House buyers could be forgiven for thinking they need to learn an entirely new language in order to get on the ladder. The property market does indeed come with its own particular lexicon and it is important that your knowledge of this is beyond ‘conversational’ before you invest in bricks and mortar. Some terms are fairly easily defined and explained and others are more complex and subtle.
Clearly cost is a big barrier when it comes to first-timers being able to mount the first rung of the ladder and, in recent years, a number of schemes have sprung up to try to help. It’s in this field in which it is worth spending time becoming ‘fluent’ in the language of the sector. Here is House Simple’s guide to Shared Ownership and Shared Equity, the differences between them and the circumstances in which they could be handy for you…
The ‘Help To Buy’ scheme falls under this category. It involves money being loaned to the buyer to reduce the deposit they must pay. It works through the Government, in this example, lending up to 20 per cent of the property sold price to the buyer. They have to have a deposit of at least five per cent to add to this borrowed cash, with the remainder then funded by a mortgage. So, for example, a £200,000 home with shared equity needs a £10,000 cash deposit with a £40,000 loan and a mortgage for the remaining £150,000.
You will own the whole home but you will need to repay the loan. This must be paid in full after 25 years or when you sell your property. For a clear and simple breakdown of the Help to Buy scheme, download our free guide.
Using the example above, if you sold your £200,000 home for £250,000, say, the Government – or lender – takes £50,000. This is because their ‘equity loan’ relates to a percentage of the price of the property, not a fixed monetary value. Chunks of that equity loan can be paid off – a minimum of ten per cent of the property value at a time – and if the value of the property drops, so too does the value of the equity loan.
So, should your £200,000 home sell for £180,000, the Government would be owed £36,000 not the £40,000 they lent.
After five years of Help To Buy there are also fees to be paid – 1.75 per cent of the loan’s value, increasing by RPI plus one per cent each year. These fees do not count towards paying back the loan.
As well as Government schemes there are also similar private sector loans in which developers, for example, take the role of lender. These can differ slightly when it comes to ownership and terms of payment. In all cases you need to check how much the equity is and the full rules of when and how you will need to pay this back.
Such schemes are ideal for people with some savings but who cannot afford a full deposit. These are often buyers for whom the mortgage payments are affordable – in many cases lower than their rent.
Shared ownership schemes are different in that they allow buyers to ‘part buy, part rent’ a property. This type of scheme involves a housing association, with purchasers getting between 25 and 75 per cent of the property from them. You then pay rent on the proportion left – costing up to three per cent of the share the association has.
Taking the £200,000 property example again, you could, say, purchase 50 per cent of that with a mortgage of £100,000, leaving up to £250 a month to pay in rent. (This works for a direct comparison although shared ownership properties are typically smaller and lower cost.)
You can buy more shares in your home - known as ‘staircasing’ – during the course of your scheme. The cost will depend on the value of the home when you buy the share. So, taking the above example, if the property increases in value to £220,000, buying another ten per cent will cost £22,000. You will also pay the fee for a valuer.
If you come to own 100 per cent of the home then you will be free to sell it yourself – with the housing association having first refusal for 21 years after you take full ownership. If you own a share of your home, the housing association is able to choose a buyer for the proportion you are leaving behind.
Although simplistic, you could see that shared equity is about cutting the deposit you’ll need while shared ownership is about reducing the total mortgage cost. Both are valid ways to get on the ladder. The important thing is to clearly understand both avenues, work out what is the main stumbling block from stopping you purchasing and finding the route that best suits your circumstances.