Affording a house

Some co-ops form when an opportunity arises – a house they are already living in comes onto the market for example. More commonly, they start with a group coming together and working out how to meet their needs.

It is usually best for co-ops to buy a property, as then they can build up capital, be more in control of their property and not be supporting a landlord. This section will focus on purchasing property. Though, sometimes good opportunities come up to rent property for less than a co-op can raise in income from the property. This can help the co-op to build up capital for a future purchase (or for whatever they prioritise).

What you can afford depends on how many members you have, what rent levels you will set, how much money you can raise and what terms you can borrow it on.

Projecting your cashflow

Radical Routes have produced a spreadsheet for house purchase cash flow projections which can help you model and compare different possibilities. It is available for free by contacting Catalyst Collective. You start by feeding in your best guesses about the planned purchase – how many tenants? Paying what rent levels? What does a house cost in the area you want to live in that could house these people? Have you been offered any loans or donations already? Make sure to factor in the legal fees and other charges as well.

When setting your rent level, we recommend choosing an affordable amount which can be fully covered by housing benefit. This keeps your housing co-op accessible for those most likely to face housing difficulties. Also, when the Radical Routes network is assessing an application for a RR loan, it is much less likely to be approved if rent is above Local Housing Allowance.

Consider if you can allow flexibility on when rent is paid - for example people on benefits may need to pay rent on a different day of the month to account for their benefits schedule, and people getting student loan may benefit from being able to pay several months of rent upfront when loans come in.

Soon you will get a picture of the gaps that need filling, such as how large a mortgage you need to borrow. Don't get disheartened if at this stage it looks like you can't afford to house your members, it usually takes a fair amount of rejigging to get things to work for your needs. Try your cash flow out with different proportions of loan stock type and mortgage type loans, and different repayment lengths to see what is best for you. A plan that needs you to refinance (find replacement loans to pay back original ones) in year 10 or so is fine, but the more often you need to find new people to borrow from and the more money you need to borrow each time, the harder it will be. In particular, if you need to refinance, this should be for significantly less than the original amount you borrowed, and usually not more than £100,000.

A purchase should work if all of the incomes are higher than the all the expenses and allow for the paying off of loans over time, often over quite a long time!

Mortgage

Like with a private house purchase, most of the finance is usually raised with a mortgage.

Normally a mortgage lender will be prepared to lend you up to 70%-80% of the value of the property. The bank will tell you what your monthly repayments will be if you borrow a certain amount, you can also get these figures from many mortgage calculators available on the web. Extending the length of a mortgage-type loan costs more over time but it also reduces monthly costs, which can make a business plan work much better.

Fewer mortgage lenders are now willing to lend to co-ops. At the time of writing your best chance is to approach Ecology Building Society or Triodos bank. It may also be worth trying local building societies. Interest rates offered vary, so contact the lenders early on in the process to find out what they might offer as it will affect your cashflow projections. They will not commit to lending to you at this stage but it is useful to start a conversation.

Radical Routes loan

Radical Routes offer mortgage type (i.e. paid off monthly with interest) loans to member co-ops which often helps bridge the gap between mortgage amount and the total needed to buy the house (alongside loan stock). Radical Routes loans tend to be under £80,000, and require a business plan to be submitted in advance to Radical Routes Finance Group, who can write up a 'recommendation', before it gets submitted to a gathering. It gets approved by being discussed and agreed on by the whole RR network at a gathering business meeting (these happen 4 times a year). A loan is much more likely to be approved if the rent levels are set below the Local Housing Allowance.

Loan Stock

One of the advantages of being a Co-operative Society is that co-ops can run and publicly advertise 'loan stock schemes' (sometimes written as one word, "loanstock"). Loan stock is a way of raising private arrangement finance, usually from individuals (including group members) and other co-ops.

Buying a property section is the most common reason for using a loan stock scheme, though loan stock can be issued at other times. Co-ops might issue loan stock to build an extension, to do extraordinary maintenance or to refinance.

Loanstock can be relatively short term, and interest is often cumulative, so compared with a mortgage at the same interest rate, it will cost you more over time. You can get around this by paying the interest annually if your cash flow can support this. On the other hand, you don't need to pay it every month, so it has a beneficial effect on your early years cash flow, when finances are often at their tightest. Investors can also choose to reduce or waive the interest when signing the loanstock certificate.

Dealing with other people's money is a matter of serious and continuous responsibility, but with adequate attention it is not difficult to master the process of managing a loan stock scheme.

Click here for more detail on raising loan stock

Public funding

There is sometimes funding available from the government or public bodies. This will vary depending on your situation, shifts in policy, and the type of problems big organisations are motivated to deal with locally. Your local council, and Community Development Workers, may be able to tell you of funding schemes relevant to you. Funding schemes are often very specific in what they are willing to fund, and will take a lot of time and bureaucracy to apply for. This is sometimes called Regeneration funding, or Community Development funding, though may be called other things.

You might be able to raise money this way while maintaining the independence of your co-op, but it also possible you will told to give up the aim of tenant control and settle for tenant participation with control by a housing association. In this case, you may have to choose between operating as a tenant-controlled housing co-op, or becoming something else.

Co-operative and Community Housing (CCH) have a report on options for funding new co-op homes on their website: http://www.cch.coop/newcoophomes/