FREE CHAPTER from ‘A Practical Guide to Shared Ownership’ by Sarah Sams

CHAPTER THREE – THE DIFFERENCE BETWEEN SHARED OWNERSHIP AND SHARED EQUITY

  1. Shared Equity?

    1. What is Shared Equity

  • The property is owned outright with a charge secured against the equity for the equity loan.

  • The scheme may require the buyer to start making repayments after a set number of years

  • The equity loan will be repayable on the sale of the property

  • It is possible to re-mortgage a property with an equity loan against it, but it will be necessary to contact the equity loan provider to request that the charge is postponed in favour of the new lender.

  • The amount to be repaid will be either:

    • The same percentage of the valuation of the property at the time of the repayment e.g. if the original equity loan was for 20% of the value of the property, the amount to be repaid will be 20% of the value; or

    • The same percentage of the sale price of the property at the time the property is sold (if applicable)

Whichever is the higher figure.

1.2 Help to Buy

  • The most well-known Shared Equity scheme is probably the Government Help to Buy Scheme. With the most recent Scheme being the 2021 – 2023 programme.

  • Outside of London, buyers could borrow up to 20% of the value of the property. This figure increased to 40% for properties in London.

  • This scheme only applied to First Time Buyers. Any occupiers also had to be a first-time buyer. This limitation meant that shared ownership become more attractive to those that had already owned a property.

  • No interest is payable for the first five years’ of the loan with interest becoming payable after this date. The rate of interest payable is 1.75% of the equity loan, followed by a yearly increase calculated using the Consumer Price Index (CPI) plus 2%.

    1. Developer Schemes

  • Historically some developers have introduced their own equity loan scheme similar to the Help to Buy scheme.

  • Some schemes allowed the buyer to pay back part of the loan without selling rather than having to pay back the entire 20%

    1. Shared Equity Mortgages

  • Sometimes referred to as Partnership Mortgages.

  • This combines a repayment mortgage with an interest-free loan.

  • Typically, these types of mortgage require a larger deposit of 20%

  • When the property is sold, or the loan is repaid, the interest-free part of the loan is repaid, together with a share in the increase in value of the property, if applicable.

    1. What are the benefits to Shared Equity?

  • A lower deposit is payable on the purchase of the property under the Help to Buy scheme; the buyer only needed a deposit of 5%.

  • As the equity loan will generally providing a 20% deposit, and the buyer will be providing a further 5% deposit, the loan to value will typically be 75% for mortgage purposes. This opens up a larger range of mortgage products, with typically better interest rates and terms.

  • The equity loan under the Help to Buy scheme was interest free for five years, with only a low rate of interest being payable thereafter. However, see below for a potential disadvantage with regards to the rate of interest going forward.

    1. What are the disadvantages to Shared Equity?

  • The amount to be repaid will increase if the property value increases. This may make it difficult to save enough to repay the equity loan outright if wanting to repay without selling the property.

  • In respect of the Help to Buy scheme, the amount of interest payable after the five years could increase significantly after the sixth year, as the interest rate is then calculated using the Consumer Price Index (CPI) plus 2%.

  • Not all lenders will provide a mortgage to those buyers using an equity loan scheme.

  1. Discounted Market Value Units

  • Discount market value units, sometimes known as Discount Market Sales, are properties that are sold with a discount off the full market value. The discount is usually 20% of the full market value.

  • No rent is payable on the share that is not owned.

  • Generally the property can only ever be owned under the same terms. When the property is sold the owner will only get the same discounted value for the property i.e. if the property was purchased for 80% of the value, the property owner will get 80% of the value on the sale of the property.

  • It may be possible to purchase the remaining share in the property. However, this will depend on whether the local authority are willing to agree to this. It is likely that the property has been designated as a Discount Market Value in a s106 Agreement and the local authority may not be in a position to agree to this.

  • Only certain lenders will accept properties owned under this type of scheme.

  • There are certain criteria for buyers to be eligible for this type of scheme:

    • The buyer will need to live or work within a specified area, or locality. It may also be a requirement that the buyer must have lived or worked in that area for a specified number of years.

    • There are restrictions on the amount of income that a buyer can have. The household annual income cannot by more than 45% of the Discount Market Value of the property e.g.

Full Market Value

£200,000

Discount Market Value Sale Price (80% of Full Market Value


£160,000

Maximum household income

£72,000

    • The buyer cannot currently own another property, but do not have to be a first time buyer.

  • It is not always easy to identify whether a property is a Discount Market Value property. You may be able to spot them by:

    • A restriction on the title requiring that a certificate is provided that the provisions in a previous Transfer have been complied with.

    • It is possible that the provisions may not be protected by a restriction. However, the Transfer from the Developer to the original buyer will contain provisions restricting the future sale price of the property

    • The requirement for the property to be sold, and retained as a Discount Market Value will usually be set out in a s106 Agreement.

3. First Homes

3.1 What is a First Home?

  • This is a more recent scheme and is similar to Discount Market Value units are referred to above

  • Properties are sold with a minimum discount of 30%

  • The buyer has to meet certain criteria (see below)

  • There will be a restriction on the title of the property to ensure that any future sales of the property are also in accordance with the discount provisions and certain other restrictions relating to the scheme.

  • The sale price for the property after discount, on the first sale, of the property cannot exceed £250,000 outside of London, or £420,000 is in Greater London. This price cap only applies to the first sale of the property, not subsequent dispositions.

  • This type of scheme is the Government’s preferred type of discount market value and it is intended that First Homes should account for at least 25% of all affordable housing provided by developers though their planning obligations

  • A s106 Agreement will be in place which will set out the necessary restrictions to be applied to the property on each future sale.

  • Guidance issued by the Government can be found at:

https://www.gov.uk/guidance/first-homes#first-homes-definition-and-eligibility-requirements

3.2 What are the qualifying criteria for a buyer?

3.2.1 National Criteria

  • The buyer must be a First Time Buyer as defined in paragraph 6 of Schedule 6ZA of the Finance Act 2003 (the criteria used for identifying First Time Buyers for the purpose of Stamp Duty Land Tax).

  • The buyer(s) annual income when combine cannot exceed £80,000 outside of London, or £90,000 in Greater London.

  • At least 50% of the discounted purchase price must be funded by a mortgage, or home purchase plan if required under Islamic Law.

  • This criteria will also apply to future sales of the property.

3.2.2 Local Authority Criteria

  • Local Authorities are able to introduce their own criteria as part of the s106 Agreement.

  • This may include such things as the requirement for a local connection, or criteria relating to employment status.

3.3 Mortgagee Exclusion

  • In order to ensure that there aren’t any issues with obtaining a mortgage on this type of property, all planning obligations should have a mortgagee exclusion clause

  • The mortgagee exclusion clause will provide that a regulated financial institution, who has provided a mortgage to enable the buyer to purchase this type of property, will not, when enforcing their security against the property, be bound by the requirement to sell the property under the First Homes criteria to a person who meets the eligibility criteria.

  • The clause should also provide that when a mortgagee enforces their security, after payment of the funds due to the mortgagee under the security, any balance should be paid the local authority.

3.4 Selling a First Home free of the First Home restrictions

  • Provisions should be included in the s106 Agreement to provide that if a buyer cannot be found for a First Home, who meets the criteria even when any local restrictions have been removed, the property can be sold on the open market, with the title restrictions being removed. This is subject to certain conditions being met.

  • The conditions to be met are:

    • There should be provision in the s106 Agreement for the developer, or First Home Owner, to compensate the local authority for the loss of the affordable housing unit. The compensation will be calculated as the value of the discount the property was to be sold for, as a percentage of the final sale price.

    • The s106 Agreement should provide that the property has to be marketed for at least 6 months in total before the property can be sold free of the restrictions, and all reasonable steps must be taken to sell the property, including, if appropriate, reducing the asking price.

  1. Shared Ownership?

4.1 What is Shared Ownership?

4.1.1 Help to Buy: Shared Ownership

Properties sold under this scheme are governed by Homes England’s requirements and are properties which have been funded through:

  1. The Shared Ownership and Affordable Housing Programme (SOAHP) 2016 – 2021; and

  2. The Affordable Homes Programme (AFP) 2021 to 2026

  • The buyer purchases a share in the property, whilst paying a subsidised rent to the Registered Provider who retains the remaining share in the property.

  • Historically the initial share that could be purchased was between 25% to 75% of the property.

  • The minimum percentage for leases granted under the Affordable Homes Programme 2021 to 2026 has now reduced to 10%

  • To reflect that the buyer owns a share in the property, the property is sold under the provisions of a shared ownership lease.

      1. Eligibility Criteria

  • The buyer(s) combined income outside of London cannot exceed £80,000 and in London cannot exceed £90,000.

  • Whilst the buyer does not have to be a first time buyer, they cannot own another property at the same time as a shared ownership property.

  • The buyer cannot be able to afford a property suitable for their housing needs on the open market

4.1.3 Rent

The rent is payable on the share of the property retained by the landlord and is limited to 3% of the share that the tenant does not own.

The following sets out examples of the amount of rent that may be payable on a property valued at £300,000:

Property Value

£300,000

Shared owned by leaseholder (40%)

£120,000

Share retained by the Registered Provider (60%)

£180,000

Rent for the first year (3% of remaining share)

£5,400

Monthly rent

£450

      1. Assured Tenancy

  • Due to the generally higher amount of rent payable under a shared ownership lease, such leases are classed as Assured Shorthold Tenancies (AST).

  • The issue with this, as is becoming more prevalent in conveyancing of leasehold properties, is that if the lease is seen as an AST, Ground 8 of Schedule 2 to the Housing Act 1988 comes into play.

  • Ground 8 provides that the landlord can take possession of the property in the event that at least two months rent has not been paid at the time a Notice Seeking Possession is served, and two months arrears remain outstanding as at the date of a possession hearing at Court.

  • There are no reliefs available if possession of a property is sought under Ground 8. The Court has no choice but to grant a possession order, brining the lease to an end, if the above circumstances can be proved.

  • Understandably mortgage lenders are not happy with this prospect.

  • However the model shared ownership leases contain the following provisions which will comply with the majority of mortgage lender’s requirements:

            1. The Landlord shall give notice to the Mortgagee or any mortgagee of the Leaseholder of whom the Landlord has received notice pursuant to Clause 3.20 (Register disposals) (as the case may be) before commencing any proceedings for forfeiture of this Lease or proceedings for possession of the Premises; and

            2. If within a period of 28 days (or within such other period specified in the Landlord’s notice as the notice period, if longer) the Mortgagee or such mortgagee of the leaseholder of whom the Landlord has received notice (as the case may be) indicates in writing to the Landlord that it wishes to remedy such breach, and/or is going to take such action as may be necessary to resolve the problem complained of by the Landlord, the Landlord shall allow 28 days (or such longer time as may be reasonable in view of the nature and extent of the breach) to remedy such breach and take the action necessary to resolve such problem.

  • In addition to the lease provisions, it may be that some mortgage lenders also require a separate undertaking signed by the Registered Provider in the same terms as that set out above.

    1. Other types of Shared Ownership Schemes

      1. Older People’s Shared Ownership (OPSO)

  • Available for buyers aged 55 and over. Some properties are available for joint applicants where only one of the buyers is over 55, so long as the second buyer is 50 or older

  • The same income requirement are in place as for shared ownership, the joint income cannot be more than £80,000 if the property is outside of London, or £90,000 if in London

  • The buyer cannot be able to purchase a property which is suitable for their needs without such a scheme.

  • Usually ownership of the property is restricted to 75%, but once the leaseholder owns 75% of the property, rent is no longer payable.

  • Some developments are also available which provide additional care, but way of an Extra Care scheme.

      1. Home Ownership for people with a Long-term Disability (HOLD)

  • Available to buyers who have a long-term disability and who are unable to buy a property through another shared ownership scheme

  • An initial share of between 10% and 75% of a property on the open market can be purchased.

  • The same criteria apply with regards to income; the joint income cannot be more than £80,000 if the property is outside of London, or £90,000 if in London

  • Leasehold granted under the HOLD scheme will be granted on the basis of the new Shared Ownership Model Lease (see Chapter 5).

      1. Other Shared Ownership Providers

There are other schemes available which involve properties which are not Government granted funded under one of the schemes referred to above. One that you may have already come across is Heylo.

Two schemes are offered by Heylo:

  • Home Reach – a scheme available for new build properties; and

  • Your Home – a scheme which is available for re-sale properties

Whilst these schemes are not generally granted funded, and are therefore not bound by the requirement to use the model leases, as referred to in Chapter 5, it is important to remember that mortgage lenders will usually only lend against properties where the lease contains those fundamental clauses as set out in Chapter 5.

MORE INFORMATION / PURCHASE THE BOOK ONLINE