What do first-time buyers and shared owners need to know about shared ownership mortgages? Catherine Beaumont is an independent mortgage adviser with London Money. Here she addresses some common queries.
Is there a smaller pool of lenders for shared ownership mortgages than for standard mortgages? And, if so, does it matter?
Yes, it’s a much smaller pool. On the other hand, most of them are high street lenders and offer fairly competitive products. Interest rates on shared ownership mortgages will depend partly on whether borrowers fix their rate, and for how long.
We would always recommend purchasing on a standard basis, if people are able to, in preference to using the shared ownership scheme. Obviously, not everyone can afford the mortgage deposit required for an outright purchase, and that’s when they might start looking at other options.
A ‘foot on the housing ladder’ can be interpreted in two different ways: making a gain on selling a starter home to help fund a subsequent purchase of a better property; or purchasing a ‘forever’ home in instalments. Do first-time buyers’ intentions in this regard have any impact on choice of mortgage product; say, interest only or repayment?
We would only recommend interest only borrowing to clients where they’ll have the funds to repay the interest only mortgage before the end of the term; or if they have a suitable repayment vehicle in place; or they intend to downsize in the future.
None of this is likely to apply to a first-time buyer accessing a home via a shared ownership scheme.
What else do first-time buyers of shared ownership homes need to think about when it comes to mortgages?
First-time buyers will need to think about what mortgage term they want. The overall mortgage term is the amount of time it will take to repay the loan. In the UK, mortgage terms are usually 25 years. Anything over that is referred to an an extended mortgage. The maximum term allowable is 40 years. One advantage of a longer term mortgage is lower monthly payments. Disadvantages are that you’ll pay back more in total, and you’re committed for longer.
People also need to think about their mortgage deal. This is different from the mortgage term. A mortgage deal is a period of fixed, or favourable, interest rates at the commencement of the mortgage term. A mortgage deal is set for a specified period of time, often between 2 and 5 years, though it can be longer.
Is it a good idea to fix a mortgage rate for a longer rather than shorter period of time?
As interest rates on shared ownership mortgages are generally higher than standard mortgages, 5-year deals can sometimes attract relatively high rates of interest. A shorter deal might produce better interest rates, but also reduce predictability around outgoings as interest rates could rise significantly once that deal comes to an end.
It’s important to obtain expert mortgage advice when entering into a shared ownership scheme. Mortgage products vary from day to day, so any specific examples could be out of date very quickly. But to give a sense of the market right now (September 2021), a fixed rate for a 50% share sits at around 1.45% for a 2-year fixed rate and 1.83% for a 5-year fixed rate. Whereas, with a standard purchase, some rates are below 1%, even on a 5-year deal.
There is no right or wrong when it comes to mortgage terms and mortgage deals. It all depends on first-time buyers’ own current circumstances, and anticipated future circumstances, At London Money we’d talk to clients about their situation and plans in order to determine whether we’d recommend a short term fixed deal versus a long term fixed deal.
With shared ownership schemes we would often recommend to fixing over the shorter term. Then people aren’t tied into a rate for too long which might be important, say, if they are looking to staircase. Flexibility can be important for other reasons too.
- Income – is their income likely to increase, in either the short-term or over the longer term?
- Long-term plans – will this be their ‘forever’ home, or do they plan to sell on?
- Staircasing – do they plan to purchase additional shares?
- Lease length – will lease extension be necessary?
Could you say a little more about flexibility?
Five years is a long time, especially for first time buyers, and we usually find that ‘life happens’ during these first couple of years. Sometimes, it’s important not to be tied down for too long.
Some first-time buyers could be living with their partner for the first time. Sadly, some might not stay together. Others might start a family and find they need to relocate to have more space or a garden, or to be near a particular nursery or school.
Subsequent shares are priced at market value at the time those shares are purchased. Do shared ownership affordability checks take into account the possibility of mortgages on future shares being a lot more expensive than the mortgage on the first share?
Housing associations don’t assess the affordability of future staircasing. Partly because it’s practically impossible to predict someone’s future circumstances. Things can change overnight! COVID provides a good example of this. Who would have predicted lockdown, or the related financial impact with many self-employed people experiencing substantial drops in income, and people in employment being furloughed?
A first-time buyer’s income might increase over time, meaning they could be in a position to purchase further shares. Obviously, if someone is planning to make a gain on selling a starter home, the hope is that the equity share will grow in value. But growth in value would make staircasing more expensive. The same applies to lease extension.
What do shared owners need to know about mortgages when it comes to staircasing?
At London Money, we discuss staircasing with all our clients. We explain that the initial share is just the first stage of their mortgage journey. Again, the specifics depends on someone’s long-term intentions. We cannot guarantee or predict mortgage lenders’ criteria in the future, or the affordability of staircasing at that point.
We would hope that the clients would be in a stronger financial position in the future to enable them to staircase. We’d always advise them on the likelihood of housing association fees for staircasing and remortgaging. And we’d educate them as best we can on the process – obtaining permission from the housing association to purchase more shares; the cost of an independent valuation; and any other applicable other fees – before even approaching a mortgage lender for the increased borrowing.
What advice would you give people about selling a shared ownership home?
It’s important to think ahead! We would always advise, where possible, not to redeem a mortgage before its fixed rate expiry in order to avoid early redemption penalties. It’s part of our process, as I mentioned above, in making recommendations on fixed term rates. We discuss this in detail with our clients to help them understand the penalties payable if they change a mortgage, or redeem a mortgage early.
And, as with staircasing, we encourage them to look into their own housing association’s policies, processes and fees for selling their shared ownership homes. It’s worth noting that different housing associations can have very different approaches in this regard.
With the building safety crisis and EWS1 issues causing many people problems in selling shared ownership flats, there’s an increased interest in subletting where they need to relocate for whatever reason. I’ve heard anecdotal accounts of mortgage providers prohibiting subletting.
EWS1 problems have caused a lot of mortgages not to proceed. Although the Government announced in July 2021 that EWS1 forms should no longer be required on buildings under 18m, it will take a lot more work and evidence for RICS and mortgage lenders to change their stance.
As regards subletting, residential mortgages are highly regulated to prevent abuses. Mortgage lenders will sometimes grant a consent to let. The problem is that shared ownership leases specifically prohibit subletting. Though some housing associations will sometimes allow it in exceptional circumstances, albeit generally only for one year. It’s complicated.
The Government has proposed reforms to allow shared owners to staircase in smaller increments, as low as 1% annually rather than the current minimum of 10%. Would shared owners actually be better off using any spare cash to pay off their mortgage faster?
This is a difficult question to answer. Each tiny increment would potentially mean a lower rental payment each month, and that would need to be assessed against the benefits of paying down some of the mortgage, versus any applicable limitations on overpayments and/or fees potentially arising.
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