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Help to get onto the Property Ladder

Understanding Help to Buy and Shared Ownership Schemes

Buying a home is a dream for many in the North West, but prices and deposits have skyrocketed, and banks are notoriously reluctant to lend to anyone without a sizable salary and savings.

So how do you buy a home of your own when the average house price in England is more than 7.5 times the average salary, and your monthly rent is making it hard to save a deposit?

Two options that are helping buyers onto the housing ladder are Shared Ownership and Help to Buy. What’s the difference between the two and which is right for you? Vincents Solicitors’ Emma Barton talks us through the choices.

Shared Ownership

Shared Ownership has been around for decades, and is aimed at helping middle to low earners become homeowners… eventually.
Available for anyone with a household income of less than £80,000 a year, who is not yet a homeowner (for example renting or living with parents), Shared Ownership is run in conjunction with housing associations across the North West.

Only certain properties are available on a Shared Ownership basis. These can be brand new, new-build homes, or older stock that the housing association is selling off, or even re-sales when a previous Shared Ownership buyer moves up the housing ladder.

This limits the choice of properties and locations, but opens up the prospect of investing in bricks and mortar, and perhaps eventually buying the property outright. Depending on the deposit you’ve saved and your monthly income, you can purchase anything from 25 per cent to 75 per cent of the property. You’ll need a deposit of at least 10 per cent of your share, and a mortgage for the rest. You will then pay a monthly rent on the share you don’t own, and possibly a service charge. Buyers can then purchase more of the share over time, but there can be restrictions. This is worth checking at the outset with the help of a solicitor familiar with this format of sale.

Help to Buy

This scheme was launched to get the housing market moving and is only available for new build properties valued under £600,000. Providing a loan of up to 20 per cent of the property’s value, Help to Buy is not limited to first time buyers and there is no restriction on income.

The buyer must be able to put down a deposit of at least a 5 per cent of the purchase price, and secure at least a 75 per cent mortgage. The balance, of up to 20 per cent of the purchase price, will be made up by a loan which is interest free for the first five years, and is paid back when the property is sold.

Many housebuilders in the region have signed up to the scheme, so there are properties available right across the North West, and the application process is relatively straightforward. It’s worth working out the monthly interest payments which kick in after five years, in your affordability calculations, and noting that the loan gets paid back when you sell or after 25 years, whichever comes soonest.

Legally speaking, is one better than the other?

The biggest issue is the lease element of a Shared Ownership purchase, as there is the potential for conflict between the two owners, considering one is also a tenant of the other. If the buyer were to fall into rent arrears with the housing association, the dispute could result in one owner taking the other to court. In a 2007 case, the owner lost her home following a lengthy legal battle.

In addition, the contract for Shared Ownership is somewhat more complex than a standard sale, as it’s actually part sale / part lease. There are obligations on the buyer that need may need spelling out from the start, to ensure they are fully aware of what they are agreeing to, and many disputes have arisen over things like maintenance responsibilities and costs.

Those scenarios aside, there’s very little difference in legal terms, as both schemes put restrictions onto the buyer in one way or another.

With Shared Ownership you will have to get permission to sell, and approval from the owner of the other share (the housing association) of your buyer. This is likely to be restricted to someone who will also use Shared Ownership, which severely limits the market. You would also need approval for works such as an extension, conservatory or new kitchen for example.
A homeowner who used Help to Buy would also need permission for a similar large investment, as the government wants its loan back if you’ve got that kind of money to spare. On the plus side, they won’t get involved with the details of who you’re selling to, and the home can be sold on the open market.

When moving on there will be a valuation process to go through before you’ll know how much you have to spend on your new pad, which you’ll have to fund.

With Shared Ownership, you’ll receive the percentage value of your share at the time of sale, which could be more or less than the original purchase depending on whether you’ve used the ‘staircasing’ option which is there for you to increase or decrease your share in the property.

With Help to Buy, you’ll have to pay back the percentage value of your loan, not the cash value of the loan. So if you took the full 20% loan on a £180,000 house, which would have been £36,000, you’ll pay back £44,000 if you sell it for £220,000. If you’ve paid back some of the loan in the meantime, that will be reflected at the time of sale.

Which is best?

That depends entirely on your circumstances, your savings, monthly income, and the area you want to live. It is likely to come down to maths, and working out which is the most financially feasible. Which is most cost effective for you? Paying rent every month, or payments on a 75 per cent mortgage (plus interest repayments after five years) with Help to Buy, or the costs of a smaller mortgage, plus rent and a service charge with Shared Ownership.

If we look at how the market is doing, we’ve seen very few Shared Ownership purchases come through since the advent of Help to Buy. More than 150,000 homes have been purchased with Help to Buy since its launch in 2013 and its popularity shows no sign of waning just yet.
 

For more information about either of these schemes contact Emmabarton@vslaw.co.uk or call