Shared ownership

I recently helped my parents extricate themselves from a shared house ownership scheme when they bought out the remaining share.  My father’s employer had always provided their housing so at retirement they needed to buy but a few years ago mortgages were not available to retirees.  His employer offered a scheme – I suspect that although it’s badged as the employer’s scheme it is actually managed by a separate company.  My parents had no experience of mortgage or the housing market, so the ever-increasing costs and unpleasant terms (I’m tempted to say “sharp practices”) weren’t immediately obvious to them.  About ten years later my parents are finally clear of it – their solicitor-friend even wrote to my father’s ex-employer to complain at how unreasonable the terms and costs were.  A responsible employer offering such a shared ownership scheme would flag the options and help their people move over to a mortgage if they wanted.

 

In my parents case, the monthly rent and management charge recently added up to a whopping 6.1% per year of the company’s current equity, still rising every year.  A discount retirement mortgage remortgaged every two years could cost as low as 1.8% per year on average, and be based on a fixed capital sum.  To make things worse, when my parents started the scheme any valuation was to be arranged by my parents (who could have sought a second opinion if they felt a valuation was too high) but the company changed the terms a couple of years ago so the company selects the valuer (who doubtless would lose the contract if they erred on the low side).

 

As usual, let’s be clear that I’m not a financial adviser.  I’ve experience of one scheme and it stinks.  I’ve looked online and don’t see much to convince me that shared ownership with private companies is a good deal.  It’s just that for some people it seems the only option and I wish they could decide what to do with an appreciation of all the costs of shared ownership.  There are some government schemes which avoid the worst of the costs but they’re still intended to be temporary and to be bought out reasonably soon.  Some schemes are only for buying new houses, but I heard on the FT Money podcast that there is some evidence of such schemes simply boosting new house prices (as if they aren’t boosted enough already) which increases the risk of negative equity later.  (Perhaps you can tell that I’m not a fan of new houses.)

 

So how does it all work?

 

We can consider that there are three parts to house financing and these three add up to make the current house value:

– Mortgage

– Shared ownership portion owned by a company

– Positive equity (when first buying, you provide this with a deposit)

 

Generally people only consider shared ownership because they do not meet the criteria for a mortgage – usually because they do not have a big enough deposit.  Buyers should try to maximise their deposit, try to get a mortgage for the rest, and only consider shared ownership if desperate.  Assuming house prices are not going to crash (!), people with shared ownership should try to get a mortgage to enable them to buy 100% of the property.  Mind you, the prospect of a house price crash would put a whole different slant on the situation.

 

People buy rather than rent because mortgages and other costs are usually cheaper than renting.  Long term the rent rises (inflation) but mortgages remain related to the original loan amount.   Once the mortgage is paid off, there is no more mortgage whereas a renter would still be paying.  In retirement when income is often low, renting can be a crippling cost.

 

People talk about the “Housing Ladder”.  This made more sense many years ago when the cost of moving was reasonably small, so you could make several house moves (up the rungs of the ladder) to better houses.  Now costs such as stamp duty are so huge and house values are so high that those steps are hard to take – it’s more of a “Housing Shelf” than a “Housing Ladder”.  Instead of many moves, property with the opportunity to improve and extend potentially offers a better means to get the house of your dreams.  Buying makes a lot of sense but more than ever it makes sense to get a long-term house and to use mortgage rather than shared ownership.

 

Here’s a quick comparison of costs that I’ve seen from my parents’ scheme and one or two others I’ve seen online and from my many mortgages over the years.  It’s not an exhaustive list but I think I’ve captured most costs.

 Shared ownershipRepayment mortgage
Monthly costsRent based on a percent of house value or percent of market rate. In my parents' case 3.4% of the company's share. IncreasesInterest
The percentage can go up or down. The number it is a percentage of is fixed.
Choose to save each month into a stocks & shares ISA. After some time you have money to increase your share of the house.
This is really important Shared ownership schemes are not good for the long term. This saving is your way out of them.
REPAYMENT MORTGAGE: Pay off a bit of capital each month. Normally this and the interest are shown as one combined monthly cost.
The capital you owe slowly decreases as you pay it off. Guaranteed to pay off the capital at a particular time.

INTEREST ONLY MORTGAGE: Save each month into a stocks & shares ISA for growth. After many years you hope to have enough to pay off the capital.
The capital you owe is fixed.
Maybe a monthly scheme management fee. In my parents' case 2.7% of the company's share. IncreasesNone
Maintenance as you choose (or maintenance charges). I read in the Guardian that in a multiple-apartment development with many shared ownership tenants it can be legally hard to force the company to make repairs. Or conversely you might be forced to contribute to some huge costs.Maintenance as you choose. Only have maintenance charges if the property is leasehold and has some central facilities that need maintenance.
Service charge if the property is leasehold and has some central facilities that need costs to be covered.Service charge if the property is leasehold and has some central facilities that need costs to be covered.
Council tax, utilities, etc.Council tax, utilities, etc.
Maybe Buildings insurance (maybe from restricted choice of companies) or perhaps a share of it, or perhaps the company pays it until you have 100%.Buildings insurance (your choice of company and cover)
Impact of not keeping up with paymentsDon't miss payments. For a start it affects your credit rating and so your chance of getting a mortgage. Worse, you could lose the property, possibly with no refund of capital invested to date. Some terms and conditions are pretty severe. I read that you are less of an owner, and more of a tenant who has paid a lot of money to get the tenancy.
Although it's called "shared ownership", the company often retains legal ownership.
Don't miss payments. The mortgage company might defer missing payments as additional loan if there's a good reason. If they force a sale (at a low auction price) at least you might get some capital back.
Can I change company to get better service or lower costs?Not in any scenario I've seen. Beware of any introductory offer - think of the overall cost long term.Yes - remortgage with another company.
When you first buyValuation fee (selected by the company).Valuation fee (selected by the mortgage company).
Valuation & survey (selected by you)Valuation & survey (selected by you)
Your legal costsYour legal costs
Admin chargeMortgage fee and admin charge
Stamp duty (part)Stamp duty
Land registry fee. Note that legal ownership (recorded in the Land Registry) might be the company until you own 100% (which is a bad thing).Land registry
Company's legal costsMaybe a discount on some of the fees above.
When you staircase (increase your share), or reduce your mortgageSome properties are restricted to always be in shared ownership. Some shared ownership schemes are limited to 80%, especially if a housing association wants to keep the property in shared ownership after you move on.
Some can be fully paid off.
The equivalent is to pay off part of your outstanding capital by overpaying (regularly or as a one-off).

It's usually free of fees as long as you stay within the annual limits that the company sets. Some have a zero limit during the initial discount period.
Personally I try to pay off some capital at the same time as remortgaging.
Valuation fee (selected by whom? Some let you choose the valuer. Some appoint their surveyor and you have to accept their figure.)No need to value.
Your legal costsNo legal costs
Admin chargeUsually no admin costs as long as you are within the limits.
Stamp duty (part). This calculation is unusual and the amount owed is less than you might have expected.
I've found it on a couple of websites.

https://www.gov.uk/stamp-duty-land-tax/residential-property-rates
https://www.gov.uk/stamp-duty-land-tax/shared-ownership-property
https://lewisnedas.co.uk/Newsroom/blogs/stamp-duty-land-tax-sdlt-staircasing-a-step-by-step-approach-by-adam-creasey.html

At values such as 150,000-200,000, stamp duty is not huge. But at larger house values it escalates dramatically.

Let's say you used savings and a mortgage to buy 65% of a £150,000 house. 65% x 150,000 = 97,500
Zero rated allowance for Stamp duty is 125,000.
So no stamp duty applied at that time.

Now you want to buy the remaining 35% when the value is £200,000.
Paid so far 65% x 150,000 = 97,500
About to pay 35% x 200,000 = 70,000
Total 97,500 + 70,000 = 167,500
Zero rated allowance for Stamp duty 125,000
So stamp duty applies to 167,500 – 125,000 = 42,500
Rate for the range 125k to 250k is 2%.
So full stamp duty would be 42,500 x 2% = 850
But you pay your proportion: 850 x 70,000 / 167,500 = 355
No - you already paid this.

If you had bought 100% at the start with no shared ownership, stamp duty would have been applied to 150,000-125,000 = 25,000.
25,000 x 2% = 500
Land registry (if you get to 100%)No
Company's legal costsNo
If you sell before you own 100%I'm not familiar with this. I guess that:
In some cases sell back to the company (and don't be surprised if their valuation is lower than expected) and doubtless there's some fees too.
In other cases you sell (and you pay all sales fees) and then split the value with the company (who doubtless has a few extra charges at this stage).
N/a
Improving the propertyHome improvement (subject to the company's approval and probably approval fees) probably increases the value of your asset. Some companies allow you to register improvements to eliminate them from the house value increase, but the company might decide that many improvements (double glazing, rewiring) are actually repairs and not offset it, even though a valuer might consider it when arriving at a value, and you might have bought originally at a discount because of poor windows or ancient wiring.
Potentially your monthly costs will increase because you are renting a better house. After improvements, it may cost more to buy a greater share of the house, so in effect you are paying part of the improvement value again. So it's better (if possible) to buy 100% of the property before doing major improvements. Some schemes (to their credit) ban improvements and insist on you waiting until you have bought 100%.
Home improvement hopefully increases the value of your asset. Make sure you have all the approval certificates and council sign-off for really big improvements.
Impact of house value changesChange in house value is shared between you and the company.

If your house value drops because of a local issue, you and the company share the hit.

If your house value drops as part of a huge national crash, don't be surprised if the company goes bust and/or pushes its contract to the limit to extract the maximum money from you before (or as part of) going into receivership.
Change in house value is all yours (up or down).

Remember of course that you only feel the impact when you sell. If you are OK to stay living in the house, then rises and falls in value only affect you if it changes your equity percentage for remortgaging.