The post that delves into the details (and pitfalls) of Shared Ownership and explains why I decided against it.
For this post I was going to go through the pros and cons of all of the various Government help to buy/affordable housing initiatives. However, that ended up being way too long so I’ve broken it down into three parts. In this first part, I look at Shared Ownership. In Part 2 I’ll go through the Help to Buy Equity Loan, and in Part 3 I’ll do a comparison of Help to Buy ISAs and Lifetime ISAs.
As anyone who’s read my blog before knows, I am currently in the final stages of buying a flat (if all goes to plan). When I was looking to buy I looked into both Shared Ownership and the Help to Buy Equity Loan and ultimately decided against using either scheme. Hopefully these posts will clarify why.
So let’s crack on with putting Shared Ownership under the microscope…
What is Shared Ownership?
Most simply, Shared Ownership is a part-own, part-rent arrangement. You purchase between 25% and 75% of the property (via a mortgage or your own savings) and then rent the other share from the housing association that owns the place, such as L&Q or Family Mosaic. Shared Ownership properties are always leasehold.
As many people like to point out, owning a leasehold means you technically don’t really own the property at all, and this is the case even in non-Shared Ownership situations (as to which see my post on the legal pitfalls of buying a leasehold). However, with Shared Ownership this is much more of an issue (see “Any nasty catches?” below).
Over time, you can choose to “staircase”, which means buying further shares of the property until you own 100%. The cost of buying further shares will be based on the market value of the property at the time you are buying the share.
Who is eligible?
Your household must earn £80,000 per year or less (or £90,000 a year or less in London).
You must either:
be a first-time buyer;
used to own a home but can’t afford to buy one now; or
be an existing shared owner looking to move.
There may also be specific eligibility criteria depending on the property or the housing association. Some Shared Ownership properties can be pretty expensive (especially the swanky new-builds in London) so also have a minimum income criteria.
I remember seeing one that had a minimum income requirement of £85,000, leading to a ludicrously narrow group of people that would be eligible. And as an aside, schemes to help households with £85,000-90,000 incomes is arguably not really helping to make properties affordable.
I’ve also heard of some housing associations with a “points” system, so you get more points if you live in the borough, are on the council house waiting list etc.
Shared ownership is only available in England.
What about Stamp Duty Land Tax?
Since the 2018 Budget, first-time buyers are exempt from paying stamp duty on the first £300,000 of a property if their Shared Ownership property is worth up to £500,000. This is back-dated to 22 November, 2017, so if you paid stamp duty on a Shared Ownership property after this date you can get a refund.
If you’re not a first-time buyer there are two stamp duty options: either pay stamp duty on the entire value of the property outright or only pay it on the share you are buying. However, if you go for the second option, if you later staircase you will have to pay stamp duty on the further share you are buying (based on the stamp duty rules and value of the property at the time of staircasing).
Can you sublet a Shared Ownership property?
This will depend on the terms of the lease with the housing association, but in the vast majority of cases this won’t be allowed. Note that this also includes renting out your home via Airbnb. I have a couple of friends in Shared Ownership properties who rent their places out via Airbnb when they’re not there, but this is probably against the rules.
Taking in a lodger, on the other hand, is generally allowed although you may need permission from the housing association.
Any other restrictions?
There is generally a smaller choice of mortgage providers for Shared Ownership and on the whole the interest rates are higher than if you were buying on the open market.
What about reselling?
It can be a bit of a faff to sell you Shared Ownership property. The housing association has the right to advertise it and find a buyer during what is known as the nomination period. They are also likely to have the right to buy the property back from you before it is put on the market (“right of first refusal”)
After the nomination period, if your housing provider hasn’t found a buyer you can market your property yourself/instruct an estate agent. However, you will still have to sell to a buyer who fulfils the eligibility criteria for Shared Ownership (and any other criteria of the housing association). Accordingly, the pool of potential buyers is smaller than if you were just selling on the open market.
Anecdotally, people can have a tough time selling their Shared Ownership property, although as with any property sale, it depends on market conditions. I know people who were trying to buy through Shared Ownership a few years ago and they were getting snapped up really quickly.
I suspect where people may struggle is where they’ve staircased up to, say, 70-80% and then try to sell. Most people looking to use an affordable housing scheme won’t be able to afford such a high percentage.
Any nasty catches?
There’s one big one that anyone thinking about Shared Ownership should definitely be aware of. Until you own 100% of the property through staircasing, legally you are treated as a “tenant in law”.
What this means is that it is actually misleading to market Shared Ownership as part buy, part rent. You are only a tenant. The upshot of this is that you could lose your property if you don’t keep up the rental payments or breach the housing association’s lease in some manner that gives them the right to evict you.
A case that everyone in a Shared Ownership property should be aware of is Richardson v Midland Heart, from 2007.
Richardson purchased 50% of a Shared Ownership property for around £30,000 in 1995. The other half was owned by the housing association, Midland Heart. Richardson got into arrears with the rent and Midland Heart brought possession proceedings against her.
The court found (with some reluctance) that all Richardson had was an assured tenancy for the 99 year length of the lease. It did not have the same protection that a lease for the whole of the property would have had. Even worse, she had no right for the £30,000 she had paid for her share to be returned to her.
Richardson’s situation was unusual as she didn’t have a mortgage for her share of the property. Most people if they can afford 50% of a property would just buy “normally”. If there was a lender they would most likely have stepped in to cover the arrears and added the cost to the mortgage.
However, rent arrears aren’t the only reason you could find yourself evicted. Depending on the terms of the lease the housing association may be able to institute possession proceedings on a range of grounds, for example, nuisance behaviour, or subletting. So my friends who sneakily put their flat on Airbnb are putting more at risk than they realise (I really must make a note to tell them about this case; rather poor form of me to have forgotten thus far…). In practice it’s probably more likely the housing association would give you a warning before instituting posession proceedings for something like that, but it’s not something I’d want to chance
I’m putting this in red as I think it’s so important: if you fall into arrears in a Shared Ownership property or breach your lease in a manner that gives the housing association the right to evict you, you may lose your property and have no right to be refunded the share you own (or rather, the share you think you own, because as we’ve discovered, from a legal standpoint, Shared Ownership isn’t ownership at all until you have staircased to 100%).
Christ on a bike! Anything else I should be aware of?
A few other points to note:
As with any long lease, you’ll have service charges to pay. However, even though you only part own (I’m going to keep referring to “owning” for the sake of ease despite what I said above), you pay the service charge as though you fully owned the property.
Many Shared Ownership properties are new-build so you get the usual problem you face with new-build that the value will depreciate almost immediately. A lot of the Shared Ownership properties I’ve seen in London seem absurdly overpriced to me. So you should probably only go for the new-build Shared Ownership properties if you think you’ll be there for a good few years to recover from any initial price drop.
Sometimes maintenance issues can be more of a problem with Shared Ownership. This will be the case where the housing association doesn’t own the whole block of flats (so they are sub-letting to you). In these circumstances, you may have no way to enforce repairs as the housing association has no responsibility for the building’s condition.
This Guardian article has a bit more detail on the above.
Fretful Finance view
I looked long and hard at Shared Ownership but decided against it for many of the reasons above. Through Shared Ownership I could have afforded a flat much closer to the centre of London but I prefer living a bit further out and not having these issues to deal with.
That said, I know quite a few people in Shared Ownership who have been very happy. One of my friends says he sees it as a preferable form of renting. You have greater security of tenure and, for him and his wife, it is cheaper that renting a similarly sized place in the normal fashion (although in some cases it could work out more expensive, you’d have to crunch the numbers for yourself).
They are, of course, hoping that their share will have increased in value so they can use that equity to buy somewhere on the open market down the line but as with any property purchase, it’s probably not a good idea to get too obsessed with your property increasing in value.
Shared Ownership seems to be particularly good for people who need more space (e.g. due to a growing family) than they could afford on the open market.
Staircasing is an obviously appealing option, although this could be expensive depending on what house prices do. If we have a period of time where house prices fall or plateau then people staircasing up to 100% could be on to a winner. On the other hand, if prices go up then it can prove pretty pricey.
Whatever you do, don’t fall behind on your rent!
Check out details on the Government Help to Buy portal.
And for London Shared Ownership see the Share to Buy website.