Solutions for first-time buyers: Shared ownership
Thursday, 27 October 2011 04:29
By Kate Saines
Without parental support, the average age a first time buyer can expect to achieve their aspiration of home ownership could soon be 43.
The current age, according to the National House Federation, is 37 but this is expected to rise as the difficulty in raising the hefty deposit for a mortgage becomes more challenging.
Depressing figures such as these can cast an even greater cloud over the already dire landscape for potential first time buyers.
So, if you are feeling the situation is becoming increasingly helpless – it might be an idea to look at taking another route onto the property ladder. In this case, shared ownership might be worth a look.
There are a variety of different shared ownership schemes around the country, each working within local authority areas. While they are all run differently, the basic principle involves purchasing a share of a property and paying rent on the remainder.
In most cases, as your circumstances and income improve, you can purchase more shares in your property – a process known as ‘staircasing’ - with the ultimate goal of outright ownership.
The idea is that because you are buying a percentage of a property, you’ll require a smaller mortgage and therefore a smaller loan-to-value (LTV) making it easier to obtain a deal.
If a property is worth £100,000 a buyer would have to find a deposit of £5,000 to be eligible for a mortgage with the highest LTV 95 per cent.
With a shared ownership scheme the buyer could opt to buy a 50 per cent share, and would be paying for £50,000 of the property. Therefore, the five per cent deposit required to be eligible for a 95 per cent LTV would reduce to £2,500.
The share of the property you can purchase depends on the scheme provider. Usually anything between 50 per cent and 70 per cent is normal. Priority is normally given to people living in a housing association or local authority home and serving military personnel.
However, many schemes are able to offer help to people – whether they are single, couples or families – who are renting privately or living with family or friends.
You’ll normally have to have an income above a specified amount, to prove you can take on the rent and mortgage. And there will also be a limit on the maximum income.
Some schemes will only consider first-time buyers, and while others will take on those who have already been homeowners it is usually only if they have been forced to sell their home following a relationship breakdown.
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A typical shared ownership scheme
One such scheme is run by Affinity Sutton and covers London, Surrey, Sussex, Hampshire, Kent, Hertfordshire, Buckinghamshire, South Devon and Birmingham
While priority is given to the groups already mentioned, those in private rented accommodation will be considered provided they earn over £18,000 and no more than £60,000 (increasing to £74,000 next year for larger homes in London).
People must have a connection with the area they wish to buy their house in and they must also have a good credit record. The average age of people Affinity Sutton helps is 31, much lower than the national average first-time buyer age of 37.There are a range of homes available from one bed apartments to four-bed family houses.
But, price is entirely dependent on location. Yvette Ruggins, sales director, explained: “The open market price varies considerably from £85,000 for a two bedroom apartment in Birmingham to £500,000 for a two bedroom apartment in central London.
“Most homes outside London are around £170,000. Of course shared ownership and equity loans make these homes much more affordable – shared ownership shares start at 25 per cent of the full market so £21,250 to £125,000 respectively.”
Buyers can purchase a 25 per cent to 75 per cent share of the full market price, depending on what they can afford. A subsidised rent is then paid on the share they don’t own. The higher share owned, the lower the rent, and there is the potential to ‘staircase’ to increase the shares owned.
Affinity Sutton has an exclusive deal with Santander which allows purchasers of shared ownership homes access to a mortgage requiring just a five per cent deposit.
Although this is naturally subject to terms and conditions, it means buyers need only find five per cent of the share they are purchasing. So, on an average house worth £170,000 and a 40 per cent share purchase of £68,000 buyers need only need to find deposit of £3,400.
To get onto the scheme, the first step is to register with your local HomeBuy agent – which can be done by going to www.homebuy.co.uk
Alternatively contact Affinity Sutton on sales@affinitysutton or 0300 100 0303.
Yvette Ruggins warned: “As awareness of shared ownership and other affordable housing products increases, so the lists are growing.”
But it could be well worth the wait. She added: “Shared ownership can offer a unique stepping stone on to home ownership. It’s a product which is increasingly attractive to the ‘squeezed middle’ hard-working low to middle income households as a real option.”
What to watch out for
There are plenty of things to beware of when embarking on shared ownership. For starters, many schemes are limited only to those already in affordable housing or local authority homes. The rising popularity of shared ownership has forced some schemes to close their doors to those in private rented homes.
Neil Harrison, marketing manager of the Edinburgh Solicitors Property Centre, which markets Scotland’s LIFT affordable housing scheme said: “When the scheme was launched it was available to a very wide group and could be used for any property that was available on the open market.
“Owing to the level of applications and funding they have restricted who they will support. Anyone in private rented accommodation is not able to benefit from this support.”
If you are successful at getting onto a scheme there are a number of other considerations. Yvette Ruggins of Affinity Sutton reminds buyers while they might need a smaller deposit they must still put aside money to pay for legal, mortgage and other costs associated with buying a home.
And then there’s the matter of stamp duty.
Chas Roy-Chowdhury, head of taxation at the Association of Chartered Accountants, explained how this area of tax can become very complicated when it comes to shared ownership.
If you purchase a share of a property which is below the stamp duty threshold for first-time buyers of £250,000 then you need not worry.
However, if you start ‘staircasing’ and taking on greater shares this will become a consideration. Indeed, this will also be an issue if you purchase a share worth more than £250,000.
Mr Roy-Chowdhury explained: “There are two options. The first is to take a one-off payment based on the total market value of the property.
“Once this is paid you won’t have to pay any more on the property purchase even if you staircase your ownership later on.
“This option is most beneficial when the total market value of the property is no more than the threshold for paying Stamp Duty Land Tax (SDLT).”
He added: “The second option is to pay SDLT in stages. Although this means you pay less to begin with, you’ll have to make further payments if you later increase the share of the property.”
While there may be no tax due on this first transaction once you have purchased 80 per cent of the property you must complete a tax return on the transaction which took you over 80 per cent and any other transactions.
It’s complicated stuff. But Mr Roy-Chowdhury thinks shared ownership remains a great way for first time buyers to get on the property ladder.
He added: “Bear in mind you only buy a percentage stake in the property. This means you will miss out on some of the equity growth if the housing market rises.
He urged potential buyers to discuss the pros and cons of shared ownership with their mortgage adviser.
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Shared ownership case studies
David Sexton and Jan Bugar
First-time buyers David Sexton, 42, and Jan Bugar, 28, from Worthing had been searching for their own home for two years whilst renting a one-bedroom flat in the centre of town.
They were scouring the Homebuy website and came upon Affinity Sutton’s latest development in Goring-by-Sea, applied and are now living in a two-bedroom flat with a balcony and sea views in Goring-by-Sea – also in Worthing.
The couple bought a 35 per cent share for of their home for £78,000 and pay subsidised rent on the remaining 65 per cent.
Jan said: “Shared ownership works really well for us. We plan to buy back around ten per cent every year, or as and when we can afford it.
“I would recommend anyone to pursue it if they don’t feel they have enough to buy on their own.”
Sam Middleton
Graduate Sam Middleton, 23, also managed to get his foot on the property ladder thanks to a shared ownership scheme in Southampton.
After graduating from the University of Portsmouth with a degree in wireless computer networks he decided to move from his parent’s home in the New Forest after finding work with a computer company in Southampton.
Through Affinity Sutton he bought a 40 per cent share of a one-bedroom flat and managed to get his mortgage via the scheme’s arrangement with Santander.
It meant he only had to find a five per cent deposit on his share.
Sam explained: “I researched mortgages available and this was by far the best deal for me. My flat cost £46,000 for a 40 per cent share and I only had to pay a deposit of £2,300.
“If I wish to buy a greater share of my home in the future, I won’t have to remortgage as the scheme allows me to increase my loan to buy a bigger share.”
Apparently his combined rent and mortgage payment are cheaper than many people’s rent alone.
He added: “I can’t believe I’ve bought my own home – it still feels a bit surreal! I’m now going to concentrate on my career and hopefully this will mean I can increase my share of the apartment in the next year or so.”
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