Over the last 10 years, house prices for those making their first step onto the property ladder have increased by 94%.
With average weekly earnings only increasing by 35% during the same period, and average mortgage rates rising at a similar rate, it’s not surprising that first time buyers are finding it harder than ever to enter the property market.
Whilst not exclusively available to first-time buyers, the Shared Ownership scheme plays an important role in opening the door to hopeful homeowners.
The Shared Ownership scheme allows buyers to purchase a share in the property, while renting the remaining share from a housing association.
The scheme is widely available with 19,386 shared ownership properties delivered between 2021-22, the highest number since recordings began.
The number of mortgage products available has also been growing, with an increase of almost a third between August and September 2023.
There is however still a clear lack of uptake among borrowers.
While the scheme does not allow borrowers to purchase a property outright, many lenders require the borrower to have the option to purchase the remaining share from the landlord (known as staircasing).
However, it is worth noting each time a borrower staircases, the price of the share will be based on the property value at that time, rather than the price at the time of original purchase.
This means the borrower can end up paying more for the property in the long term in comparison to purchasing the property outright to begin with.
There is still opportunity to save, as borrowers can choose how they pay stamp duty from one of two ways:
1. At the time of original purchase the borrower can opt to pay stamp duty on the full property price; or
2. At the time of original purchase the borrower can opt to pay stamp duty on the share being brought. They will then need to pay stamp duty again when staircasing above 80% loan-to-value (LTV), based on the property price at that time.
Based on the above considerations alone, it is important to consider the long-term aspirations of borrowers when applying for a Shared Ownership mortgage.
Doing so can ensure shared ownership is suitable and help to determine which options work best for them.
Staircasing can be a great benefit of Shared Ownership mortgages, particularly for first-time buyers who cannot afford to purchase a property outright as it gives them the chance to realise their dreams in the future.
In reality, it’s not possible for all borrowers. Research shows during 2018-2019 only 2.3% of shared ownership households were able to staircase up to 100% loan-to-value.
This may be linked to a number of reasons, from shared ownership borrowers typically being in receipt of lower incomes, to rising rental payments impacting borrowers disposable income available to save towards staircasing.
During 2020 and 2021 shared ownership rents increased quicker than rent in any other sector.
Following this, as recent as October 2023, the UK Government announced reforms to bring Shared Ownership rent in line with other kinds of social housing.
This amendment changes the maximum annual increase housing associations can make to rental payments and lowers the floor rate for shared ownership rent, giving the housing associations flexibility to protect borrowers from potentially high rental increases during periods of high inflation.
Across the market it can be considered that the shared ownership scheme has not received the same level of publicity support when compared to other more well publicised schemes. This is likely to contribute to the lack of uptake and awareness.
Another consequence is a lack of understanding among borrowers of how the scheme works and the potential benefits it could bring.
As a result, advisers and lenders are, and must continue to play their part in raising awareness and educating potential borrowers.
For lenders, it is imperative to understand the needs of the market and plug gaps where possible.
Whereas advisers are finding it’s a requirement for them to act as educators to potential buyers.
More recently further support has been provided by the Levelling Up, Housing and Communities (LUHC) Committee, who are undertaking a review into the shared ownership scheme – part of which will consider the borrowers barriers to entry and property availability.
Typically, many shared ownership properties tend to be new build homes. This can again be limiting through restricting availability.
Further consideration is needed to increase the number of properties available across the market.
This could be through further funding to housing associations to support them in developing more new build homes, or a reform of the scheme to increase availability through the involvement of resale properties.
Overall, it’s clear shared ownership is a great opportunity to support first time buyers on the market, provided support and education is given from lenders, advisers and the UK Government alike.
Becky Wheeler is marketing & product manager at Tipton and Coseley Building Society
