Shared Ownership lending – the scheme and its customers

We know it’s important for you to help your customers make the right choice. This could mean talking to them about Shared Ownership, so it’s important to have a good understanding of the scheme.

Not only have we been in the Shared Ownership market for over 30 years, but we’ve continued our commitment to the scheme even throughout the pandemic.

To help you and your customers explore Shared Ownership, we’ve put together the key information you need to know. We’ll be adding to this page over the next few weeks to give you more details on the scheme and its customers – so bookmark this page and keep checking back for more information.

1. The Scheme

• What is Shared Ownership?
• Scheme eligibility
• What options are there for mortgage finance?
• How does a customer access the scheme?
• What are the key stages that are different to a normal purchasing process?
• What is Homes England?
• What does a lender require?
• The model lease – an overview

2. The Customers

• Is there a typical Shared Ownership customer?
• So, what has changed?
• Where are customers most likely to live?
• What are some of the options that a customer has for their Shared Ownership property?

3. Key things to know about Shared Ownership

• Customers
• Size of the scheme
• The mortgage market
• Miscellaneous

1. The Scheme

What is Shared Ownership?

Shared Ownership is a key part of the Government’s affordable housing strategy. It’s a scheme that offers people the ability to purchase a share in a property whilst paying rent to the organisation who owns the remaining share (typically a Housing Association).

The scheme was launched in the 1970s and there are currently over 200,000 in the scheme. New properties are continually being developed^[1].

Those households have been attracted by the scheme's key benefits:

• Lower deposit requirements (as deposit is only required based on the share the customer is purchasing).
• Ability to purchase more of the property when they are able to afford it (in a process called ‘Staircasing’).
• Potential to limit stamp duty payments.
• Ability to take the scheme on new build properties.

It should be noted that whilst the customer only owns a percentage of the property, they are responsible for all of the property’s upkeep in terms of property maintenance (cleaning, repairs, etc.).

[1]Affordable housing supply statistics (AHS) 2018-19

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Scheme eligibility

In order to be eligible for the scheme, the customer must:

• Typically be a first time buyer unable to afford a home suitable for their needs on the open market, or a previous home owner who can no longer afford one.
• Have a household income less than £80,000 (£90,000 in London).
• Be 18 or over.
• Purchase between 25% and 75% of the property initially.

Most properties that are purchased under Shared Ownership are new build (61.5% in 2016/17^[2]), but there is still a significant market for existing Shared Ownership properties being re-sold – particularly in areas such as London and the South East² where Shared Ownership has traditionally been sold in higher volumes.

[2] MHCLG CORE Data – CORE website

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What options are there for mortgage finance?

There are many choices for customers seeking a mortgage to purchase their Shared Ownership home, from smaller regional building societies to national high street banks. Customers using a mortgage to purchase their property will typically require a deposit, starting at just 5% (a key reason for the appeal of the scheme).

The journey to purchasing a Shared Ownership property will typically begin with a Housing Association. These organisations are likely to be the first point of contact for a customer purchasing a Shared Ownership property, they will talk the aspiring property purchaser through the details of the scheme – but they cannot give advice as to where to access the mortgage they will require to purchase a property; as a result, they will advise the customer to obtain independent financial advice e.g. a mortgage broker.

This advice benefits the customer as seeing deals from a wider choice of lenders best increases the opportunity for the customer to find a product that meets their individual circumstances.

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How does a customer access the scheme?

The first step for the customer is likely to be through a Housing Association, however that doesn’t mean finding a property has to be any more difficult than finding a standard residential property. In fact, it could be as simple as visiting a new development – Shared Ownership is a popular method of affordable housing that many local authorities insist housing developers build as part of new projects. Then there are traditional websites such as Rightmove and Zoopla where customers can search for properties and bespoke websites such as Sharetobuy.com that advertise Shared Ownership properties exclusively.

When a customer has found a property they are interested in the process for purchasing shares is similar to the standard house buying process, with only limited differences (changed parts of the process are in italics below).

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What are the key stages that are different to a normal purchasing process?

The financial assessment of the customer is a key element of a Shared Ownership purchase. This process will see the appropriate Help to Buy agent inputting the customer’s financial details into a calculator maintained by Homes England. The calculator will, taking all factors into account, give an indication of the size of the share the customer will be expected to buy (for which a mortgage will be required) and the size of the remaining unowned share (upon which the customer will pay rent, which is typically set at a starting rent of 2.75% e.g. unowned share of £100k resulting in annual rent of £2,750, or £229/month).

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What is Homes England?

Homes England is a Government body sponsored by the Ministry of Housing, Communities, and Local Government. Homes England was established in 2018 as the new trading name for the Homes and Communities Agency (HCA).

As the HCA was established via legislation, it still technically exists but the roles that it used to carry out (primarily delivery of housing and regulation of social housing) are split out into two sections: Homes England (responsible for housing delivery) and the Regulator of Social Housing (responsible for regulation including maintaining the list of registered providers - those providers of social housing who are subject to regulation).

The memorandum of sale that the customer receives from the housing provider is used by the solicitors as confirmation of the different shares, and is often required by the mortgage lender as proof that the mortgage they are being asked to provide is appropriate to the share being purchased (and also to confirm their rental payments).

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What does a lender require?

Lenders in the Shared Ownership market typically expect the landlord to be regulated. The list of current providers confirms there are, at time of writing (07/01/20), 1,627 registered providers, although there are some lenders that do not have this requirement (it is not known how many non-registered providers are currently operating). The non-registered provider sector is, however, believed to be growing driven by changes in the Government’s delivery approach – with the Shared Ownership and Affordable Housing Programme 2016-2021^[3] opening up funding for private providers for the first time.

In addition to the registered provider requirement, lenders expect the lease (as all Shared Ownership properties are sold on a leasehold basis) to be of a good quality, and to assist with this Homes England and UK Finance developed and released a ‘model lease’ which Housing Associations are encouraged, although not obliged, to use.

[3]Shared Ownership and Affordable Homes Programme 2016 to 2021: guidance

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The model lease – an overview

The model lease contains protections and clauses that help facilitate Shared Ownership agreements that have appropriate protections/arrangements for customers, landlords, and lenders.

It sets out rules, that are considered fundamental, relating to:

• Alienation – ensuring the customer has the property for the purposes of residential accommodation rather than for letting out to others.
• Mortgagee Protection – ensuring that the lender has the ability to reclaim losses up to the full value of the property (rather than just the share lent against) in the event of arrears/possession.
• Rent Review – giving the customer certainty of what their likely rent increases will be (typically RPI + 0.5%).
• Staircasing – giving the customer the ability to purchase further shares in their property, potentially giving the opportunity to fully own the property.

From a wider lending criteria perspective, the key differentiator is likely to be loan to value (LTV). Each lender has their own view as to what is required, however it is possible to find loans with a low percentage deposit requirement. It’s important to remember that deposits are based on the share being purchased, not the overall property value e.g. a £200k property, with a 50% share purchased, would have a deposit based on £100k.

Whilst not every lender will accept Shared Ownership applications, there are a wide range of national lenders and a number of smaller building societies who are able to lend. The exact providers and their criteria can change, so it’s best to refer to sourcing systems/lender’s websites in order to understand what is available.

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2. The Customers

Is there a typical Shared Ownership customer?

Yes and no. Shared Ownership, whilst launched over 30 years ago, has not remained static in that time, with the scheme having evolved to its present state (where it is open to more customers than ever before). This has been driven by changing Government ambitions for home ownership, and also changes seen in the housing market e.g. significantly rising costs of housing, particularly in London and the South East.

As a result, a customer who has been living in a Shared Ownership property for many years is likely to look very different to a customer who has recently purchased a property. However, as they live within affordable housing they are likely to share key characteristics:

• Typically younger than the average first time buyer.
• Typically have an income that is lower than the average first time buyer.

Ultimately, any customer who can afford the mortgage and rent, is able to save a minimum 5% deposit (based on the share they are purchasing) and falls under the minimum income criteria could be a Shared Ownership customer.

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So, what has changed?

At inception the scheme was heavily targeted towards key workers such as police officers and nurses, and existing social housing tenants. Since launch, however, changes have been made which have opened up the scheme’s availability; with the key differences being the removal of the key worker priority in 2011 (now open to all first time buyers) and changes to maximum income (now £80,000 outside London, and £90,000 in London). These changes recognise that house price growth has significantly outstripped wage growth, increasing the necessity of affordable housing.

With this scheme now more open than it has ever been, more customers are able to benefit from the scheme than ever before.

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Where are customers most likely to live?

Data from CORE^[1a] suggests that whilst London is still a major area for Shared Ownership (19% of sales in 2016/17) it has shrunk from being the largest area in 2011/12 where it delivered 25% of sales. This change has been driven by increasing mix in other areas such as the South West moving from 11% in 2011/12 to 16% in 2016/17. However, the Southern bias still appears with 60% of all sales in 2016/17 in London, the South East and the South West.

ONS^[2a] reported average property and VOA^[3a] reported rental costs for properties in each of England’s regions confirm that property remains expensive both to buy and to rent. Reports on average property and rental costs by ONS and VOA for properties in each of England’s regions confirm that property remains expensive both to buy and to rent. Shared Ownership customers can benefit by having a monthly payment that is likely to be less than the equivalent higher LTV lending if they were buying 100% of the property, and whilst some monthly costs may be more than just private rent they benefit from any growth in property value meaning over the long run they are likely to see wealth accumulation rather than just paid to a landlord.

The fact that the scheme has been able to support so many customers in areas where property ownership remains an aspiration (that many believe they will never achieve) is a testament to why it is now perceived as “The Fourth Mainstream Tenure” behind ownership, private rent, and social rent.

It also helps answer the concerns of ‘Generation Rent’; with the perception that ownership is expected to become increasingly out of reach for younger people, Shared Ownership presents a viable and attractive alternative option. As a result, it’s important for the industry to educate potential purchasers as to the options that are available to them, and organisations such as the Chartered Institute of Housing are at the forefront of this education piece – with their ‘Shared Ownership 2.1’ report^[4a] giving case studies of where the scheme has been invaluable and made a massive difference in people’s lives.

[1a] CORE website

[2a] UK House Price Index for March 2019

[3a] Private rental market summary statistics: April 2018 to March 2019

[4a] Shared Ownership 2.1: Towards a fourth mainstream tenure - taking stock (PDF)

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What are some of the options that a customer has for their Shared Ownership property?

Once a customer purchases a Shared Ownership property, many will simply maintain their position (paying their mortgage and their rent). Historically, Shared Ownership was sold on the basis that one day a customer can purchase more shares and eventually own their property 100%. This is true, but for some customers it’s not their desired or expected outcome. In this section, we’ll explore what a customer may do when in their property.

• Staircasing
• This is a process by which a customer purchases a larger share of their property (in minimum increments of 10%). This will mean that they own a larger share of the property, and as a result they will pay commensurately less rent to their landlord.
• To staircase, a customer must approach the landlord and a valuation will be required (as additional shares are based on the property’s current value).
• When this valuation is confirmed, the customer will be expected to provide the funds for the purchase. The easiest way for this will typically be for the customer to approach their current lender for a further advance, however customers can also remortgage and obtain further borrowing.
• Otherwise, purchasing additional shares is broadly the same (in terms of requiring solicitors) as a new purchase.
• As a result of the requirement for valuations each time the customer wants to purchase an additional share, many customers will try to minimise the number of times they staircase. A popular option is to remortgage and buy out the entire remaining share (therefore becoming a standard residential customer).

• Remortgaging
• The remortgage process is broadly in line with that of staircasing. Again, the customer must first approach the landlord in order to obtain permission (the housing association will usually say yes to this – unless the customer is intending to remortgage for the purposes of debt consolidation).
• After this permission is granted, the process follows much like any standard remortgage.

• Selling the property
• There is an active resales market for Shared Ownership.
• To sell the property the customer must again contact their landlord. Sometimes, the landlord reserves the right to find a buyer for the property for a period (typically 8 weeks). This is driven by the fact there are often waiting lists for Shared Ownership properties, recognising the popularity of the scheme and the more limited number of properties available).
• If the landlord does not provide a buyer, the customer is free to advertise the property on the open market through an estate agent of their choice. They are able to sell the property for the share that they own, and the property will be sold to the next customer on a Shared Ownership basis.
• When the property is sold, the customer can use the receipts to purchase another Shared Ownership property if they wish – or they could use it to go and purchase a mainstream residential property.

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3. Key things to know about Shared Ownership

Customers

To access the scheme the customer must:

• Typically be a first time buyer.
• Have an income less than £80k (or £90k in London).
• Be able to purchase an initial share of between 25% and 75%.
• Be able to afford the combined rent and mortgage payment.

Their combined rent and mortgage payments may be lower than private rental, and equivalent 95% standard residential loans – and has associated benefits in terms of deposit and required incomes.

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Size of the scheme

• Around 200,000 households currently live in Shared Ownership.
• The scheme has seen growth^[1d]:

• £4.3bn of funding announced in the 2016-2021 Shared Ownership and Affordable Housing Programme with an original expectation of 135,000 new Shared Ownership properties.

[1d] Affordable housing supply statistics (AHS) 2018-19.

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The Mortgage Market

• There are mortgages available to customers with no deposit (100% loan to borrower (LTB) share).
• There are a number of lenders active within the market.
• Typically, providers of higher LTB mortgages are building societies, with banks requiring a larger deposit.

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Miscellaneous

• Initial rent on the unowned share is typically set at 2.75% and rises each year at RPI +0.5%.
• Customers can purchase additional shares in the property (in a process called staircasing), typically in 10% increments, up to 100% ownership – and therefore no longer have to pay any rent.
• When they choose to sell the property (assuming they haven’t staircased to 100%) they must first approach the housing association who has a period (known as the nomination period) to find a buyer. After this, the customer can sell their share on the open market (but it remains a Shared Ownership property). They can then purchase a new mainstream property or use the receipts to fund a new Shared Ownership purchase.

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