Shared home ownership unravelled
What would the quintessential aspiring first time buyer with little or no experience of buying a home or the real estate industry do when they first decide to explore the possibility of investing in a shared home ownership scheme? Where would they start? Google?
In order to make this article beneficial to each and every one of these first timers, Thompson McCabe decided to google the words ‘shared home ownership’ and see what comes up…
Before we share our experience it is imperative to note that these aspiring first time buyers are predominantly made up of hard working people who after years of being a ‘tenant’ have realised they perhaps ought to start paying towards their own mortgage rather than indirectly aiding yet another buy-to-let landlord on his/her quest of increasing his/her passive income whilst dreaming up the plan to buy his/her next monopoly piece.
These aspiring first time buyers, majority of whom are well educated, have a reasonably astute grasp of their finances and as their ‘tenancy years’ have gone by they have (quite frankly) had enough of forever reporting leaks and waiting three months for the landlord to finally send a handyman around in his white/grey van and amusing haircut to fix the bathroom leak that has been poring directly into the kitchen floor… you get the picture! So now that the first time buyer has the ‘WHY’ aspect of this important decision making process covered off, the next question is ‘HOW’ to find a way to get on the property ladder? Especially, with the knowledge that the minimum deposit requirements for a regular mortgage are not within his/her reach (today)… Surely, there has to be a way around this he/she wonders?
So what was our UX (user experience) from this experiment? The answer is hundreds of companies, agencies, intermediaries, charities, housing associations, local councils and basically overwhelming amount of information which convolutes the whole topic of shared home ownership, leaving the inexperienced first timer feeling simply overwhelmed and lost!
The reason for this is because each of these sources are ultimately trying to sell something. They are commercially driven. This invariably results in the information that they communicate being engineered around what they are designed to achieve. They lack subjectivity and substance. The substance is what the individual who is considering to buy for the first time deserves to be given and subsequently digest in their own way and in their own time. This unbiased ‘substance’ is what will allow them to consider everything that they need in order to make an informed decision based on their particular set of circumstances, rather than a generic website or marketing material which is designed for the masses and like all other commercially driven initiatives fails to address the specifics and as a result, leans away from those that need the right level of information the most and therefore, failing to add any value to the aspiring first time buyer.
The following is an overview which covers everything that an aspiring first time buyer needs to know. It is a good place to start. The reason why it is good place to start is simply because it is not selling anything. It also does not have a hidden agenda or like thousands of E-Books and online tutorials that are available on social media where by the reader is roped in with a small proportion of the book, or whatever the case maybe, being made available for free and using the classic ‘waving the carrot’ approach, the publisher will demand a fee to allow access for the rest.
This article is produced to simply add value to as many readers as possible. Even if one individual who reads this article ends up acting on any of the information that it is being provided here and as result is able to benefit, then it is safe to say that it has served it’s purpose!
Shared Home Ownership is a topic which has been consistently supported by the UK law makers at Westmister over the recent years in an effort to aid the precipitous falling rate of home ownership across the country since 2001–2002. Owning a home is undoubtedly on top of every individual’s wish list. It is simply regarded as the tenure of choice in the UK. What do the facts tell us? According to the 2014 British Social Attitudes survey, given the option, 86% of the population would prefer to buy their own home rather than rent.
Furthermore, records show that the younger households are more prominently challenged in accessing home ownership. 48% of households aged between 25–34 currently resort to the private rental sector compared to 21% in 2003–04. Over this period of time, the percentage of owner occupation in this same age group experienced a drop from 59% to 36%.
The global credit crisis of 2007–2008 and the subsequent fall (albeit almost momentarily) in house prices after the end of 2007 barely touched the surface as far as affordability for first time buyers was concerned. The market dynamics actually worsened for the same first time buyers in the subsequent seven years to 2016 as the market aggressively climbed higher and as a result created a larger disparity between valuations and the realistic affordability levels for first time buyers. They are simply priced out of most areas, namely London.
Moreover, Lenders have also tightened their lending criteria for mortgage applications and subsequent approvals. Lenders require buyers to have substantial deposits. Another noteworthy facet to this topic is that given the record interest rate lows which The Bank of England has sustained in an effort to encourage lending in the market, the mortgage products are punchy!
Coming back to the main focus of this article which is each and every individual who is considering all options available to take the plunge and get on the property ladder, the records show that most of them clearly do not have the pre-requisite five figure balances in their saving accounts to put forward as deposits. This is a realisation which they will reluctantly capitulate to after they have spent a considerable amount of time and resource to educate themselves about the requirements. They realise that even with schemes like shared home ownership they still cannot afford to buy.
So going back to the first paragraph and the ‘Google search’ we are going to show how one can prevail by intelligently taking advantage of what we refer to as ‘little snippets of opportunity’ that most individuals overlook. Why? Because they are not experienced; or they do not have access to the right level of advise from those who are experienced, to piece together a 3–5 year plan that will take them from a very small amount of deposit (between five to then thousand pounds) to three to four times multiple equity stake which can then be utilised to finally relieve oneself of the never-ending tenancy spiral.
Here is the all-important ‘HOW’ which we referred to earlier…
How to get help with your deposit:
1. Low-interest loan towards your deposit — Equity Loan. (N.B. Fees apply)
2. Help-To-Buy ISA
Facts about the Equity Loan:
1. Deposit rate of 5%
2. The government provides equity loan of up to 20% — up to 40% in London
3. Mortgage will be required for the balance of 75% — up to 55% in London
4. Homes can only be bought from registered Help to Buy builder
Eligibility criteria for The Equity Loan:
1. New builds
2. Purchase price of up to £600,000 in England (or £300,000 in Wales)
3. Must be the only property you own
4. You cannot sub-let or rent out after you buy
Fact about Help-To-Buy ISA:
1. Government will top up your savings by 25% (up to £3,000.00)
2. If you are buying with another individual they will also qualify for 25%
3. The best part about this is that you never have to pay a penny of it back!
List of lenders who will lend against Help-To-Buy:
Bank of Ireland (Northern Ireland only)
Bank of Scotland (provided by Halifax)
Al Rayan Bank (formerly the Islamic Bank of Britain)
Increasing Equity options:
Almost every single website and marketing material relating to shared home ownership schemes from agents, developers and housing associations has an entire section allocated to drumming home the idea of encouraging prospective buyers to increase equity, even before they have committed. We advise against this. Whilst, we agree with the notion that the increased equity stake will bring the cost of servicing the underlying loan and associated monthly rental payments for the property down, it is very important not to lose sight of the ultimate goal with this plan which is the transition from being a ‘tenant’ into a home ‘owner’. The making use of shared home ownership is merely a stepping stone in this plan. The punch line to this plan, and the ultimate goal for those who decide to follow this plan, relies on capital appreciation or in other words the increase in the value of residential real estate which you will own a percentage in. Within the 3–5 year period this will allow you to take your equity out. This will become the deposit that you do not have today.
What are the costs that you need to be aware of from the outset:
1. Legal fees
2. Survey costs
4. Stamp duty
5. Service charges (N.B. this will vary on a case by case basis — read the small print)
How and when to divest:
This relates back to the punch line of this plan/article which is ‘capital appreciation’. The best time to divest and essentially come out of the shared home ownership scheme is dependant on the only caveat that will predominantly rely on time and trajectory of the real estate market. Simply put, you will need the market to do what it has been doing since 2007 (actually the last fifty years) and you will be in a very strong position in three to five years (please do remember to send us an email or tweet when you have made a tidy profit). In other words, when the market valuations have appreciated high enough to allow you to cash in at the level that yields a big enough ‘white space’ for you to then use as your deposit, that is the right time to exit!
The imortant point to note here is that the capital appreciation proportion will directly correlate with the percentage equity which is being held in the property from the outset. In other words, if you own 25% equity within the property and the valuation has increased by £100,000.00 within three years, you will be entitiled to 25% of the increase in valution between purchase price and sale price, which in the case of this example equates to £25,000.00 plus the initial deposit which you contributed towards the purchase at the beginning, which lets say, was £25,000.00 consisiting of a 25% (or £5,000.00) ISA boost and Equity Loan which covered the remaining £20,000.00 with a mere 10% contribution from the borrower, which in this example is £2,000.00. In short, from a £2,000.00 outlay within three years there is potentially £50,000.00 return. This figure, based on today’s rates, would be an adequate deposit level for a regular mortage. The main advantage of this plan is that it is 100% tax free. What else can the average person do to generate 50k – as savings not earnings – net of tax, in three years?
(side note here… as we write this paragraph, we anticipate a lot of criticism about the contents of this article and what we basically call the ‘the glass is half empty’ critics which always come up with the same old, what if the house prices come down? What if the market turns for the worst? What if the there is another recession? A million and one scenarios which are all possibilities; yes there are all just possibilities. Our response is always the same. There are no guarantees in life. There is a risk with everything. No matter how thin you slice it, there is always two sides! The best part is that when prudent risk taking equates to gains in a scenario like this, and more importantly, the satisfaction of being historically correct. That is why we are writing this article. Our aim is to help those who need it the most and demonstrate a clear understanding of the sector which we are extremely passionate about, have a solid foundation in and remain focused on as our ‘lane’.)
Useful sources of information and where to start:
Share to Buy website — For those living in England (outside London)
First Steps website — For those living in London
Scottish Government’s website — For those living in Scotland
For those living in Wales — approach housing associations direct
Visit this website if you are living Ireland
We are alway happy to respond if there are any questions which readers may want to ask. We welcome any requests for further information in relation to the content which we provide. Our aim is to share information freely and would welcome the opportunity to open dialogue within others in the real estate and construction industry both in the UK and internationally.
Thank you for reading!
Disclaimer: This article is for information purposes only not aimed at providing financial advice of any nature. Any individual/s who decide to act on the infomration being provided will do so at their own risk. The author will not accept any responsibility in any shape for form for present/future gains/losses which may arise as result of the content being provided in this article.