Shared ownership schemes
Shared ownership schemes promise to help the first-time buyer on to the housing ladder. But how do these schemes work and how do you qualify?
The concept of shared ownership, now more than 20 years old, was the original solution to sharing the cost of a home. The scheme - confusingly now also referred to as New Build HomeBuy - requires the buyer to find between 25 and 75 per cent of the cost of a property while the remainder is bought by a local housing association. Housing associations have replaced local authorities and councils as the main providers of affordable social housing.
A subsidised rent is paid on the part of the property you do not own and the homeowner is able to buy back shares from the housing association (a process known as 'staircasing') until they own 100 per cent. When the property comes to be sold, both parties simply pocket their relative share of the equity based on the percentage they own. Depending on how house prices have performed, this could be enough for a first-timer to use as a deposit on their own place.
To pay for your share, you will need to source a mortgage from a lender that deals in shared ownership. According to financial analyst Moneyfacts, there are currently 22 lenders that offer loans on shared ownership, 18 of which are building societies.
There are no centralised criteria or rules for shared ownership schemes, so mortgage deals will vary from lender to lender.
Interest rates also vary. The vagaries of shared ownership mortgages also extend to who qualifies for the schemes in the first place. Some housing associations will restrict their schemes to current social housing tenants and 'key workers' such as nurses, teachers and police, while others will consider buyers on a low income. Properties are usually also restricted to certain new developments that are marketed through local housing associations. To find out if you are eligible and to register your interest, contact your nearest HomeBuy agent at http://www.housingcorp.gov.uk/
Open Market HomeBuy
The government's HomeBuy scheme is designed to bridge the affordability gap for the most needy first-time buyers. The scheme is split into three parts. New Build HomeBuy is the new term for shared ownership. Social HomeBuy allows housing association or council tenants to buy their existing home - recently the government decreased the minimum stake tenants can purchase from 25 to 10 per cent.
Lastly, there is Open Market HomeBuy, which was launched in October 2006. This scheme is open to all first-time buyers and, as the name suggests, on any property. But you will have to prove you can't afford to buy your first home alone, and what this means will depend on the area of the country you live in. Therefore criteria among housing associations and HomeBuy agents will vary. Again, your local HomeBuy agent will assess your application.
Open Market HomeBuy works on a shared equity, rather than shared ownership, basis and requires the buyer to qualify for a conventional mortgage of 75 per cent of the property value. The remaining 25 per cent, known as the equity loan, is stumped up in equal measure by the government and a specific lender. Whichever lender you opt for, the 75 per cent conventional mortgage comes with a five-year tie-in and is charged at standard market rates of interest - usually base rate plus 1 per cent. The 25 per cent equity loan is interest-free during this time to both government and lender and can be redeemed penalty-free. At the end of the five years, a rate of 3 per cent will become payable on the lender's part of the equity loan, but there will still be no interest to pay on the government's portion.
There is no opportunity to 'staircase' under the joint equity scheme. Ownership of the property will always remain split into 75 per cent for the buyer and 12.5 per cent each to the government and lender. When the house is sold, all parties reclaim their relative percentages, making a profit if house prices have risen. If house prices have fallen, the borrower will only lose equity on the 75 per cent conventional loan. Of the equity loan, the lender will take what it is owed first, with the government making the biggest loss by being repaid whatever is left.
The launch of a new scheme has opened the gates for all first-time buyers, allowing them to purchase a share of any property, anywhere in the country, as long as it costs under £250,000. This time, the other party is a private investor, whom the first-time buyer never even has to meet.
The company behind the scheme, called Joint Equity, acts as a middle-man between these investor-partners and first-time buyers known as owner-partners. “Many young people are resigned to a lifetime of renting as they think they can't afford to buy but, after contacting us, have realised they can,” says Brad Bamfield, chief executive at Joint Equity.
The owner-partner can choose to purchase between 25 and 75 per cent of the home while their investor-partner puts up the remainder.
The two parties must then put down a 10 per cent deposit on their relative shares. The owner-partner must pay what is effectively rent - although it is termed an 'investor return' - of six per cent compound growth on the investor-partner's original stake. This is paid monthly.
Like shared ownership, the owner-partner is able to staircase from their investor-partner but only after the first two years, after which time the investor-partner cannot refuse staircasing requests. When it comes to staircasing, if house prices go down, the investor-partner is protected and will be entitled to the value of the initial stake as well as the 6 per cent annual returns. But if the owner-partner wants to sell rather than staircase - which they can do at any time - both parties will share in losses as well as gains.
Mortgage deals for the scheme are expensive and limited. But Joint Equity could be a good solution if you do not qualify for one of the more established schemes. At least this way you do not have to live with the other buyer and you know they cannot leave.
However, it's not cheap, so all other options should be explored first.
Article taken from 'What Mortgage' publication 'Sharing the burden'