Sharing the facts on new ways to buy property; Property lawyer Toni Spencer explains the difference between shared ownership and shared equity.
FIRST-time buyers are finding it increasingly difficult to take that first step on to the property ladder and many families are struggling to move up the ladder into a larger home.
So the Government, lenders and new homes developers have introduced a variety of schemes ro help buyers of new and older properties to be able to move on with their lives. But the new schemes can appear confusng. A word often used is "shared", which can mean very different things in different circumstances.
So what is the difference between shared equity mortgages and shared ownership properties? SHARED EQUITY MORTGAGES Some builders and the Government - through the Help to Buy scheme - offer what are called shared equity mortgages.
What are these and what are the potential advantages/disadvantages? The lender lends you a certain percentage of the price of your property - say 15 or 20%. Typically you pay nothing back for the first few years. After that interest has to be paid and this increases every year in line with the retail price index.
The mortgage will often have restrictions in it which require you to get permission for extension/ alterations and require you to live in the property. It is often a requirement that you cannot own any other residential property whilst you have the shared equity mortgage.
When you come to pay off the mortgage, the amount you pay back is not based on what you borrowed but on the value of the property when you decide to pay off the mortgage. You will be required to get a valuation.
For example, you buy a house for PS160,000 with a shared equity mortgage of 20% = PS32,000.00 . You decide to pay off the mortgage after five years. The value is now PS170,000, so you pay back PS34,000. However if the value falls to say PS150,000, then you only have to pay back PS30,000.
The advantages of these mortgages are that hey allow you to buy a more expensive property and there is usually no interest to pay for at least five years. Also, if your property drops in value then the amount you pay back goes down.
But buyers n eed to be aware of the potential disadvantages. If house values shoot up, the amount you have to pay back also increases rapidly, making this an expensive way of borrowing money.
As you have to live in the property, if your job moves to a different part of the country, you may have no option but to sell as you cannot rent the house out.
You may find that when you wish to borrow money to pay off the shared equity mortgage, the value of the house is insufficient to allow you to borrow all the money you need.
Alternatively your financial circumstances and the lender's rules don't allow you to borrow what you need. One way of reducing the amount you need to to put some money aside regularly to help pay the mortgage off.
Finally as the interest payments are tied to the Retail Price Index, it is possible that there could be a sharp increase in monthly payments.
SHARED OWNERSHIP Many people find it difficult to save a relatively large deposit to buy their own house and also difficult to raise and afford necessary mortgage.
An alternative way to get on the property ladder is to buy a shared ownership house. Most properties in the available schemes are newly built.
Shared Ownership schemes are run by local social housing companies. You have to earn less than a stipulated amount and be renting.
If you qualify, then you can opt to buy a percentage of the property - say 40%, 50% or even more. You have to raise a mortgage to buy this share.
You are given a lease of the property by the housing company. In addition to your mortgage, you also pay rent to the Housing Company and a service charge which includes buildings insurance. The rent is increased every year, broadly in line with the Retail Price Index.
Once you have bought the share, you are responsible for repairs and for paying all the bills.
The rent you pay is based on the share of the property which you haven't bought. For example if you buy a 40% share, you pay 60% of the full rent for the house. If you bought 60%, then you would pay 40% of the full rent.
At a later stage, when you can afford it, it is possible to ask the housing company to buy a larger share in the property or even the whole property. If you buy a larger share, this reduces your rent. If you increase your share to 100% then you no longer have to pay any rent.
Toni Spencer is a lawyer in the property department of Browell Smith & Co, tel: 0800 107 3000, email Toni.Spencer@browells.co.uk, visit www.browells.co.uk