It is often said that the generation of young adults today ‘want it all’. But considering the exorbitant housing market they have had to swallow for nearly a decade now, this is as unfair as it is untrue. The price of an average first-time home has now climbed to £141,832 according to Nationwide Building Society, which – requiring a single salary of around £40,000 – is nothing short of a dream for most young people.
So, far from ‘wanting it all’, an increasing number of first-time buyers are having to look at schemes that allow them to share a property with another party in order to make the first rung of the housing ladder.
Shared ownership
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 (see box). Some, such as Abbey, will lend its standard 95 per cent of the share of the property value you need to borrow, whereas Kent Reliance Building Society will lend 100 per cent. With interest rates relatively low, it’s often a case that people can afford the repayments but not the deposit, which is why we will lend the full amount, says Kent Reliance’s deputy chief executive Rob Procter.
Interest rates also vary. Britannia Building Society, for example, offers its entire mortgage range on shared ownership deals (provided 50 per cent of the property is being purchased), while Teachers’ Building Society only makes the scheme available on a three-year fixed rate priced at a staggering 7.49 per cent or 6.59 per cent if you have a 5 per cent deposit. It is also restricted to teaching staff.
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 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 – last month 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. Current participants include Nationwide, Yorkshire Building Society and Advantage – part of the Morgan Stanley group. HBOS was also poised to launch with the scheme at the time of print under its Halifax banner.
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.
Joint Equity
The launch of a new scheme in January 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. Only a two-year fixed rate priced at 6.44 per cent or a two-year tracker pegged at 1.26 per cent over base rate (current pay rate 6.54 per cent) are available. Both deals are offered by only two lenders – Infinity and UX Mortgages – which can only be accessed through broker Mortgagebeaters.
But Joint Equity could be a good solution if you do not qualify for one of the more established schemes, comments James Cotton, mortgage manager at broker London & Country. Some people who do not qualify for government-led schemes team up with other buyers – even stra
ngers through websites such as Sharedspaces.co.uk. 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.
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