Shared ownership mortgages have been getting a lot of press lately with many offering it as the solution the crippling deposits first time buyers often face. The concept is pretty easy to grasp- you can’t afford the deposit on a whole house or flat, so instead you offer to buy only a part of the house. Then, you make mortgage payments on your part of the house, and pay rent to the housing association (who own the rest of the house). Then, as your earnings increase, you can back more of the house.
It seems too good to be true, which experience tells you it probably is. So let’s take a closer look at shared mortgages and see just what risks you are opening yourself up to. One argument that’s going around as that lenders treat shared ownership as sub-prime- mortgages that are unlikely to be paid back, which anyone who hasn’t been living in a hole for the last three years will remember is what caused the huge financial disaster that we’re all still so busy recovering from.
This isn’t really true- lenders are far more careful these days, that’s true. But part of that means they every individual lending decision is made on its own merits that involves an overall assessment of your credit history and income. While you may have other problems that have led you to the shared ownership route, shared ownership itself will not be a barrier to getting a mortgage.
One thing potential buyers should be aware of is the importance of working out just how much your mortgage will cost in advance. Remember, while the mortgage repayments themselves will be much cheaper than most other mortgages, you will be paying rent on top of that. Also, unlike most tenants in rented accommodation, someone with a shared ownership mortgage will usually find themselves responsible for the cost of repairs and upkeep to the property. It’s important to do the maths and work out exactly what you’ll be paying before you sign any agreements.
You also face the same risks that anyone taking out a mortgage faces. If the property drops in value, you may end up owing the lender more than you can make back from selling the house. At the same time, if the value of house rises, although the value of the portion of the house you have bought will rise, you won’t benefit from the rise in value of the rest of the property. This can mean you will have to pay more than you would have before to buy addition portions of the property.
However, the properties that housing associations off under shared ownership mortgages are usually good quality, new build houses and flats, and if you are looking to get into the property ladder, shared ownership mortgages allow you to start off a rung or two higher than you might have done otherwise. It’s also possible that, depending on how much of the house you initially buy, you might miss the threshold for paying stamp duty to Inland Revenue.
Buying a house under a shared ownership mortgage is a big decision. It may lead to you eventually owning your dream home outright- but it’s essential that you look into all the details first.