Shared ownership continues to be an attractive option for many people with the price of a home now unaffordable for many. However, although shared ownership looks as if it is a cheaper option, it is not without risks and these are often not made very clear at the beginning of the transaction.
Shared ownership appears to be cheaper than a mortgage because after paying your deposit, you will then pay a mixture of mortgage repayments and rent for the remaining value of the property. Unless you buy further shares in the property (a process known as “staircasing”), up to the full 100% share, a shared ownership lease is really little more than a type of tenancy. In effect although the value of your share may rise, you are not the full owner of the property until you really do own all of it.
Although you may have a substantial share in the property, you will still be liable for 100% of the service charges for the maintenance of the building. These are often unpredictable and can rise steeply particularly in the case of blocks of flats. Shared ownership buildings age like any others so there may be significant repair costs in the pipeline. Covenants and restrictions on ownership of the properties may also be part of the feature of these leases some of which are designed to be sold initially through a list maintained by a local authority.
Purchasing an increased share of the property by staircasing will be based on the future overall market value of the property, which the Landlord will assess. The value of, say, a 25% share now, is likely to be significantly lower than buying the 25% in 5 years’ time. Property prices which continue to rise need to be factored into future plans and budgets. In any event you should check that you can staircase to 100% as this is restricted for homes in certain areas.
The conveyancing process for buying a shared ownership property (particularly a shared ownership lease) is very complicated and involves large amounts of often highly technical documentation. Ironically it is possibly the worst introduction to conveyancing for first time buyers. It will usually involve higher legal fees in the process due to the complexity. Stamp Duty rates and calculations are also more complicated.
The mortgage market for shared ownership market tends to be dominated by a few major lenders who also have substantial terms and conditions to protect their interests. The lending market is therefore not as wide for this type of transaction.
Since the cost of rent plus mortgage can be substantial and bearing in mind that mortgage rates are at a historic low level, jumping into a shared ownership property solution should not be a first choice unless other alternatives have been looked at e.g. purchasing in a cheaper area, looking at the availability of loans and gifts from parents etc. On the other hand it may be that this is your first chance to get on the property ladder and should not be discounted. It is a question of weighing up the pros and cons.
If you would like further information and general advice on this subject please contact any of our offices and ask to speak to our residential property team.