Help to Buy, but not to keep?
The safety net for owner-occupiers is less effective than for renters and changes under UC will exacerbate this situation.
Housing is high on the political agenda these days, with the rise of private renting, concerns over affordability and worries of a bubble stoked by Help to Buy. There is also the prospect of interest rate rises in the not too distant future, which could spark affordability problems. From a poverty perspective, the focus is usually (but not exclusively) on renters, given the various cuts to housing benefit in both the private and social sectors. But it is worth noting the gaps in the safety net for owner-occupiers as well; although not a high ‘risk’ group, it is the most common tenure in the UK. The gaps in this provision are going to grow when Universal Credit is introduced, with something of a double standard emerging. A good safety net should not discriminate.
What does the safety net for owner-occupiers look like? NPI views the safety net as the support available for unavoidable costs (such as housing, council tax, prescriptions etc) that ensure a household still has a basic income remaining for the other essentials (such as food, fuel, transport etc).Recent cuts to housing benefit have undermined this safety net for renters.
Owner-occupiers though do not pay rent. Their safety net for housing costs is provided via the Support for Mortgage Interest instead of housing benefit. It is intended to pay the interest on a mortgage, usually directly to the lender. Rather than the actual interest charged on the mortgage, it pays a fixed rate of 3.63% on mortgages up to £200,000 for working-age adults, so there may be a shortfall or an excess. This scheme is available only to those receiving a means-tested out of work benefit. But those working 16 hours or more are not eligible and get no support with mortgage costs. It takes 13 weeks of being out of work for households to be eligible and it ceases to apply after two years as a job-seeker. Under Universal Credit, the difference becomes more extreme: those who do any paid work cannot receive support for mortgage costs under the ‘zero earnings’ rule.
The graph below gives an indication of this. It compares how the income (after housing costs) of a renter and owner-occupier changes as they do more hours of work at the minimum wage (with mortgage interest repayments/rent of £33.30 per week, and council tax of £14.47 a week). Under the current system, both renters and owner-occupiers experience the same flat net income as they work more hours, with every pound in earnings leading to the loss of a pound in jobseeker’s allowance. Once working 16 hours (after a four week grace period), however, the owner-occupier now has to pay all of their housing costs from their earnings, whilst the renter still has housing benefit. This leads to a small cliff edge, whereby an individual working 15 hours per week is worse-off if they increased their hours to 16 or 18. This is more substantial the higher the mortgage repayment: at around £74 a week, it is not worth working more than 15 hours at the minimum wage as an owner-occupier unless you are able to work 27 hours a week.
The effect becomes more drastic under Universal Credit, with the ‘zero earnings’ rule. Any earnings whatsoever under Universal Credit remove eligibility for mortgage support, leading to a substantial drop in income after housing costs between being workless and working one hour for this single adult. In this scenario, work does not become worthwhile financially until working12 hours a week (and at around £74 a week mortgage, until 26 hours).
Why is the safety net less effective for owner-occupiers? Firstly, “the Government believes that taxpayers should not in effect be helping people to acquire personal assets through any potential long-term rises in house prices.” It is not clear whether this still applies when Help to Buy gives support for those acquiring personal assets.
The government also notes that mortgage holders tend to be different: they needed to have held a full-time job to get a mortgage and they need a full-time job to maintain a mortgage. Thus, there is a time limit and no in-work support available in order to spur them back into full-time work as quickly as possible. This is in contrast to renters, who are (particularly under UC), considered far from the labour market and thus need to be coached back into work a step at a time through the promotion of mini-jobs. Whether these are correct as generalisations or not, it may mean there are people who face, for example, reduced hours at work who find it more economically worthwhile to leave work altogether. Universal credit was designed to iron out these forms of incentives.
Organisations such as the Chartered Institute of Housing have argued that social security should become more ‘tenure neutral’ – the idea that support should be applied on the same basis regardless of whether renting or purchasing. In ensuring that people do not fall through the gaps in the net, this seems like the right idea.
 The mortgage cost is the average amount of SMI paid and the council tax is the Minimum Income Standard amount for 2013. This SMI average includes pensioners: it tends to be higher for those of working age.