Shared ownership mortgage. 5 good and bad things about them.
A Shared Ownership mortgage helps those on a lower income, or with less saved deposit, purchase a property. Great in theory but are they as good as they sound? If you are struggling to find an affordable property or if the mortgage required is out of reach a shared ownership scheme could be worth considering. However, as with most things there are positives and negatives to weigh up. Mortgage Pirate gives you an honest view of a shared ownership mortgage scheme.
Today we will cover:
What is a shared ownership mortgage?
Shared Ownership is a type of affordable housing scheme in place in the UK. It helps those who are finding it difficult to save for a deposit on a new home. The scheme can also help where the household income cannot support the cost of a traditional mortgage. It does this by allowing people to purchase a share in a property instead of the entire dwelling. The percentage of share for sale varies between property. However, between 10% and 75% is normal.
The portion of the property not being purchased will remain under the control of a housing association. Rent is then paid to the housing association each month.
For example:
- Assume a property is being sold via a shared ownership scheme. The full market value for the property is £300,000.
- The housing association are selling a 40% share in the property valued at £120,000 (40% of £300,000)
- Rent is payable to the housing association on the remaining 60% share.
Using the example above, if a buyer had a deposit of £12,000 saved, they could put towards the £120,000 share being sold. This means that they would only need a new mortgage for £108,000 to complete the purchase of the share.
Over time the buyer can increase their share in the property if they wish to. This procedure is called staircasing. Once 100% of the property is owned by the buyer, the housing association will no longer charge any rent.
As you can see, effectively the buyer has been able to purchase a larger more expensive property than they otherwise may have with a traditional mortgage. This is the entire premise behind shared ownership.
What are the 5 good points of a shared ownership mortgage?
As with anything there are good and bad sides.
1. Cheaper home ownership.
As the mortgage amount required will be lower than normal, the monthly costs will be lower also. Smaller mortgage amounts are also less affected by interest rate fluctuations meaning that affordability should remain fairly constant throughout periods of turbulence.
Even when taking into account the reasonable level of rent paid on the non-owned share, the overall cost remains competitive.
As the value of the property increases, or as your mortgage balance reduces, you will benefit from having more equity in the property. So, if housing values rise over the coming years, you will also see your investment increase in value.
2. Low deposit.
A deposit as little as 5% can be used on some shared ownership purchases. The deposit is calculated as a percentage of the share being purchased. Not the full market value.
3. Option to purchase more of the property in the future.
Your share of the property can be increased (staircasing) in the future. This flexibility allows up to 100% ownership, at which point no further rent will be charged. Once you achieve 100% ownership you can sell the property on the open market without any major restrictions. The choice to increase a share or not lies with the homeowner.
4. Stability of being a homeowner.
Unlike renting there are no surprise notices to vacate the property. This gives people confidence that they can make longer term plans with their family. Simply keep up the mortgage and rental payments to keep everyone happy. Another benefit of being a homeowner is that it can also provide extra confidence to other credit lenders or insurance companies.
5. You can leave your property share to others.
Property shares will be left for a beneficiary as part of your will or trust. This is unlike renting as the asset is owned by the landlord. Make sure to include the property shares when you review your inheritance planning.
What are 5 bad points of a shared ownership scheme?
1. Limited choice of property to purchase.
Shared ownership properties are only available through certain channels. You will need to register your interest. The housing association can then submit your application for approval. In the majority of cases, they are new build units. This means that you can’t take out a shared ownership mortgage on any property.
The scheme will have a limited number of properties allocated meaning that demand can be high. You may also find that the plot locations are close to roads, railways or other potential disturbances. The specification of the property could also be of a lower standard than the rest of the development.
2. Limited freedom.
The housing association will need to provide permission for all but very minor property alterations. Decorating and consumable replacements such as carpets, appliances and sanitary ware etc are usually ok. Anything much more than this and you will need to speak to the housing association first. It is unlikely that they will grant permission for remodelling or extensions.
You are unable to rent out the property as one of the conditions is that you must be an occupier of the house or flat. Only under exceptional circumstances would permission be granted for the property to be rented out.
You will also face restrictions on how the property is sold when you decide to move to a new home.
3. Fees and speed.
Fees are everywhere when it comes to shared ownership properties. Housing associations may charge fees when you switch to a new mortgage deal, increase your share in the property, or simply have its valuation assessed. When purchasing a shared ownership property, your solicitor will need to deal with the housing association requirements, and this incurs extra cost.
You may also have to pay a regular service charge or ground rent as part of the deal. Check the full cost of these ongoing fees before applying for your mortgage.
From the many shared ownership mortgages I have arranged in the past, it has been clear that housing associations can drag their heels. So, my tip here would be to give them plenty of time if there is a deadline to stick to.
Over time the true cost of all these little admin, legal, and regular fees can really add up.
4. Limited choice of mortgage lenders and products.
Not every mortgage lender will offer a range of products for shared ownership property. As a result, you may find that you cannot source the cheapest deals on the market.
5. Leasehold property.
Finally, all shared ownership properties in England are sold as leasehold. This means someone else owns the land it is built on and the property is simply leased for a defined period. This sometimes remains the case if you were to staircase all the way up to 100%, so it’s well worth reading the small print before you sign the final contract.
Is a shared ownership mortgage right for me?
The answer to this question does depend on what your ultimate goal is and will be personal to you.
You should carry out as much research as possible. This includes reading every piece of documentation you receive from the housing association. Every housing association operates in a slightly different way. Likewise, each property lease will vary too. Look closely to see if a shared ownership mortgage is available for you.
Things to look out for are:
- Who receives priority when homes are allocated? (armed forces workers often receive priority)
- How many times will you be allowed to staircase? Also check the minimum and maximum shares that can be purchased. Some mortgage companies won’t lend on a property which can’t be staircased to 100% ownership!
- What service, estate or maintenance charges apply and when are they payable?
- How long will you have to wait until you can begin staircasing?
- What lease restrictions are there (including what alterations you can and can’t make to the property)?
- Details about selling the shared ownership property, including how long the first refusal period is.
- What the various fees will be when you remortgage, value the property or request to staircase your share.
Asking these questions will put you in the best position possible to understand the scheme in more detail.
Check with a broker to see if your deposit and income is enough to purchase a property using a traditional mortgage. This will always be the preferred way to purchase a house and although the costs may be higher initially, over time the investment is likely to pay off. Plus you can avoid any of the downsides listed above.
Shared ownership can be an excellent way to get onto the property ladder, but it certainly isn’t for everyone. Do your homework, read the small print, and work out whether or not this type of home ownership truly is the right path for you.
Post compiled by Grant Carpenter CeMAP, CeFA – 15 years of regulated mortgage advice.
Please note that the content listed within this post is purely for information purposes only and does not constitute advice.
