Hidden dangers every first-time buyer needs to know when using popular scheme to buy a house
GETTING a foot on the property ladder can often feel like a pipe dream for many, but there are many schemes available to make it easier.
A shared ownership scheme can help you to buy a home of your own even if you think you cannot save for a deposit or keep up with mortgage payments.
Instead, you can buy a share of the property and pay rent to a landlord on the rest.
You can apply if your household income is £90,000 a year or less in London or £80,000 a year or less in the rest of the UK.
More than 103,000 shared ownership homes have been built and sold in the last decade, according to the National Housing Federation.
However, experts have warned that shared ownership comes with several hidden dangers such as high service charges, short leases and even the risk of being evicted.
Here, we explain the positives and negatives of shared ownership so you can decide if it is right for you.
Benefits
Low deposit
One of the big advantages of shared ownership is that you only need a small deposit.
This is because by owning a share of a property rather than the whole thing you can apply for a smaller mortgage.
For example, if you want to buy a property worth £250,000 then you would need a nest egg of £25,000 to put down a 10% deposit.
But if you buy a 45% share in a shared ownership property worth £250,000 then you would only need to save £11,250 for a deposit.
Some shared ownership properties will also let you put down a 5% deposit.
For the same house this would mean saving just £5,625.
Do not need to be able to afford the whole house
Another benefit of shared ownership is that you do not need to be able to afford the full market value of a property you are interested in.
Instead, you buy a share of the total property, which is usually between 25% and 75%.
What help is out there for first-time buyers?
GETTING on the property ladder can feel like a daunting task but there are schemes out there to help first-time buyers have their own home.
Help to Buy Isa – It’s a tax-free savings account where for every £200 you save, the Government will add an extra £50. But there’s a maximum limit of £3,000 which is paid to your solicitor when you move. These accounts have now closed to new applicants but those who already hold one have until November 2029 to use it.
Help to Buy equity loan – The Government will lend you up to 20% of the home’s value – or 40% in London – after you’ve put down a 5% deposit. The loan is on top of a normal mortgage but it can only be used to buy a new build property.
Lifetime Isa – This is another Government scheme that gives anyone aged 18 to 39 the chance to save tax-free and get a bonus of up to £32,000 towards their first home. You can save up to £4,000 a year and the Government will add 25% on top.
Shared ownership – Co-owning with a housing association means you can buy a part of the property and pay rent on the remaining amount. You can buy anything from 25% to 75% of the property but you’re restricted to specific ones.
Mortgage guarantee scheme – The scheme opens to new 95% mortgages from April 19 2021. Applicants can buy their first home with a 5% deposit, it’s eligible for homes up to £600,000.
But you can buy a share worth as little as 10% on some homes.
For example, if you want to buy a 10% share of a property worth £300,000 then you would need to take out a mortgage for just £30,000.
The smaller your mortgage the lower your monthly repayments will be.
Increase the proportion you own over time
You can increase the amount of the property you own up to 100% through a process known as “staircasing”.
You may want to do this if your circumstances change, for example if you get a pay rise or are given some money from a friend or relative.
For example, you could start by buying a house with a 25% share then staircase to 50%, then 75% and finally buy the whole home.
Usually you can buy shares of 10% or more at any time but this will depend on your lease.
Some older leases may only allow you to staircase by 25% or more but newer leases may let you buy shares for as low as 5%.
Every time you staircase the housing association will carry out a property valuation of your home.
This is to ensure that you buy each share at the current market price, not the price at the time you bought the first share of your home.
If the value of your home has risen this could mean that you pay more for additional shares in your home than you did in the first share.
You will also need to remortgage, which is when you take out another mortgage with a new lender or stay with your existing one.
Meanwhile, you will also have to pay stamp duty on the whole value of the property when the portion you own equals or exceeds 80%.
This could cost you thousands of pounds on top of the cost of buying additional shares.
Mobeen Akram, New Homes Director, Mortgage Advice Bureau, warned: “If you increase your share through staircasing, your rent will decrease but the other fees will likely remain the same.
“You may also need to pay additional costs associated with getting a mortgage when you staircase, such as valuation fees and legal costs.”
Value of the portion of your home you own may increase
House prices constantly go up and down depending on the property market.
Usually house prices grow steadily over time, which could mean that the proportion of the home you own may also increase in value.
If this happens then you have built up equity in a property, which you could use to take the next step on the property ladder.
For example, if you bought a 50% share in a property which is in total worth £300,000 then your share is worth £150,000.
If the value of the property increases by 10% then its new market value will be £330,000.
Your share is still 50% but it is now worth £165,000.
Drawbacks
High ground rent and service charges
When you buy a shared ownership home you usually need to pay a service charge which covers the cost of cleaning and maintenance.
This can be charged monthly, yearly or twice a yearly.
You can ask your landlord for a summary showing how the charge is worked out and what the money is spent on.
The cost of the service charge does not depend on the share of the property you own.
This could mean that even if you own a 25% share you will still pay the same level of service charge as someone with a 75% share.
The initial service charge fee is also not fixed, which could mean that the cost soars after a few years.
Beware of short leases
Shared ownership properties are leasehold, which means that you own the building for a set number of years.
Unlike freehold properties, you also do not own the land that it is on.
When the term of the lease expires, the property will belong to the landowner unless you extend the lease.
Applying for a lease extension from your landlord could cost tens of thousands of pounds.
As the number of years left on the lease gets shorter the property becomes harder and harder to sell.
You could be forced to reduce your asking price to encourage someone to buy the property.
It may not be cheaper than getting a mortgage
High monthly mortgage payments and rent could mean that you do not save any money compared to just getting a mortgage.
Typically, your annual rent is charged at 2.75% of the portion of the property that you do not own.
For example, if you bought a 25% share of your property, your monthly rent would be 2.75% of the remaining 75% share.
If you buy a new-build shared ownership home then the rent limit is 3% of the value of the share the landlord owns.
But for resale homes the starting rent will be set at the same level as the previous shared owner was paying.
The landlord will review the rent at a time set out in your lease, which is usually once a year.
The rent may go up when it is reviewed but it will not go down.
You are still a tenant
As you pay rent on the portion of the property you do not own you are still a tenant of your landlord.
This means that you could be evicted on many grounds, for example if you fail to pay rent, sub-let your home or are a nuisance.
If you are evicted then there is a risk that you could lose the proportion of the home you have already bought as you do not own it fully in the eyes of the law until you have staircased up to 100%.
The housing association is not legally obliged to reimburse you if you are evicted.
Instead, you are only legally entitled to be paid for your share on the sale of the property.
You must make sure that you can afford your mortgage payments and rent before applying for shared ownership.
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