Shared ownership is a complex product, subject to ongoing reform. The marketing slogan ‘part buy, part rent’ has been criticised as misleading. And housing providers may have different policies, so what’s true for one shared ownership scheme may not be true for another. Approach these FAQs as an introduction to some key issues, but do your own research and check anything you’re not sure about with your mortgage advisor, solicitor, valuer or other accredited professional.
Is SO a ‘realistic pathway to full ownership’?
The Government claims that shared ownership is a ‘realistic pathway to full ownership’. Shared ownership undoubtably works for some households. But many don’t staircase to 100%, and don’t sell on to full ownership in a subsequent property.
What is shared ownership? What is part buy part rent?
Shared ownership is often described as ‘part buy part rent’. Which sounds simple enough. Unfortunately, it’s a bit more complicated than it sounds. It’s a good idea to make sure you understand, and plan for, long-term financial costs and potential risks associated with purchasing a home via shared ownership schemes.
Parliamentary briefing (CBP-8828 Shared Ownership (England): the fourth tenure) explains the legal nature of a shared ownership lease.
‘A shared ownership lease is an assured tenancy under the Housing Act 1988.20 As such, if the shared owner fails to pay the rent required by the lease and/or fails to adhere to their obligations under the lease, then the housing provider may be entitled to terminate the lease and evict the shared owner (subject to obtaining any necessary court order). If the lease is terminated the shared owner will lose, and will not be entitled to any compensation for, their equity share in the property.’
In plain English, this means that if a shared owner gets into financial difficulties they face a risk of losing their home and – potentially – the cash they’ve invested in it to date.
Some people might assume that shared owners have a legal right to reimbursement of their equity in the share they’ve purchased (often via a mortgage) but this is not the case. Law firm, Walker Morris, flag up concerns about ‘part buy part rent’ terminology:
‘… it is incorrect, and therefore misleading and potentially an offence in contravention of the Consumer Protection from Unfair Trading Regulations 2008 (the CPRs) for housing associations, landlords, developers or lenders to advertise or refer to shared ownership schemes as “part buy, part rent”, or indeed by using any other terminology or slogan which suggests that the customer purchases anything other than an assured tenancy leasehold interest at any time prior to the 100% staircasing stage’.
What is ‘a foot on the property ladder’?
It’s not always entirely clear what the Government and housing associations mean by ‘a foot on the property ladder’. Shared ownership was introduced under a Conservative government, and their manifesto for the 1979 election promised: ‘We shall encourage mortgage shared purchase schemes which will enable people to buy a house or flat on mortgage, on the basis initially of a part-payment which they complete later when their incomes are high enough”. Which suggests shared ownership is about buying a home in instalments. Marketing of shared ownership schemes has tended to place a lot of emphasis on staircasing (buying additional shares).
However, another interpretation of ‘a foot on the property ladder’ is buying a starter home with the intention of making a gain on sale to enable purchase of a home which is larger, in a better location, or otherwise preferable.
Why does it matter? Shared ownership – or ‘part buy, part rent’ – is pitched as the ‘affordable’ route into housing. The marketing of shared ownership homes sometimes implies that ALL buyers benefit from shared ownership as a ‘step onto the property ladder’. But this is over-simplistic and fails to recognise that the wider housing market creates both winners and losers.
A rapidly rising property market will benefit buyers who buy a starter home as an investment generating a profit to help buy their next property. On the other hand, a rapidly rising property market will disadvantage buyers who interpret ‘a step onto the housing ladder’ as an opportunity to purchase their forever home in instalments. And vice versa.
It’s essential for home buyers to be clear what their intentions are, so that they can take appropriate advice and plan accordingly. For example, whether to budget for staircasing and lease extension.
Is shared ownership really cheaper than renting, or outright purchase?
Marketing often suggests that shared ownership is cheaper than other housing options. Whether this is true or not depends partly on the timescale. In the short-term, shared ownership may be cheaper than renting privately or buying outright. But it’s important to consider longer term costs too; for example, rent increases, staircasing, lease extension (more expensive since a 2019 legal case changed the way lease extension premiums are calculated), service charges, and future repair and maintenance costs.
Contractual annual increases may mean that rents rise faster than open market rents (which can remain static or even go down). This can become problematic if shared owners find they can’t afford to staircase, and/or don’t want to (or can’t) sell. Selling on can also be difficult if monthly rent on un-purchased shares has risen to levels more expensive than other local properties.
Remember too that shared owners pay 100% of repair and maintenance costs regardless of the % share purchased. This has become particularly significant for some shared owners in recent times, given substantial liabilities for the costs of fire risk remediation and waking watch.
A study by Savills found that:
‘At the end of a 25-year mortgage term… shared ownership becomes more expensive than full home ownership’.
How many shared owners staircase to 100%?
It’s surprisingly difficult to obtain statistics on exactly how many shared owners staircase to 100%. One researcher, Dr Alison Wallace, reported to a meeting of the London Assembly Housing Committee in January 2020 that:
“The data is lacking to answer that question easily and has been for a long time, unfortunately, but all the evidence that has been attempted so far points to quite a low rate”.
Per a Parliamentary briefing (CBP-8828 Shared Ownership (England): the fourth tenure):
‘Existing data also suggests that it is currently fairly rare for shared owners to staircase to owning 100% of the equity in a property. [According to] data from housing associations about equity-sharing schemes including shared ownership and others [around] 4,000 households staircased to 100% ownership in 2018/19, less than half of the number of households buying their initial stake in a home.
It’s been suggested that one reason so few people manage to staircase is that house prices rise faster than wages. Even those who intended to staircase find themselves priced out. Research carried out by CCHPR for SO Resi in 2020 also indicates that fewer than 2-3% shared owners staircased to 100% in 2018-19. This figure includes people staircasing to 100% in a home they live in, and simultaneous sale and staircasing transactions undertaken purely in order to sell. So the real figure is likely to be even lower than 2-3%.
Does 100% staircasing matter?
Does it matter if only a small minority of shared owners staircase to 100%? Well, yes, actually. Shared owners are not entitled to extend their lease under the statutory route until they’ve been staircased to 100% for two years. And some experts advise against extending a lease under the alternative informal route. Other disadvantages faced by shared owners, compared to households who’ve staircased to 100%, include restrictions on subletting and selling.
Does lease extension matter?
Homes start to devalue – all things being equal – once there are fewer than 80 years left on the lease. Shared ownership homes were often sold with 99-year leases (per Homes England’s model lease up until recent reforms). Consequently, many people will cross the 80-year threshold before they’ve finished paying off their initial mortgage. Why does it matter? The fewer years left on the lease, the more expensive it is to extend that lease. And the fewer years that are left, the more reluctant lenders are to issue mortgages. So it can become difficult to sell a shared ownership home; and any gain can be eroded by the cost of extending a lease in order to do so. This may all seem a long way in the future. But it’s worth considering if you’re planning to sell at some point or, say, to leave your home as inheritance, or to use it to fund health care in retirement.
What will proposed reforms to shared ownership mean for me?
It’s a good question. It will depend on your own circumstances, and on how proposed reforms play out. It’s a question Shared Ownership Resources will engage closely with over the coming months and years.