Times have been tough for wannabe homeowners. There's a real shortage of mortgages for borrowers with anything less than a 25% deposit. Many lenders now expect the average first-time buyer to put down more than £30,000.
But before we get too bogged down in all this bad news, there is some light at the end of the tunnel. HSBC, for example, has pledged to make an extra half a billion pounds of mortgage funding available to home buyers with a 10% deposit.
But for some even this is still too much to ask. If this sounds like you don't despair because owning your own home isn't necessarily beyond your reach.
Shared ownership
There are several schemes available which can help to lessen the huge financial burden of buying a home. I'm going to take a closer look at the increasingly popular shared ownership scheme - also known as New Build HomeBuy - which can help you buy a new build property.
At one time shared ownership was only available to certain homebuyers including social housing tenants and key workers. But the scheme has been made available to any first time buyers with an annual household income of less than £60,000.
Shared ownership enables you to buy a share of the property - usually between 25% and 75% of its value - while paying a subsidised rent on the remainder. The portion you rent will be owned by the housing association or developer managing it. The rent you pay will initially be set at no more than 3% of the housing association's share of the property, but it will be reviewed every year.
You'll also have the opportunity to increase your share as it becomes more affordable until, in most cases, you own the property outright.
Although you won't own your home to begin with you'll still have all the normal rights and responsibilities of an owner-occupier. For example, it will be down to you to pay for repairs and maintenance of the property.
You'll need to wait for a suitable property to come up for sale in the area where you want to live. You'll have a better chance of being accepted for a shared ownership home if you live or work in the borough where it's located. That said, it may be possible to buy in a different area.
Financing shared ownership
Once you've been accepted for a property, how do you go about buying a share? Quite simply, you apply to a mortgage lender for a loan to cover the share you want to buy.
There are only a handful of lenders who are willing to fund shared ownership primarily because it's considered higher risk than a traditional mortgage. But large high street lenders who may be able to help include Abbey, Halifax, Nationwide and Woolwich.
Shared ownership mortgages
Halifax has a new 'Affordable Housing' product range specifically for shared ownership borrowers. (The range is also available to customers buying through shared equity schemes where the property is purchased partly with a conventional mortgage and partly with a low-interest equity loan).
Halifax offers two and three-year fixed rate mortgages to borrowers with rates of 4.49% to 7.29% depending on how much you want to borrow. To be eligible, you'll need to put down a deposit of between 10% and 40%. But, before you panic, remember this amount is only a percentage of the share you want to buy, not the full value of the property.
For example, if you want to buy a 50% share in a property valued at £150,000, you'll need a £75,000 shared ownership mortgage. This will require a minimum deposit of just £7,500 (10% of the share), rather than the £15,000 (10% of the full value) you would need if you were buying using a conventional mortgage.
But you don't always need a deposit. Mansfield Building Society, for instance, has launched a shared ownership initiative with South Yorkshire Housing Association (SYHA). Buyers who want to purchase a SYHA property using shared ownership can borrow up to 100% of the share.
Other lenders don't tend to offer specific mortgage products but make the conventional range available on a shared ownership basis with the same rates, fees and deposits.
Buying more shares or 'staircasing'
Buying an extra share of your home is known as 'staircasing'. Most buyers will staircase up to 100% so they eventually become the outright owners of the property at which point rental payments stop. If you don't have sufficient cash available, you can finance extra shares by taking a further advance on your mortgage.
Normally, the shares you buy will be a set size - 20% or 25% of the property value is common. Your home will need to be valued every time you want to buy more of it to determine how much the share will cost.
The downside of share ownership
Shared ownership sounds like it could be a good solution to a rather thorny affordability problem, but there's a downside:
- If you decide to sell your home you'll generally have to give the housing association first refusal. If a buyer can't be found, you can sell the property on the open market. This could delay the process. Anecdotal evidence suggests selling a shared ownership property can be more difficult and time consuming than normal.
- Although rent is subsidised, don't expect buying a home through shared ownership to be vastly cheaper than a conventional mortgage. That said, the scheme does enable buyers to get on the property ladder with no deposit or a reduced deposit.
- There's no guarantee you'll be able to afford further shares in your home. Think about this way: let's say you buy a home with a conventional mortgage for £130,000. Your mortgage debt will reduce as you repay more of it. Even if the value of your home doubles over time, you'll still only owe your lender the outstanding amount of the original loan. Now let's say you buy a 50% share of the £130,000 property instead. You have a mortgage of £65,000 and pay rent on the rest. If the price doubles, the remaining 50% share in the property will have increased from £65,000 to £130,000. If you want to take full ownership of the property, you'll need to find a way of financing that extra share which is now twice as costly as it would have been at the start. On top of that, you won't get the full benefit of any increase in the value of your property as you only own a part-share, which could make it more difficult to move up the property ladder in time.
- If you want to improve your home or remortgage, you may need permission while the housing association remains a part-owner.
- You'll still need cash to cover legal fees, mortgage fees, any deposit and possibly stamp duty.
Is shared ownership right for me?
This is the $64,000 question. In the conventional mortgage market, loans which require a 10% deposit are gradually returning. If you really can't manage that, shared ownership could be a more affordable alternative. But there are limitations as outlined above.
Overall I suggest you speak to a whole of market broker first to help you consider your options before taking the plunge.
Remember, shared ownership is just one possible route to affordable housing. There are others. Find out more at direct.gov.uk.
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