Shared Ownership – Should You Staircase?

Shared Ownership – Should You Staircase?

March 21, 2017

Shared Ownership – Should You Staircase?

As part of an incentive scheme to encourage first time buyers into the property market, housing association-backed “Shared Ownership” schemes have become a highly visible part of the real estate landscape in recent years. These properties are sold with different conditions attached to a standard private house sale, and it’s important to understand what terms are a part of shared ownership houses.

How Does Shared Ownership Work?

             Essentially, instead of buying the house outright, you’ll purchase a percentage of it (25%+) from the housing association. The percentage which you own outright is bought and paid for in the same way as a regular house purchase would be, by putting down a deposit and obtaining a mortgage; this helps buyers by reducing the total amount they’ll have to pay, and making their deposit stretch further. £10,000 might not go very far towards a £200,000 house, but towards a 25% share of it £10,000 constitutes a 20% deposit.

Whatever percentage of the home you haven’t bought will be rented to you by the housing association at a discounted rate. In many cases, this means that you’re paying less overall for the property than if you’d bought it outright, or were privately renting it.

What is Staircasing?

             You’ll have three opportunities to purchase more “shares” in your house. If you’ve extended your ownership twice, the final extension must be to full ownership at 100%. As you buy more of your home, you’ll be charged less in rent but will also likely pay out more for your mortgage.

Why Staircase to 100%?

             There are several key conditions which apply to you when you share ownership of your home with the housing association. Firstly, since you are not the property’s outright owner, you do not own the freehold. This restricts what you can do with the property, and you’ll have to seek permission from the housing association to make any major modification to the property. In addition to this, while a property is still under shared ownership, the housing association has control over the sale of the house, and can dictate who the property is sold to (they’ll usually want it to remain as a shared ownership property).

In most cases, when a shared ownership tenant extends their ownership to 100% of the property’s value, they become the de facto freeholder. Since they’ve “bought out” the housing association, they’re free to treat the house as their own, and have total control over altering or selling the property. This can be an advantage for homeowners who want to turn a profit, as the restrictions placed on a sale by a housing association can hinder a profitable sale. Check the terms of any shared ownership agreement, because the terms attached can vary between different housing associations.

Why Not Staircase?

             The advantage of buying your home in instalments is that it lessens the initial burden on the purchaser to put down a large deposit. If someone’s only able to put £15,000 towards the purchase of their home, they’ll probably be forced into taking a high-LTV mortgage with a top interest rate. By paying off the full amount gradually, it’s possible to keep monthly outgoings low whilst still working towards full home ownership.

However, for some people, outright ownership might not be the best option, and whether to staircase or not should be carefully considered by individual owners; it’s not an automatic no-brainer. Keep in mind that the rent you pay on the property is discounted, and may well be cheaper than the rates you’ll pay on a mortgage to own it yourself. In order to make it worthwhile to staircase your ownership, you’ll need a large enough deposit to obtain a good interest rate; don’t stretch your finances just to take on a bigger slice of the pie.

Problems with Purchasing Freehold

             Some cases have recently come to light where buyers of shared ownership houses have been unable to extend their ownership to 100%, and have effectively been denied freehold ownership. This may come about when the freehold is sold to a third party company, who can then charge excessive amounts for the right to buy the property’s freehold. It’s therefore very important to ensure that you understand whether you’re guaranteed to have a right to buy the freehold, and how the value will be calculated. If this is provided to you in writing when you purchase the home, you should be protected from the potentially high costs of purchasing your property’s freehold.