Mortgage lending on shared ownership properties

Shared ownership in one form or another has been a feature of the housing market and government housing policy for many years with the underlying principles largely unchanged.

The current scheme is Help to Buy Shared Ownership and this offers certain home buyers purchasing some types of property the opportunity to buy a share in the property and pay rent for the remainder.

In due course, as the buyer’s income improves further, shares in the property can be purchased (by a process called “staircasing”) until eventually 100% is owned.

Under the current arrangement the purchasers can buy between 25% and 75% of the property with the aid of a mortgage granted by one of the mortgage lenders supporting the scheme.

The remaining 75% to 25% will be rented from a housing association at a subsidised rent. In England the applicant’s household income from all sources must be £80,000 or less to qualify, except in London where the limit is £90,000. Different schemes apply in other UK nations.

The applicants must be first-time buyers, people who used to own their property but do not currently or owners of existing shared ownership properties wanting to move.

The eligible properties must be either new build purchased from a developer (usually a Housing Association} or an existing Housing Association resale.

Under previous arrangements we used to have an additional scheme called Do It Yourself Shared Ownership under which the purchasers could find a house or flat for sale in the open market and then arrange with a Housing Association to buy it jointly with them on a shared basis. However, this is no longer available.

The applicants must deal with a Help to Buy Agent in the locality and the Agent will guide them through the process. Overwhelmingly the applicants are first-time buyers, typically young singles or couples with insufficient income to support a conventional purchase and mortgage.

What to look out for…

It has to be said that shared ownership may not always be the best way for young people to gain a foothold on the property market ladder.

If the purchase is a new flat the outgoings will include not only the mortgage payments on the share purchased and the increasing rent on the rented share but also the ground rent and service charge.

Service charges have a habit of increasing steadily (and sometimes dramatically) in line with increased maintenance costs.

Also when the time comes to buy extra shares the purchase price for the shares will reflect market values at the time so if property prices have risen, so will the cost of the shares.

Many young buyers will generally find their best first purchase to be a small freehold house with a conventional mortgage especially if they have some do-it-yourself skills and the property responds well to modernisation.

Thus no rent, no ground rent, no service charge and the value of the improved property will outperform the market generally. However not all young people with busy lives want to do up a property and if they need a new build flat in an expensive area shared ownership may be the only way to achieve their dream.

Mortgage lenders who agree to support shared ownership will need some reassurance that their lending is secure since these are loans to buyers who, by definition, have low incomes, high percentage advances (up to 100%) and are fairly stretched financially.

The mortgage deed should provide that the mortgage lender’s charge on the property takes precedent over that of the Housing Association.

In the event of shared ownership defaults mortgage lenders need to know that their lending is easily recoverable since the resale and marketing of these properties in the second-hand market will typically be in the hands of Housing Associations who will be offering them to applicants on their waiting lists although some shared ownership properties do come onto the market via conventional estate agency.

Peter Glover is a surveyor and author of ‘Building Surveys’ and ‘Buying a House or Flat’