Agenda item

Context:

 

To outline the various methods available to the Council of calculating a redemption value on the settlement of a Property Appreciation Loan (PAL).

 

Key Issues:

 

Welsh Government has provided funding to local authorities in Wales to help improve the standard of properties in the private sector. This funding is a combination of grant and repayable loan streams.

 

Due to mixed success of the grant scheme throughout Wales, Welsh Government introduced new criteria, terms and conditions in 2018 in the hope that there would be greater take up. The new conditions allowed for the creation of equity release loans for homeowners who were unable to access loans under the previous scheme.

 

Individual Cabinet Member Decision (ICMD) approval was sought and granted on the 25^th July 2018 to accept the new criteria, terms and conditions and for continued participation in the scheme.

 

There are three options available in respect of determining the redemption value of the Property Appreciation Loan (PAL), namely:

 

Option 1: To determine the settlement value, the PAL percentage value of 4.93% is applied to the revised value of the property at sale or transfer, for example, the value of the property at sale or transfer in December 2017 is £271,187. The redeemed figure is £271,187 x 4.93% = £ 13,370.

 

However, in times of exceptionally high property value increases, using this method can generate overly high redemption values.

 

Using the example above, if the property was valued in February 2018 it would be valued at £306,800, an increase in value of £35,613 between December 2017 and February 2018. Calculating the redemption figure in this instance the valuation at the date of sale or transfer = £306,800 x 4.93% (the PAL percentage value) = £15,125. This represents a percentage increase of 13.13% in the space of two months.

 

This could create the following scenario whereby two applicants, A and B, take out loans in September 2009. Applicant A dies in December 2017 and applicant B dies two months later in February 2018. Potentially, there could be the perception that the 13.13% increase in property values and hence the higher redemption value has an unfair impact on applicant B’s estate.

 

To avoid this scenario the Authority can instead look to the monetary value of the loan in terms of its purchasing power rather than its relationship to the value of the property to calculate a redemption value, as exampled in option 2.

 

Option 2:This method relies on using monetary inflation calculations to calculate the purchase power of the money borrowed on the date of redemption.

 

For illustrative purposes the following information will be used:

 

Loan Value: £10,000

Loan Commencement Date: 2009

Loan Redemption Date: 2017

 

Using the online inflation calculator the original loan amount of £10,000 in 2009 is worth £12,750 in 2017 (Inflation averaged 3.1% a year).This becomes the redemption figure.

 

Options 1 and 2 provide an uplift value that will take into account any monetary inflation.

 

Option 3: This option will redeem the original amount only.

 

For example, the agreed loan value is £10,000. On sale or transfer of the property, the value of the settlement figure remains the original loan value of £10,000. This method does not take into any account any uplift in value to offset monetary inflation between the date of the PAL and its redemption. However, in real terms the £10,000 repaid to the Council is worth less than the £10,000 originally loaned.

 

Member Scrutiny:

 

·         Monmouthshire is a County where house prices are rapidly rising and has some of the most expensive housing areas within Wales. Some people have few immediate resources.  Wage rates of people who live and work in Monmouthshire are often low. Monmouthshire, therefore differs to other counties in Wales.  In terms of equity, people who have very little will have to pay in excess of the Wales average if option one is agreed by Cabinet. Therefore, some Members considered that Option 2 would be a fairer option in Monmouthshire.

 

·         Concern was expressed that a £10,000 loan could result in £20,000 being paid back.  If this were the case, the take up of the loan, if on an equity basis, might be lower. It was considered that the fairest system would be to undertake an index linked inflation proof system.

 

·         In response to questions raised, it was noted that an advantage of Option 1 is that it replenishes and increases the funds available to provide more loans to a greater number of vulnerable households in the County. Option 1 is equitable in that it is proportionate to the value of the house and that value remains the same.

 

·         The Consumer Price Index is the measure that will be used.

 

·         Concern was expressed that Option 1 would result in an increased amount of money being taken from people with very little money. Funds will be replenished but potentially at the expense of vulnerable people.

 

·         Other Members considered that Option 1 should be the preferred option.  If a house doubles in value resulting in an increase in the amount of loan to be paid back, it was considered that most dependents of the home owner would accept this. More money would then be available via loans for vulnerable people.

 

·         Whichever option is agreed by Cabinet, the level of take up for the preferred option will be carefully assessed.

 

·         Option 1 will result in a gain in monetary terms for homeowners from the uplift in the value of their properties.

 

·         It was suggested that Option 2 be considered with a view to its take up being reviewed, as it was considered that the take up of this option, an index linked CPI scheme, would be a better option.

 

·         In response to questions raised, it was noted that the Welsh Government had established the funding because the vulnerability refers to people who do not have the means of paying back home improvement loans.  There are people that have lived in a property for a long time and would rather have an equity release loan than move out of their property.

 

·         The people who are the most vulnerable will not generally be residing in houses that will be paying large amounts of money back.  Their property prices would be lower, hence, the amount paid back would be lower. The money would be paid back most likely when the homeowner passes away.

 

·         The Authority will be working with a credit union partner (Robert Owen) and it will be supportive towards the applicant guiding them through the application process.  The applicant will not be required to pay large fees, which would be required if they went through a similar process via a high street bank. It will be a fair and equitable system.

 

·         This process will be a Credit Union based product and will be marketed by this organisation. The Credit Union has had success in Powys and in other areas with this scheme.  It is anticipated that this scheme will be more successful in Monmouthshire than the Authority’s home improvement loan scheme.

 

·         It was noted that people could have this product for a long time.  Therefore, it is important that funding is recycled back into the fund quite quickly to ensure that funding continues to be available, going forward.

 

·         In order to enhance take up, it was considered by some Members that Option 2 would be the most appropriate option.

 

·         Concerns were expressed regarding the issues in respect of vulnerability.  However, it was noted that there were some people who were asset rich but cash poor living in their homes and might need a home improvement loan but were unable to finance this by any other means.

 

·         This is a Credit Union product which would support applicants through the whole process which would provide reassurance to applicants.

 

·         In response to a question raised regarding vulnerability, it was noted that this referred to the ability to make repayments in respect of other schemes that could be undertaken by local authorities. 

 

·         The loan provides options not just for older people but can help to up-lift private housing within the County.

 

·         A Select Committee Member asked that, in order to provide elected Members with quality information regarding the opportunities that this proposal offers, the report be discussed at Full Council.

 

Having debated the three options outlined in the report, the Select Committee voted as follows:

 

In favour of Option 1           -           2 votes

In favour of Option 2           -           5 votes

In favour of Option 3           -           0 votes

 

 

Committee’s Conclusion:   ·         A majority view of the Adults Select Committee was that Option 2 might be the more appropriate option.   ·         A Select Committee Member asked that, in order to provide elected Members with quality information regarding the opportunities that this proposal offers, the report be discussed at Full Council.   ·         If Option 1 was agreed by Cabinet, it was suggested that consideration also be given to implementing a cap.   ·         A hybrid option could be considered by Cabinet combining elements of Options 1 & 2 to offer safeguards and that it not be disproportionately unfair, but allowing the pot to be replenished to allow for more home owners to take out a loan.