Despite the recent sluggish housing market, decades of spiralling property price rises have made homeownership seem, for many, nothing more than a pipe dream. But help is at hand.  And, over the next few months, we’ll analyse the upsides and downsides of the various schemes on offer.

Help to Buy

Under the umbrella phrase “Help to Buy” the government has introduced three schemes: Shared Ownership, Equity Loan and The Help to Buy ISA. 

This month we’re focusing on Shared Ownership.

 

What is Shared Ownership?

This scheme has been set up in conjunction with housing associations. Effectively, Shared Ownership offers prospective buyers the chance to buy a share of a property—the Housing Association owns the rest. 

Buyers can purchase between 25 per cent and 75 per cent of the property’s value. Rent is then payable on the remaining portion. The scheme includes newly-built properties or ones made available through resale programmes from housing associations.

 

Who is eligible?

Shared Ownership is not open to everyone, but the allowances are pretty generous. In England, your household income needs to be less than £80,000 a year (in London this rises to £90,000). 

Also, you must be a first-time buyer, a former homeowner, or an existing shared owner who wants to move.

 

The upsides of Shared Ownership

Shared ownership allows people on very modest incomes to become homeowners—in part at least.  It also allows you to increase your ownership all the way to 100 per cent.  This is through a process called “staircasing”, whereby you have the right raise your equity stake.

The rent you pay on the portion of the property you don’t own is capped. Typically, the initial rent is based on a sum equivalent to 3 per cent of the outstanding equity retained by the housing association.

The rent will then increase annually in line with increases to the RPI (Retail Price Index), plus an amount, usually ranging between 0.5 and 2 per cent. (It should be noted that the RPI measure of inflation usually rises faster than the government’s preferred measure of inflation (the CPI) as the RPI includes the cost of housing).

Another consideration is that housing associations are non-profit organisations that rent properties to people on low incomes. They were not set up as profit maximizers. As such, they are normally reasonable landlords.

 

The downsides of Shared Ownership

When you can afford to raise your stake, you have to pay the “current market value” for the additional percentage you want to buy. In addition, some people have complained of high administration fees each time they have tried to “staircase”.

All Shared Ownership properties are leasehold. Worse still, a shared ownership lease does not qualify for the right to purchase the freehold. This is a right that all other leaseholders enjoy as a result of the Leasehold Reform Act 1967. 

Another thing to consider is that a Shared Ownership leaseholder only qualifies for the statutory right to extend their lease if they have “staircased” up to 100 per cent ownership. However, some landlords have their own policy of allowing lease extension where there is less than 100 per cent ownership. Make sure your conveyancing solicitor investigates this thoroughly and that you are aware of the possible implications.

On top of rent, you will have to pay maintenance fees, annual service charges and a share of the buildings insurance. Ground rent may also be payable. Additionally, freeholder permission will have to be obtained should you want to undertake any major renovations. On top of this, leaseholders may face other restrictions, such as not owning pets. Again, these are worth investigating before committing.

 

Is it worth it?

If you can afford to buy a property outright, definitely not. However, if you’re likely to see your salary rise, it’s a great way for young people to get onto the property ladder. But, I can’t help but think the Equity Loan scheme is better—more on that next month.

To buy a home through a Shared Ownership scheme, contact the Help to Buy agent in the area you want to live.

 

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