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Loans

Rural Housing Guide

It is likely that any community led housing development will require the community trust to take out a loan to fund the housing development. The amount of loan funding which is required will depend on the amount of rent the housing development will generate. This is a crucial first calculation in determining whether a community housing project is viable or not. If the project is viable there are a number of banks and institutions which will provide loan funding for community housing projects. These are discussed here.

The income that is generated from rent (after deductions for running costs) can then be used to calculate the size of loan funding achievable. The Scottish Government assumes a standard annual deductions from the rent of £321 for housing management; £464 for maintenance and £525 for a major repairs fund. It may be possible to  administer community owned for lower rate if managed alongside other assets but putting aside funds for maintenance and future major repairs/improvements is essential.

Below is a worked example of a mid market rent housing project by the fictional Balamory Community Trust!

Tigh Dubh Housing Project

Total Rental income based on 5 x 2 bedroom houses = £22,800 (5x £380 per month x 12)

Deduct Void Allowance (1%), ie £228, leaving a net rental income of £22,572

Rental Income is assumed to increase annually by RPI plus 1%. The financial multiplier to generate the maximum level of mortgage available is 19.7746. (The financial multiplier assumes long term interest at 6.5%, inflation at 2.75% and the loan period of 30 years - the multiplier will be different dependent on the long term interest rate achieved - this multiplier is the one used by the Scottish Government in their Mid Market Rent Guidance Note)

Therefore multiplying the net rental income of £22,572 by the multiplier (19.7746) results in a maximum income over the 30 years of £446,352.

We then have to deduct the standard costs/running costs as outlined above. These running costs are £6,550 in total. The multiplier for these costs is assumed to run in line with inflation and is calculated as 17.5689. We therefore multiply the assumed running costs of £6,550 by this multiplier to give £115,076 as the assumed costs over the 30 year period. Deducting this from the maximum amount of income leaves a maximum mortgage/private finance component of £331,276.

Balamory Community Trust could therefore expect to secure a loan of £331,276 to help build their five houses for rent - the viability of the project will be dependent on the what the houses cost to build and how much grant funding the Trust can secure for the project. If their build cost for the 5 houses was £670,000 (based on 5 x 80sqm houses @ £1500 per sqm* + fees + development finance costs) they would require grant funding of £338,725 or £67,745 per house. Current grant levels average £40,000 per house which would leave a shortfall of £138,725.

The shortfall could potentially be overcome by selling one of the houses as a shared equity property. This would bring to the project 60%+ of the house value - which is determined by the District Valuer for shared equity developed using grant funding. In the Tigh Dubh scenario the sale would bring in £72,000 (if the house was valued at the cost it took to build). This would however just lower the deficit by £5745 as the reduction in rental income from 5 to 4 houses would reduce the level of loan available by £66,255. However if the house was valued at £180,000, the sale of a 60% equity stake would raise £108,000 lowering the deficit by £41,745; and the sale of a 80% share at this valuation would raise £144,000 would lower the deficit by £77,745. Still leaving a deficit of £60,980. The shared equity sale of two house may resolve this.

* building costs will depend on ground conditions, infrastructure costs, planning, remoteness of location - £1500 is suggested as a rural average but island location costs could be as much as £2500 per square metre