The Truth About Shared Ownership

There is no arguing that Help to Buy has helped many people onto the property ladder (including myself) as well as helping property developers to buy a few yachts with their £1.09 billion profits; but this hasn’t come without its issues.

I, myself know all too well the frustrations of trying to buy a property when the cost of my rent is the same as a monthly mortgage repayment, yet I still couldn’t get a mortgage. So, I began exploring my options and regularly came across ‘shared ownership’. As well as being unaffordable for me, there were other potential issues that I thought I should share with you.

Shared Ownership means you can purchase a share of between 25% to 75% of the value of your home and pay rent on the remaining share. You then only take a mortgage out on the percentage you purchase which you can increase at any time. Let’s look at figures:

Home value: £200,000

Your share: 30%

What you pay to the seller: £60,000

Your deposit: £6,000

The mortgage you would need: £54,000

Monthly mortgage repayment: £300 per month (£69 per week) Based on 25-year mortgage at 4.5 %

The share retained by the person you buy off: 70%

The value of their share: £140,000

Maximum annual rent: £3,850

Maximum monthly rent: £321 per month (£74 per week)

Combined monthly mortgage and rent you pay per month: £621 (£300 (mortgage) + £321 (rent)

 

There is then the opportunity to buy more shares in your home which is known as staircasing. Let’s have a look at these figures:

Home value at staircasing: £220,000

The share you want to purchase:   20%

What you pay to the seller: £44,000

Share owned by you after staircasing: 50%

Equity share retained by landlord: 50%

Rental payment before staircasing: £385 per month

Rental payment after staircasing: £275 per month

 

So, you can get a £200k house for £621 a month; I personally think that’s pretty good. But before you close this page and start your google search, there are a few things you should know.

Additional costs

Just like any type of mortgage, there are the additional costs related to solicitors etc. But with shared ownership, they are usually leasehold properties which means you will have to pay monthly service charges as well as pay a contribution to maintenance work. Then there is stamp duty. In England and Northern Ireland first-time buyers would be exempt from paying stamp duty if the shared ownership property is worth up to £500,000. In Wales, this is £175K.

No sub-letting allowed

Restrictions are likely to be in place on whether you can rent the property out.

Buying more shares in your property can be expensive

Although I mentioned that you can buy more shares ‘staircasing’ there are other costs involved, such as:

• Valuation fees – a surveyor will need to come and value the property which can cost up to….
• More legal costs – changes to the existing lease will come at a cost as it will require a solicitor
• Mortgage fees – if you want to change your mortgage lender to buy an additional share or to get better interest rates, you will need to pay the valuation fee and a mortgage arrangement fee, plus any penalty charges for ending your current mortgage

There are restrictions to changing your property

If you want to make any structural changes to your home, you will need to get written permission from the housing provider. In some cases, you will need the same permission to decorate!

The risk of losing money

If you buy a new build through both shared ownership or on the open market, it usually makes more sense to stay there for a number of years. This is because house value is likely to go down, just like it does when you buy a new car.

Potential problems when you want to sell your share

It is likely that the housing provider has the right to buy back your property (right for first refusal) before you can market it yourself. This can happen even if you own 100% of the property at that stage. Ultimately, this will benefit other people on the waiting list that are unable to buy a property through the ‘open market’. So, you can feel comforted that you are doing ‘the right thing’. However, if the housing provider can’t sell your share, you will need to find someone that meets the eligibility criteria for shared ownership. This could be difficult as some banks don’t provide shared ownership friendly mortgages and it limits the number of potential buyers.

Being prepared is key to success

Obviously, the idea behind shared ownership is great and it is positive that the Government want to support people to get themselves on the housing ladder despite the difficulties we face in this current economy. In fact, only two days ago, the UK Government announced that they have changed the staircasing rules in England and Northen Ireland. This means that people can now buy more shares in their house in 1% chunks rather than the 10% that existed previously (not in Wales (yet?).

However, it is important to remember that costs can spiral with the service charges and maintenance charges. Not to mention the annual rent increases. So, although you own a share of the property, if you fail to keep up with those rent payments, the housing provider can take action against you. Equally, if you do not keep up with your mortgage payment, the lender can repossess your share.

I am not trying to be negative about shared ownership, I just think it is important that you are prepared before jumping in. Make sure you check the eligibility criteria of the housing provider and read all of your lease and restrictions. Also, think about the increases associated with your rents, service charges etc. Can you afford the costs associated with buying more shares?  Think about your long-term plan because as you can see, it isn’t all plain sailing.