Shared Equity - The Way Forward For The First Time Buyer?
The lot of the first time buyer has never been so bad. A combination of soaring house prices in recent years together with the application of much stricter lending criteria by mortgage providers following recent upheavals in the financial markets has contrived to exclude the majority of first time buyers from the house buying market. Data released by the Land Registry reveals that the average house price for properties in the south east of the country is approximately £350,000, with the average house price for the remainder of the country rising to £183,000 – more than seven times the average income of those persons who would qualify as first time buyers!
It is as a result of this situation that more and more first time buyers are now looking at Shared Ownership as a means (indeed in a lot of cases, the only means) by which they can get their feet on the first rungs of the housing ladder. The concept of Shared Ownership is that a buyer purchases a part share in a property and then rents the rest from his landlord/co-owner. Typically a buyer would purchase a 50% interest in a property and then pay to his landlord a rent equivalent to 2.5%-3.5% of the remaining value of the property. As the buyers financial position improves over a period of time, he is then able to increase his share in the property, buying tranches of 5% or more at the then current market price. This process is known as “Staircasing”.
Shared Ownership was first launched by the Conservative government in 1990. It was intended to be solely for the benefit of key workers such as teachers, nurses and policeman who were finding it difficult to purchase properties, particularly in the south east of the country, during the last property boom in the late 1980’s. The scheme has since been extended to cover low income households (the income threshold varies from region to region). Many of the shared ownership schemes are operated by registered social landlords and some through private property companies. Although the schemes only cover a small percentage of properties in this country, property developers of residential developments over a certain size are required to ear mark a percentage of the flats and houses on that development as ‘affordable housing’ (which includes Shared Ownership schemes).
There are certain disadvantages to Shared Ownership. If a buyer has bought in partnership with a registered social landlord or charity the property must be resold through that organisation so it can find a buyer which satisfies its criteria. This would take time, which could be problematical if the seller is attempting to buy another property and is involved in a chain. In addition, anyone owning a 50% share of a property will only get 50% of the capital appreciation. Furthermore a buyer will have to pay his mortgage instalments and the rental payments to the landlord, which are generally index linked to the rate of inflation plus 1%.
Nonetheless, all things considered, shared ownership would appear to be one of the few very real options available to first time buyers to give them a foothold on the property ladder.
Paul Grindrod
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