The 20 Year Rule provides that a heritable security (e.g. a standard security) over a private home may be redeemed on repayment of all money advanced under the security together with interest and expenses after 20 years.
This can create issues in shared equity arrangements. In 2014 Scottish Government held a consultation on exempting certain shared equity schemes from the 20 Year Rule. The intention is for the exemptions to take effect in the first half of 2018.
We understand that the Scottish Government has carried out a mini-consultation with RSLs asking for the details of any local shared equity schemes that were not included in the initial consultation but should be made exempt from the 20 Year Rule.
The note will look at the 20 Year Rule and shared equity schemes alongside the benefits of exempting schemes.
The 20 Year Rule and Shared Equity Arrangements
Under shared equity arrangements the shared equity provider (for example the Scottish Government) contributes a proportion of the purchase price of a property to a home buyer. In return the shared equity provider will get a proportion of the subsequent sale price or valuation of the property. The buyer will grant a standard security to the shared equity provider for the amount of the provider's contribution to the purchase price. Once the proportion is paid back the standard security is discharged.
The idea is that if the property's value increases the provider will receive more money as the value of their initial stake has increased.
However, through the 20 Year Rule the buyer can redeem the standard security after 20 years by repaying all of the money the shared equity provider advanced initially - meaning the provider does not benefit from the increased property value.
Attempts to solve this issue
The Scottish Government has attempted to resolve this issue by including a contractual clause in shared equity documents which required buyers in year 19 of the arrangement to either:
- repay to the Scottish Government, the full value of their equity stake at that time
- or to grant a new standard security to Scottish Government
The 20 Year Rule is not able to be used as the standard security never lasts for 20 years.
This approach caused a variety of issues resulting in the Scottish Government's decision to exempt certain shared equity schemes from the 20 year rule.
What Schemes are included?
At present, it seems that the schemes the Scottish Government intends to exempt are:
- The Help to Buy (Scotland) Scheme
- Open Market Shared Equity Scheme
- New Supply Shared Equity Scheme
- The Help to Adapt Scheme
However it could be that more schemes are added depending on the result of the mini-consultation.
Are there any additional benefits to exemption?
Exempting additional shared equity schemes would likely shield shared equity providers (for example RSLs) from the financial risk associated with the 20 year rule.
Even if any applicable local shared equity schemes have the '19 year limit' to guard against said risk, exemption could be beneficial in other ways.
The Scottish Government have advised that lenders have been reluctant to participate in the Help to Buy (Scotland) scheme unless the year 19 year limit in the shared equity documentation was removed. Through exemption, lenders can be encouraged to participate more in local schemes as there will be no need for the 19 year limit.
If you have any questions regarding shared equity or the 20 Year Rule please do not hesitate to contact our property team.