Tuesday, September 8th, 2020
The Housing Secretary Robert Jenrick will today (8 September 2020) announce an £11.5 billion Affordable Homes Programme which intends to provide up to 180,000 new homes across England between 2021 and 2026. Of those new properties, the government has declared that “around half” will be available for affordable home ownership. Specifically, he will announce changes to the Shared Ownership scheme that is currently in place, by reducing the minimum share that a buyer can purchase from 25% to 10% and allowing people to increase their percentage ownership (called staircasing) in 1% instalments rather than 10%.
What is the Shared Ownership scheme?
The Shared Ownership scheme allows purchasers who cannot afford the 100% value of a property to become home owners. Currently, a first time buyer, someone who has owned a property before but not any more or a current shared ownership property owner can buy a percentage of a property (minimum threshold currently 25%) and “rent” the retained percentage from a housing association. Because the purchaser will be considered the legal owner of the property on completion, the scheme means that they can raise funds for the purchase via a mortgage which can then be secured against the legal title.
Great, so I can own a home for less?
Not so fast. On the one hand, yes, it would allow you to become the legal owner of a property for a percentage of its full market value. However, you would have to ensure that you could afford all of the monthly outgoings, including mortgage repayments and the specified rent on the percentage of the property that you do not own. These properties are always leasehold and so you may have to also budget for monthly service charge payments and ground rent.
Any other issues?
As with any leasehold property, the unexpired term of the lease will reduce each year. Unless you own 100% equity of the property, you will not be eligible for a statutory lease extension and will have to rely on reaching agreement with the landlord. As most landlords are housing associations, this should not be too difficult. However you would have to ensure that the landlord has the right to extend your lease as sometimes complicated legal titles may mean they are restricted from doing so.
So how can I increase my share to 100%
The process of increasing your ownership of the property is known as staircasing. Currently you can only purchase minimum instalments of 10% of the property at a time. The value of the 10% will depend on the full market value of the property at the time, meaning that should you increase up to 100% equity over a period of time which has seen steady house price rises, you will actually end up paying more than the original full market value of the property. You would also need to pay the landlord’s fees for every instalment you purchase. The government’s proposals today would allow you to increase your ownership in smaller instalments of 1% or more.
What about selling the property?
When you come to sell, you will sell the percentage of the property you own. You would need to agree the full market value of the property with the landlord and provide them with a period of time to market the property (or buy the share back from you) before you would be free to advertise the property. This can lead to delays and make a quick sale difficult.
So is it for me?
The Shared Ownership scheme is an innovative way to get people onto the housing ladder. Many young people who are paying high rents will struggle to save for a full 10% deposit required to purchase a property at full market rate. For example, a £400,000 property would need a deposit of £40,000 if being bought for full value. If 25% of the property was being bought as part of the Shared Ownership Scheme, the buyer would only need a deposit of 10%. The buyer would then have the right in the future to increase their percentage ownership as detailed above.
Whilst this may appeal to a lot of young, first time buyers, care should be taken when considering the option, as the monthly outgoings can be high. Following completion, the purchaser would need to budget for mortgage payments, rent on the retained percentage, service charge, possibly ground rent and of course bills. As purchasers of shared ownership property often have a lower monthly income anyway, real care should be taken before purchasing a property through the scheme.
Whilst the government’s announcement today (which in itself is a re-announcement of the policy proposed in August 2019) is welcomed, first time buyers should be careful when considering shared ownership as a means to get on the housing ladder.
Steven Bannell is a Solicitor in Hanne & Co’s Property Law team.