Assetz® News - Shared Equity versus Shared Ownership for First Time Buyers

Shared Equity versus Shared Ownership for First Time Buyers

25th August 2008 |

Shared equity schemes are offered by developers where typically 10% up to 25% of the property price is loaned by the developer meaning that the homebuyer only needs a 75% mortgage for example (less than a deposit they put down). The homebuyer is however purchasing 100% of the property. Typically these developer interest free loans need to be repaid in 10 years time but there are clauses in the developers loan agreement to protect against hardship and indeed the primary lender who lent the homebuyer the 75% is particularly concerned over anything that might prejudice the security of their loan and its ability to be repaid and anything that might make the property a forced sale. The key benefit of a shared equity scheme is that the homebuyer purchases a property on a relatively low loan to value compared to traditional first-time buyer territory and has an interest-free loan for the balance for at least 10 years - their only cost is the mortgage which is typically at a lower level than if they had purchased traditionally. There is no rent permitted to be charged on the balance because the homeowner owns 100% of the property. The downside is that the developer retains a right to a share of the house price growth or indeed losses at the point at which the loan is repaid. If house price goes up 25% over 10 years and the homeowner borrowed 25% of the equity from the developer they would only get 75% of the house price gain when they sold.

Shared ownership schemes are offered by registered social landlords or housing associations typically. In this case the homebuyer may only purchase a small percentage of the property, for example 50% and they would obtain a mortgage on this purchase price. Unlike shared equity, shared ownership means that the registered social landlord or RSL for Short retains ownership of the remaining balance and they charge rent on this although it is typically London market rents and indeed under mortgage interest cost levels should the homeowner has purchased the property outright. The rent charged by an RSL can be anything from 0% up to around 5% but there has been a definite trend towards it being lower. Unfortunately this is still an extra outgoing above and beyond the mortgage cost and it does make the ownership of the property more expensive on a monthly outgoing basis. Homeowners on shared ownership schemes can choose to purchase further shares in their property over the years and there is not normally a deadline or indeed any compulsion to purchase further stakes in the property. Therefore, although it is more expensive for a given percentage ownership than a shared equity scheme due to the additional rental cost there is more flexibility for the homeowner to acquire the additional stakes in the property in the future if indeed they want to. Shared ownership schemes are similar to developer shared equity schemes in that they too typically share the gains or losses in the house price when it comes to valuing up any additional share that the homeowner wishes to purchase in the future. The key benefit of shared ownership schemes is the flexibility of buying out the RSL in the future but the key disadvantage is it is more expensive on outgoings basis in the short term due to the additional rent being paid.

There was an interesting negative press for shared equity schemes this weekend in the Mail on Sunday, probably as a result of some PR from Melanie Bien of Savills Private Finance - Melanie is clearly against developer shared equity schemes which undermines one of the remaining exit routes for developers trying to offload any excess housing stock they have at present. The reason quoted is the possibility in 10 years time that the developer will bankrupt the homeowner by demanding repayment of the loan. 10 years is a reasonably long period and buy Savills's own research published only a few days ago the lowest growth they forecast for a region over the next 10 years or so was around 24%. Personally I don't agree with their forecasts and think they understate significantly most of the country but regardless even their own lowest forecast shows that the property will have risen enough to repay the majority of the developer loan if the property was remortgaged at that time. Bearing in mind we live in inflationary times it is very likely that the homeowner will find it relatively straightforward to remortgage and that their debt will have shrunk in real terms materially and hence their repayments of the mortgage on a monthly basis will be very affordable by then permitting them to remortgage.

Perhaps Savills are being a little disingenuous and with new build sales having collapsed their shared ownership side of the business is receiving more focus now and as the article itself says in the Mail on Sunday, developers often steer purchasers towards their own mortgage brokers, rather than perhaps Savills, meaning no fees.

I still feel it is very unlikely that we will see any material reduction in house prices here in the UK and that the Halifax and Nationwide indices misrepresent the state of the housing market as a whole due to them just representing the sector of the market most affected by the great crunch - high loan to value, below national average house price purchasers. This means buyers will continue to be squeezed by profiteering banks charging greater margin than previously on top of bank base rate whilst at the same time house prices do not fall enough to make them particularly more affordable.

Shared equity schemes from developers do have their risks but it is important not to overstate them. Home buyers who need to get on the housing ladder and do not want to overstretched themselves with repayments beyond their means would do well to consider shared equity schemes over shared ownership schemes but the choice is not an easy one.