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  • Shared Ownership v Shared Equity

    24th November 2017

    Shared Ownership v Shared Equity

    What are they for?

    Ownership structures that you can use when you’re not an individual cash buyer or using a mortgage alone. With it becoming harder to save up a large enough deposit to buy a house, these ownership options are designed to help people to buy a property who otherwise couldn’t put a deposit together.

     

    Shared Equity

    The home will belong completely to you. It provides you an ‘equity loan’ covering a percentage of the property’s value and effectively gives you a bigger deposit allowing to access cheaper mortgage deals. This option is typically offered by large house builders, local authorities or government initiatives such as some of the first time buyer schemes.

    Help to Buy is the government scheme to provide shared equity options but some building firms offer their own schemes. It is important you check these terms as they may vary between lenders.

    Repaying the loan: This is usually in full when you sell the property and based on the current value of the property. Sometimes it is repaid gradually after a set number of years.

     

    Who is eligible?

    Anyone able to put down a 5% deposit on a new build home up to a maximum value of £600,000.

     

    PROs

    You only need to get a 5% deposit together and you can get onto the property ladder.

     

    CONs

    If property prices shoot up then you will have a much larger equity loan to pay back because the loan is related to a percentage of the property value over the life of the loan. In this case it could have been cheaper to save up longer for a larger deposit. The catch 22 here is that with the price rises you may not have been able to buy anyway having waited.

    For example:

    Deposit: 25% (£25,000)

    Equity loan: 25% (£25,000)

    Mortgage: 50% (£50,000)

    Property price start: £100,000

    Property price end: £200,000

    Total equity loan to repay: £50,000 (£200,000 x 25% loan)

     

    What if the property price decreases?

    The agreement commits you to repay a percentage of the market value at the time of sale or repayment equal to that of the percentage of assistance received. So, if the value falls below the original purchase price you will pay less than you received originally.

    However, you must always show that the proposed sale value is at the prevailing market value and the Agency’s Mortgage Administrator must approve the sale. If you don’t comply with sale terms, the Agency may seek to recover money they are owed.

     

    Shared Ownership

    Exactly as it says – you share ownership and buy part of the property (typcially between 25% – 75%) and rent the other part (at a below market rate typically up to 3% of the value owned by the developer or housing association).

     

    Who is eligible for shared ownership?

    Household income below £60,000 and be a first-time buyer.

    Alternatively you will need to show you cannot afford to buy now if you are a previous homeowner, be renting from a council or potentially if you have a long-term disability under the Home Ownership for People with Long-Term Disabilities (HOLD) scheme.

     

    Can I buy a greater share at a later date?

    Yes – this is done via a process called staircasing. It allows you to buy in minimum increments of 10% and you will pay a lower rent as the rental portion decreases. The amount you pay depends on the value of the property at the time of staircasing.

     

    Selling your home

    If you end up buying the full share you can sell as you please. Bear in mind that the housing association has the right for ‘first refusal’ on the property within 21 years of you initially purchasing the home.

    If you only own some of the equity then the housing association can find its own buyer. The pool of buyers can also be limited by the number of mortgage companies offering shared ownership mortgages.

     

    PROs

    Again, this is another good way to get on the property ladder and build equity in a property rather than spend money on rent. It also allows you to get a bigger property than saving up a deposit alone.

     

    CONs

    • No renting – often there are restrictions on renting or sub-letting the property
    • Increasing equity – staircasing is not without its costs. You should also check if there are limits to what equity level you can staircase to and how many times you can staircase. You will need to pay for:
      • a surveyor to conduct an official valuation
      • a solicitor to change the lease terms
      • Stamp duty (either lump sum or in stages)
      • Mortgage fees – if applying for a larger mortgage there may be valuation fees, mortgage arrangement fees and penalties for terminating and current agreements
    • Maintenance fees – properties are usually leasehold on this scheme. These properties usually have a monthly service charge contributing to building insurance, maintenance works etc.
    • Restrictions – can you have pets, do you need permission to decorate rooms?
    • Negative equity – should the property price fall after moving in. This risk is reduced if you plan to stay for several years as property prices generally increase in value in long-term trends
    • Rent arrears – failing to keep up rental payments can lead to repossession (as with your mortgage payments). Depending on your deal you may also not be entitled to the share of the amount you have already paid for the property.

     

    References

    https://www.moneyadviceservice.org.uk/en/articles/shared-equity-or-partnership-mortgages

    https://mortgageadvisers.which.co.uk/first-time-buyer/shared-equity-and-shared-ownership/

    http://hoa.org.uk/advice/guides-for-homeowners/i-am-buying/shared-ownership-what-to-watch-out-for/

    http://www.moneysupermarket.com/mortgages/hubs/first-time-buyers/shared-ownership-schemes/