Basic Facts About Shared Ownership
- Shared Owners buy a share of a Long Lease.
- Rent is paid on the part of the Lease which is not purchased.
- Shared Owners normally pay 100% of the Service Charge and from the point they purchase any share in the property.
- Shared Owners may purchase further shares of the Lease, which means that the amount of Rent they pay goes down. This is known as ‘staircasing’.
- Once a Shared Owner has purchased 100% of the property the Lease will normally convert into a Freehold if the property is a House, and remain a Lease if the property is a Flat.
- Shared Ownership properties are normally purchased from Housing Associations. Often the Housing Association is not the Freeholder of the property, and the Freeholder is in fact a private developer which provides the services and determines the level of Service Charge.
Purchasing a Share in a Shared Ownership property
For many people Shared Ownership is a fantastic opportunity to own a property. The Shared Ownership system particularly helps people who would be unable to borrow enough (as a mortgage) to buy a property outright.
The way Shared Ownership works is that a Lease on a property is sold at its estimated market value. However, purchasers can choose to buy only part of the Lease initially and then wait until future years to buy more of it.
Typically purchasers are required to buy an initial share of a minimum of 20% to 30% at the beginning.
Once this first share is purchased Shared Owners enter into a Lease for the property giving them rights of usage, and responsibilities, virtually identical to those of a full Leaseholder, except that the Shared Owner must pay a rent to their Landlord (generally a Housing Association) in respect of the share of the property they are yet to buy.
This is the name of the process by which Shared Owners buy further shares in their property.
What happens is when the Shared Owner wants to buy more of the property, the Landlord will revalue the property and offer to sell the further share based on this revised price. Buying the second 25% of a property is likely for more expensive than buying the second 25% if properties go up, as they tend to do.
There will some legal and administrative costs each time you but a further share (staircase). You will need to pay a fee to your Landlord, your solicitors, and more than likely your own mortgage lender.
Once a Shared Owner has purchased 100% of the property, their rights over the property will often change. It is normally to attach a further document or part at the back of a Shared Ownership which sets out what happens when the 100% is purchased.
Typically, a person purchasing a House through a Shared Ownership will be granted a Freehold Title over the property when have purchased a 100%. For Shared Owners of flats the terms of the Lease tend to change. 100% Leaseholders are able to have more freedom over how they use their flat, particularly to sell it on the open market or let the flat out commercially. Normally, Shared Owners with less than 100% are prohibited from doing either of these things.
Rent for Shared Owners
By the point of sale the Landlord will have decided a total amount that could be charged on the property if it was rented out, this is known as the Gross Rent. This will be stated in the Shared Ownership lease. The Gross Rent is a normally an annual amount and for the term of the Lease it will be the starting point for calculating how much Rent the Shared Owner should pay each month.
Because a Shared Owner has purchased some of the property, they do not pay the entire amount of the Gross Rent. They pay only a share of it called the Specified Rent. The Specified Rent goes down as the Shared Owner purchases more of the property.
The Specified Rent is equal to the share of the property which they do not yet own. For example, if a Shared Owner purchases 40% of a property (meaning they have 60% left to buy) the Rent they must pay (known as the ‘Specified Rent’) is going to be 60% of the Gross Rent. If the Gross Rent was £5,000 per year, then the Rent they would actually pay would be £3,000 per year (£250 per month).
The Gross Rent will normally go up each year, typically in line with inflation. This means the Rent a Shared Owner pays goes up in the same way each year. The Lease will state how annual increases in the Rent are to be calculated.
You might expect that if a Shared Owner only purchased 20% a property they would be required to pay only 20% of the Service Charge. However, the vast majority of Shared Ownership leases require payment of 100% of any Service Charge as soon as even the minimum share is purchased.
Service Charges can represent a significant cost for a Shared Owner. For flats the Competition and Markets Authority estimates that in 2014 the average annual Service Charge was £1,123. This works out as £93 per month, in addition to Rent and Mortgage.
Service Charges need to be taken into account by anyone thinking about buying a Shared Ownership property, but it is worth noting that overall the combined Rent, Mortgage and Service Charge payments for a Shared Ownership property tends still to be considerably less than the cost of renting a similar property on the open market.
Exactly how much the Service Charge will be depends on a long list of factors, the most important of which is the type of property is purchased. Service Charges on houses tend to be lowest, as there are no communal entrances to maintain and the Shared Owner will generally be responsible for maintaining the house. The next lowest tends to be for flats in small low rise developments where there are few services provided and very small common entrances to maintain. The highest Service Charges tend to be paid by Shared Owners in large purpose built developments which often have extensive facilities. These large developments are more often than not designed to cater for the requirements of wealthier purchasers. Because of Local Authority planning requirements, even the most expensive developments are required to contain some ‘affordable housing’, such as Shared Ownership flats, whose owners will share usage of the facilities with the other residents, but perhaps be less keen on paying for them through the Service Charge than the wealthier residents.
Problems with Shared Ownership
Shared Ownership, whilst an excellent scheme providing genuine opportunities for low cost ownership of high quality property, has two main pitfalls and it is not going to be suitable for everyone.
1. Being Locked In. Until a Shared Owner purchases a 100% share there is little they can do with the property other than live in it. It is difficult to sell a Shared Ownership property and the property can only normally be sold through the Landlord. Moreover, until 100% of the property is purchased then normally the Landlord will not allow the property to be sub-let. If the Shared Owner wants to move, perhaps for work or because they no longer like where they are living, they may struggle to sell and at the same time they cannot rent the flat out to cover their costs for the Rent, Service Charge and Mortgages. Sadly many Shared Owners end up feeling trapped in the property never increasing their earnings enough to support a mortgage that will enable them to buy 100% of the property.
2. Feeling Marginalised within a Development: Many Shared Ownership flats are on private developments where Shared Owners make up the minority. The other residents with whom they share the development will have paid a lot more for their flats and this tends to mean that they have higher incomes.There is often a divide between the two groups, with the Shared Owners sometimes having their access to shared facilities restricted and being made, generally, to feel less important than the residents who bought their flats at a higher price. A second source of tension sometimes arises between the two groups in the form of disagreements as to the level of services provided. The wealthier residents may want a higher level of service than the Shared Owners and be more prepared to pay for it. Because the private purchasers outnumber the Shared Owners, if these matters are decided by a vote then the Shared Owners will tend to be stuck with the higher service level/higher cost management options favoured by the other residents, in effect making their ‘affordable housing’ much less affordable.