Back to December 2015

Shared ownership – hit or myth?

Shared ownership could help thousands more homebuyers to step on to the housing ladder – but research by Leeds Building Society has discovered this important and growing lending sector is under-used and misunderstood.

With house prices rising at a faster rate than most salaries[1] and people continuing to struggle to get onto the property ladder, shared ownership is a potential solution for many, yet is often overlooked despite having been introduced 30 years ago.

As an expert lender in this specialised segment, Leeds Building Society has identified five key myths around shared ownership and presents the evidence to disprove these misconceptions:

  1. The belief that a shared ownership mortgage is more difficult to place than an ‘ordinary’ mortgage
  2. That the properties are in less desirable areas
  3. That it’s more expensive than renting
  4. That it’s difficult to qualify unless you’re on a very low wage, or a key worker
  5. That it’s the ‘consolation prize’ of homebuying, and not real ownership

 

“In a nutshell, the lack of understanding around shared ownership boils down to these five distinct points,” said Louisa Sedgwick, Head of Intermediary Distribution for Leeds Building Society.

“In reality, these beliefs are inaccurate and there is an abundance of information for intermediaries, and the borrowers they serve, available from housing associations, the Government and lenders to help them understand how shared ownership could work for them.

 

 

  1. More difficult to place

“Some may believe a shared ownership mortgage is more difficult to broker than an ‘ordinary’ mortgage and that it’s somehow difficult and time-consuming to progress. Although it may be true that many housing developers or associations are linked to specific intermediaries in certain areas, there’s nothing to stop individuals approaching their own broker about shared ownership. At this stage, many clients will have been assessed - certainly in terms of eligibility for shared ownership - by the relevant Housing Association (or Registered Social Landlord as they are categorised), before going to consult an intermediary, meaning the process for the broker can actually be fairly straightforward since they only need to place the mortgage.

  1. Less desirable areas

“A mistaken public perception exists that shared ownership homes may be badly maintained, poor quality properties in poor, or less desirable, areas. Again, this is far from the truth.

“London provides an interesting example and showcases the fact many shared ownership properties offer a desirable home and community environment to live in. Properties available through the scheme can be found in prestigious and sought-after areas such as Notting Hill[2]. What’s more, the availability of shared ownership properties extends far beyond London to desirable areas across the UK including Harrogate[3], Chester[4] and York[5].

“Shared ownership schemes are found across the UK as housebuilders are often obliged to include a proportion of affordable housing - some of which will be for shared ownership - regardless of where they are developing.

  1. More expensive

“Many believe the monthly payments required to live in a shared ownership property hover somewhere between those paid for a full mortgage and rent. In reality, monthly payments for shared ownership properties could be lower than either full ownership or private renting.

“In fact, a report published by the National Housing Federation in 2013 highlighted average shared ownership monthly payments were lower than rent or full ownership[6] in all regions of England, with the exception of the North East, where monthly private rent payments are the lowest.

“The report goes on to highlight that, at a national level, the average monthly payment for a shared ownership property is £688, compared to the private rented sector average of £893.

“The report also shows how, in most regions, the average share purchased varies between 38% and 46% so it should be remembered that as the property’s value increases, so does the value of the borrower’s share.

“At Leeds Building Society we have developed our own model to illustrate the difference in cost between shared ownership and private renting. Based on average rents available to those in a position to choose shared ownership, it’s clear to see over the life of a mortgage that shared ownership costs the customer less compared to private renting. For example, on a property valued at £200,000, the average private rent would be approximately £814 per month[7]. By contrast, 50% ownership of the same property, via a shared ownership mortgage with a 10% deposit, could produce a difference in payments of over £200,000[8] over a 25-year period.

  1. Qualification is difficult

“Some believe to qualify for a shared ownership property, you need to have a very low income or be a key worker - a public sector employee working in an essential service such as police officers, firefighters or NHS clinical staff. In reality, the concept is open to a much broader section of society.

“Simply put, anyone with a household income up to £60,000 per annum can qualify - or up to £71,000 a year in London for a one or two bedroom property, or up to £85,000 a year for a property with three or more bedrooms[9].

“Shared ownership is a great opportunity for young professionals and couples to make the first move to buying their own home.

  1. It’s not ‘real’ home ownership

“Some people disregard shared ownership because they see it in some way as a lesser form of ownership when it should be recognised as a useful and mainstream category of tenure in its own right.

“For some homebuyers it can be a stepping stone towards 100 per cent owner occupation but it should also be a perfectly acceptable option to own a share of a home.

“In this way the owner can benefit accordingly from any appreciation in value should they wish to sell in the future - in addition, it provides security of tenure compared to the private rental market.

“The myth that these homes are difficult to sell is far from the truth - shared ownership properties are demand-driven, very much like the rest of the housing market. The housing association which holds the remainder of the property may want to buy back the owned share to maintain its stock levels. If not, the property can then be sold on the open market.

“Whilst shared ownership is not the sole answer to the ongoing housing crisis facing the UK, it does provide first time buyers and those on low to mid wages with an opportunity to get their foot on the property ladder and a home they can call their own.

“What’s more, the buying model is an integral part of the Government’s affordable housing strategy - with that in mind, it’s worth reiterating the point that some equity, large or small, in many ways is better than none.”

 

[1] http://www.kpmg.com/uk/en/issuesandinsights/articlespublications/newsreleases/pages/affordable-housing-further-out-of-reach-says-kpmg.aspx

 

[2] http://www.nottinghillhousing.org.uk/shared-ownership/homes-for-sale

[3] https://www.harrogate.gov.uk/hpol/Pages/AffordableHousingAvailableTable.aspx

[4] http://www.rightmove.co.uk/property-for-sale/Chester/shared-ownership.html

[5] https://www.york.gov.uk/info/20012/housing/1131/shared_ownership

[6] Most recent data - http://s3-eu-west-1.amazonaws.com/pub.housing.org.uk/SharedOwnership-MeetingAspiration.pdf

 

[7] http://homelet.co.uk/assets/documents/HL4069-August-2015-HomeLet-Rental-Index-03-09-15-Final.pdf

[8] Leeds Building Society Rental Data and Trends model – see Notes to Editors for full data

[9] https://www.gov.uk/affordable-home-ownership-schemes/shared-ownership-schemes

Ends

Notes to Editors

Notes to Editors

Shared ownership versus rental model

The model gives an indication of the costs associated with shared ownership compared to private renting and is based on available data and a number of assumptions, which are detailed below.

The cost of buying a 50% share in a property worth £200,000 could be over £200,000 cheaper than renting over a 25-year period. Furthermore, the borrower could have built up equity of £329,412.

 

Rent

Shared Ownership

Difference

Total Payments (25 Year Term)

£448,170

£241,064

£207,106

Equity

£0

£328,635

£328,635

 

Equity is calculated using an increase in the House Price Index of 5% per annum and assumes the borrower has paid off their mortgage over the 25 year term.

Key assumptions in the calculations

  • The cost of shared ownership and renting is based on a 25 year term.
  • There is no change to the mortgage rates (except at the end of the initial product term of five years set out in the calculation below) during the term.
  • The borrower does not increase their share (staircase up) of the property.
  • Housing Association rent is charged at 2.75%[1] of Housing Association share, which is the norm.
  • Home Insurance costs not included in either shared ownership or rental options.
  • Upfront costs eg legal fees, rental deposit, and agency and mortgage fees not included.

 

Rent Calculation

 

Monthly Rent

£814[2]

Increase per annum

4.7%11

Total Rental Payments (25 year term)

£448,170

 

Shared Ownership Mortgage and Rent Calculation

 

Initial Product Term

5 Years

Product Rate

4.95%[3]

House Value at time of Purchase

£200,000

LTV of Borrowers' Share

90%

Total LTV

45%

Deposit for Borrowers’’ Share

10%

Loan Size

£90,000

Percentage Share Bought by Borrower

50%

Monthly Payment (Initial Product for 5 Years at 4.95%)

£529

Revert Rate

4.54%[4]

Monthly Payment (Remaining 20 Years at 4.54%)

£488

Total Mortgage Payments (5 years @4.95%, 20 years @4.54%)

£148,961

 

 

 

 

 

Shared Ownership Rent Calculation

 

Housing Association Initial Monthly Rent

£229

Increase per annum

1.2%[5]

Monthly Maintenance

£36[6]

Increase per annum

1.2%14

Total Housing Association rent (including maintenance)

£92,103

 

Total Cost of Shared Ownership

 

Total Rent and Mortgage Payments

£241,064

 

Leeds Building Society received the ‘Innovation Award (Lenders)’ at the Mortgage Finance Gazette Awards 2016, the third consecutive year it has won this category, as well as the award for ‘Product Innovation (Lenders)’.

The Society also was named ‘Best Regular Savings Account Provider’ for the second consecutive year by independent consumer advice website Savings Champion.

Leeds Building Society has 67 branches throughout the UK, Gibraltar and Ireland and assets of £12.7bn (as at 30th June 2015). The Society has operated from the centre of Leeds since 1886.

 

[1] https://www.gov.uk/government/.../homes-and-communities-agency

[2] Average rent based on English Housing Survey, Homelet and BDRC

[3] Available Shared Ownership product as at 7th December 2015

[4] Average Standard Variable Rate - Bank Of England

[5] https://www.gov.uk/government/.../homes-and-communities-agenc – RPI + 0.5% (based on Octeober RPI)

[6] Leeds Building Society Estimate