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shared ownership a-z

Shared Ownership is a government backed Part Buy/Part Rent scheme designed to help you take that first step on the property ladder. The properties sold under this scheme are usually new build apartments or houses; you can purchase shares from 25% up to a maximum of 75% on the initial purchase.

As this scheme is designed to be the first step onto the property ladder you cannot own another property or land in the UK or abroad.

All applicants are expected to purchase the maximum share they can afford; this will be dependent on your income and savings which you will need for your deposit, and any financial commitments you may already have. You will need to use some of your savings for legal fees and the rest of your savings will be required for your deposit. You will need to arrange a mortgage for the share you want to buy you will also have to pay a discounted rent to your landlord on the share you don’t own and a service charge

Am I eligible?

If the following statements apply to you then it is very likely that you will be eligible:

  • Your annual gross household income is less than £80,000, £90, 000 in London
  • You do not currently own a home
  • You have no outstanding credit problems
  • The monthly mortgage, rent and service charge payments on the property are less than 45% of your household income after tax

Some other restrictions may apply on certain properties such as a local residency requirement or minimum household size.

Your general eligibility can be confirmed once you have filled in the application form and you have a specific scheme in mind. You will also need to register with your local Help to Buy Agent.

Financial assessment and property suitability

We will then assess both the make-up of your household and your affordability in relation to the home you are interested in.

  • In terms of household make-up the general guideline is that you can apply for a home with one more bedroom than you need eg a single person or couple can apply for a home with up to 2 bedrooms, and a household with at least 1 child (or other dependant) may apply for a 3 bedroom home.
  • Regarding affordability we must be sure that your current income is sufficient to sustain the financial commitment involved. Please note that we will carry out a credit search before offering you a property.
  • We require and will arrange for a specialist financial advisor to contact you and carry our an affordability assesment. This will help us establish the share you will be required to buy.

What is leasehold?

Leasehold ownership of a flat is simply a long tenancy, the right to occupation and use of the flat for a long period – the ‘term’ of the lease. This will usually be for 99 or 125 years and the flat can be bought and sold during that term.

The leasehold ownership of a flat usually relates to everything within the four walls of the flat, including floorboards and plaster to walls and ceiling, but does not usually include the external or structural walls.

The structure and common parts of the building and the land it stands on are usually owned by the freeholder, who is also the landlord. The freeholder is responsible for the maintenance and repair of the building. The costs for doing so are recoverable through the service charges and billed to the leaseholders.

A leasehold ownership of a house usually relates to the whole building both internal and external and possibly a garden and driveway. Typically a leaseholder of a house would be responsible for the repair and maintenance of the whole building.

The landlord can be a person or a company, including a local authority or a housing association.

What is a shared ownership lease?

In addition to the usual leasehold property there is a form of leasehold property referred to as a shared ownership lease where the leaseholder can purchase a share of a property (house or flat) and pay rent on that part of the property retained by the landlord. The leaseholder will have a right to purchase additional shares in the property until they own 100% of the equity. At this point the property is no longer a shared ownership property.

Most shared ownership leasehold properties are granted by housing associations as part of their home ownership programme. Such leases are almost always in a format approved by the Homes and Communities Agency (HCA, formerly the Housing Corporation). The intention is to provide a first step into home ownership for those who are currently renting and cannot afford to purchase a home at the full market value.

What are the differences between a shared ownership lease and an ordinary long residential lease?

A shared ownership lease of a house does not qualify for the right to purchase the freehold ,under the provisions of the Leasehold Reform Act 1967, if there is a provision in the lease for the freehold to be transferred on the purchase by the leaseholder of the remaining share in the property (referred to as the final staircasing). Other exemptions apply if the leasehold house was provided for the elderly or within a designated area referred to as a protected area.

A shared ownership leaseholder of a flat only qualifies for the statutory right to extend their lease as the holder of a “long lease” if they have “staircased” up to 100% ownership. However, the landlord may have their own policy of allowing lease extension where there is less than 100% ownership. Leaseholders would need to check with their landlord.

As rent is paid on that part of the equity not owned by the leaseholder, a landlord can take action to repossess the property for rent arrears in the county court in the same way that a landlord of an assured shorthold tenancy can under the provisions of the Housing Act 1988. If the property is repossessed in these circumstances no compensation is payable to the leaseholder to take into account the balance, between the leaseholder’s debt and the market value of the leaseholder’s share in the property.

HCA approved shared ownership leases must contain core clauses.

They are listed below:

  1. Restrictions on sales and prohibition on subletting (alienation clauses)
  • HCA approved shared ownership leases do not allow subletting in any circumstances.
  • Under a shared ownership lease the landlord will normally have “pre-emption” rights if the leaseholder has not staircased up to 100% ownership.
  • This means that if the leaseholder wishes to sell they have to offer the property to the landlord first,or to a purchaser nominated by the landlord. The purchase price is determined by an independent surveyor appointed by the landlord.

If the landlord does not exercise their pre-emption rights within 8 weeks  the leaseholder can sell in the open market, subject to conditions .

  1. Rent review clause
    In buying a proportion of the equity in a property the owner of a shared ownership lease must pay rent on that share of the property retained by the landlord. The lease will have an initial rent, usually based on a sum equivalent to 3% of the outstanding equity retained by the landlord. The rent increases annually in line with increases to the Retail Price Index (RPI), plus an amount, typically ranging between 0.5% and 2%.Example:
Market value of the property on first purchase = £250,000
Initial share purchased by leaseholder 25% = £62,500
Share retained by the landlord 75% = £187,500
Market rent @3% of market value of property = £7,500 per year
= £625 per month
Initial rent @ 3% of outstanding equity = £5,625 per year
= £468.75 per month
  1. Assuming the RPI increases in the following year by 3.5% and the lease allows for an increase by reference to the upward movement of the RPI plus 2%, then the rent paid by the leaseholder will increase by 5.5% to £5,934.38 per annum (£494.54 per month).If the leaseholder purchases additional shares in the property, the rent paid will reduce proportionally until 100% is acquired and no rent is payable.
  1. Service charge clause
    All shared ownership leases must contain a clause providing for the payment of a service charge. In the case of shared ownership flats this will be in the same terms as any other lease of a flat. The shared ownership leaseholder needs to be aware that they will pay the full service charge and not a proportion in accordance with their equity share.

Where there is a shared ownership lease of a house, the leaseholder will be responsible for maintaining and repairing the property and the only service charge payable will be in respect of buildings insurance.

There is an exception to this general rule where a leasehold house is located on a private estate; in this case a service charge may be payable for the maintenance of the common parts of the estate such as pathways, private roads and other amenity areas. An obligation to pay towards these costs would typically continue if the leaseholder acquired the freehold of the house.

  1. Mortgage protection clause
    This clause is designed to protect a mortgage lender’s security and to encourage mortgage lenders to advance loans on shared ownership leasehold properties. A lender under the mortgage protection clause is entitled to acquire and dispose of 100% of the equity in the property and must be informed by the landlord if they intend to take possession or initiate forfeiture proceedings. If the lease does not contain a mortgage protection clause, a borrower will find it extremely difficult to obtain a mortgage.

The conveyancing solicitor acting on behalf of the buyer is required to forward a copy of the mortgage to the landlord for approval and must obtain and deposit with the title deeds after completion of the purchase an undertaking from the landlord to the mortgage lender confirming that they will notify the mortgage lender if they intend to repossess the property or forfeit the lease.

Because of this requirement, earlier shared ownership leases, typically granted by local authorities, which do not contain a mortgage protection clause, are difficult to sell. This is because mortgage lenders appear reluctant to lend in the absence of a mortgage protection clause.

If you own such a property you should consider asking the landlord to provide a deed of variation to include a mortgage protection clause in the lease. If they refuse, a leaseholder should consider contacting the HCA who may bring pressure to bear on the social sector landlord to provide the deed of variation.

  1. Purchasing additional shares (staircasing clause)
    The majority of shared ownership leases must contain a clause allowing the leaseholder to purchase additional shares in the property until they own 100% of the equity. This is known as staircasing. In the majority of shared ownership leases the leaseholder is allowed to make 3 such applications and the last application must result in the purchase of the remaining shares. Since September 2011 there is no restriction on the number of staircasing applications that can be made.

There are some shared ownership leases of houses in protected rural areas that restrict the right of the leaseholder to purchase shares to 80%, or where the leaseholder is allowed to staircase to 100% of the equity/he is under an obligation to sell the property back to the landlord or nominated purchaser, which may be another housing association.
In addition to the rural area exception a shared ownership leasehold property for older persons can limit the equity share to 75%.

Stamp duty Land Tax (SDLT)

SDLT may be payable on the sale of a new shared ownership property and the sale of an existing lease of a shared ownership property.

When you buy a share in a property through shared ownership, you may have to pay SDLT. There are 2 ways to pay:

  • make a one-off payment based on the total market value of the property
  • pay any SDLT due in stages

If you decide to make a one-off payment up front, this is making a ‘market value election’ for SDLT.

If you choose to pay SDLT in stages, you pay anything that’s due on the first sale amount. But then you don’t make any further payments until you own more than an 80% share of the property. You can choose which option’s best for you, depending on your circumstances.

The thresholds for payment of SDLT change on a regular basis and any prospective purchaser or vendor of a shared ownership property should take advice from their conveyancing solicitor.

Stamp Duty at 2016

Purchase price of property

Rate of Stamp Duty

£0 – £125,000

0%

£125,001 – £250,000

2%

£250,001 – £925,000

5%

£925,001 – £1.5 million

10%

You can see more guidance on stamp duty from the Government Department here

Please be aware that the above is for information only, stamp duty rates rates and goverment policy may change. You should consult your solicitor for the up to date rates and policy.

What is specified rent and gross rent?

Gross rent is the total rent payable if you are renting 100% of the property. If you are buying a proportion of the house, then the specified rent is the percentage of the gross rent that you will pay the Housing Association (for example it could be 40% or 50%)

Why does the Housing Association need to approve my mortgage?

The Housing Association needs to make sure that the mortgage allows the shared ownership scheme; it also protects the Housing Association in the event of repossession for unpaid mortgage; and it ensures the right amount is being lent. On the other side, the mortgage company need to be assured the shared ownership lease has a mortgage protection clause to protect them in the event of repossession for unpaid rent

Buying Extra Shares

You may purchase further shares in the future known as stair-casing, and generally you may stair-case until you own your home outright. A RICS valuer will need to value your property as further shares are based upon the current market value. You will incur legal and surveyor fees when stair-casing.

Rent and ongoing costs

Your discounted rent is due monthly and the amount depends on the share that you own. This amount will be reviewed annually. Service charges will vary between properties and will include the cost of insuring the building and may include ‘communal’ costs e.g. lift maintenance, cleaning communal areas etc. You are liable for all household bills e.g. council tax, utilities contents insurance etc. You will be responsible for your own repairs as a home owner.

Example:

table

* Based on a 25 year repayment mortgage; interest rate 6% and 10% deposit. Please note mortgage rates vary,

REMEMBER YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED AGAINST IT.

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