5,000 to put towards the purchase of the home. The home they are seeking to purchase has a value of £190,000 a rent charge on the retained equity share of 2.75% and a service charge of £1,320 p.a.  So assuming an interest rate of 6.50%, and a mortgage repayment period of 25 years the individual can afford a 50% share as this would require a minimum income of £34,000 p.a.  Applying the principle of not exceeding 45% of net income the applicant’s costs as a proportion of their net income will be 45% or equivalent to an income multiplier of 2.99 making the purchase in this example affordable.  

5. We would encourage RSLs and HomeBuy Agents to use the service of IFAs and at the very least signpost all applicants to FSA regulated organisations where they can receive independent financial advice.  The tool kit includes a sample template Service Level Agreement (this appears as a separate template) for HomeBuy Agents and RSLs to use, if they so wish, in contracting the services of Independent Financial Advisors to undertake the detailed affordability assessment of prospective low cost home ownership applicants.