Is half a home better than none?
By Ricky Browne
It is every British person’s dream to own their own home. But with an average home now costing more than £250,000 and an average salary of £32,000 – there is a bit of a disconnect between want and ability.
If someone has got their act together at the age of 35, and is ready to buy a home on their own – that would give them the chance to get a 30 year mortgage.
If the buyer had an average salary of £32,000 and wanted to buy an average home for £250,000, and had somehow managed to save £30,000 as a deposit, he would be able to get a mortgage from an institution like NatWest of £124,000. His monthly payments would be in the region of £962 to £1010,
So basically, the same amount he (or she) might pay in rent – a bit more or a bit less, depending on what type of property he was interested in. He would be paying about 50 percent of his income after tax in mortgage payments, but at least he would know that he owned the place that he lived – or some of it anyway.
But what if things went pear-shaped, and for some reason the wanna-be home owner managed to reach the age of 55 without owning a UK property? What then?
Well, the picture would be a lot less pretty, as the buyer may only be able to get a 10 year mortgage, until his retirement age of 65.
In that case, the 55-year old buyer with the same salary of £32,000 and a deposit of £30,000 could get a 10 year NatWest mortgage of £72,200. His monthly payment would be in the region of £2,153 to £2,194 per month, according to the NatWest mortgage calculator.
But that would mean that he could only buy a property of up to £102,200 – well below the average price. And the mortgage payments would be higher than his take home salary.
So basically, he’s stuffed. Either he has to come up with a much larger deposit, or he needs to continue to rent, or he has to look for another alternative.
That is where the Shared Ownership concept comes in.
WHAT IS SHARED OWNERSHIP?
First of all, it doesn’t only apply to 55 year olds like this example. The younger the better.
But is Shared Ownership a possibility for someone 10 years short of retirement?
Shared Ownership is a government-backed scheme that allows buyers to purchase a share in a property and pay rent on the rest. It has been going on for about 25 years now.
The purchaser gets a mortgage for a the share they own, and then pay rent to a housing association or private developer for the remaining share.
This allows the buyer to get a more affordable mortgage – with a lower deposit — on a property that might cost much more. So that sounds good. On the minus side, not only will he be paying a mortgage, but he will also be paying rent.
But, the buyer can increase his share in the property he partially owns, through a process called ‘staircasing’. That would allow him to decrease the rent that he’s paying – and if he was able he could even increase his share overtime to 100 percent. But he’d still be paying the mortgage, and may also need to pay existing maintenance fees.
Shared-ownership properties are increasing in popularity. There are currently about 157,000 shared ownership homes in England, representing less than one per cent of all homes. But this has shown growth – as in 2017 there were estimated to be 136,000 shared ownership households in England.
The buyer can own anything between 25 percent to 75 per cent and rents the remainder. Priority often goes to armed forces personnel. Key workers may also have an advantage.
While the idea was first designed for first-time buyers, others are now being considered.
Moving to 100 percent ownership might not be as simple as it appears at the offset. Staircasing rates are considered very high – making it difficult for people to achieve full ownership.
To get on that first ‘step” to increasing ownership, the buyer will have to usually acquire a further 10 percent. That will entail a new valuation, and normally a 10 percent share will be more than it would have been at the time of buying.
The rules may be changing though, and soon share holders may be able to take much smaller steps of perhaps one percent to increase their ownership, rather than 10 percent.
Steep steps or not, some people are successful in acquiring 100 percent of their property. Currently, it is estimated that about 10 percent of share owners go ahead to buy 100 percent of their properties – that’s up from about four percent not long ago.
But apart from that many people do sell their homes, and move onto perhaps full-ownership elsewhere or a property with a greater share.
But government is planning to change the rules to make the process easier.
Another hidden danger though, is that the property increases in value at a faster rate than the share-owner’s salary increases – making it even more difficult for him to ever reach 100 percent ownership.
So is it worth it?
Some say that it can be looked at as a better way of renting rather than of buying, in which case it can indeed allow people to rent a property at a much better rate than it would in the regular market.
Another advantage is that the deposit will be much lower and allows the buyer to afford a much more attractive property.
The overall monthly cost to the buyer can equal less than it would cost to rent a similar property.
But its not all pros, there are some cons as well. One danger is that service charges can escalate drastically, when you are responsible for 100 percent of the maintenance and repairs.
So its best to make sure that you have room for manoeuvre if you have to end up paying more in service charges than you were expecting – or if the cladding on your building has to be removed and replaced.
A mortgage for shared ownership is often at about the same rate as it would be for a regular open-market mortgage.
One thing to look out for is the length of time on the lease of the property. If there is ‘only’ 80 years or less left on the lease, the property becomes much less attractive, and a potential buyer may have a problem getting a mortgage, unless the lease is extended. This can be a difficult process, and the share owner has little power to make the housing association increase the lease.
Reselling the property may also have a few issues.
So shared-ownership may be a good idea for someone starting off on the property ladder at the beginning of their career, who just wants somewhere decent to live.
But for our 55 year old, it may not be the best idea. A better idea may be to buy the worst house on the best street and take it from there, improving the home and watching its value increase with the rest of the street.
Shared ownership is an option though. And if you look at it as you would a rental property it might be best to have a 25 percent share, rather than a larger one, which will make it easier to sell when you decide to move on. So in that case, a quarter of a home may be better than half a home.