Why are Shared Ownership Schemes usually a Bad Idea?
Q. Why are Shared Ownership Schemes usually a bad idea?
A: There are a number of reasons to be careful of these schemes. However, there are numerous variations on the theme, which makes it impossible to describe any one scheme's pitfalls.
The major problems are:
- Overpricing. It's common practice to bump up the price for a shared ownership property. E.g. £200k normally, £110k for 50% share, £60k for a 25% share. You potentially overpay severely unless you are able to confirm the price of a full ownership property of a similar nature.
- Rent. The rent looks cheap, but it usually isn't. It's "below market", but that's because it doesn't include insurance, maintenance, ground rent, service charges, wear & tear, etc. In addition, there may be provisions for the rent to rise. E.g. rent starts at 4% of the original value of the equity (per year), but each year it is increased by RPI + 1%. In other words, every year you get an inflation busting rent rise.
- Mortgage. You will need a special mortgage that will accept a share of ownership as security. Most mortgages require that you have sole ownership of the property. These special mortgages are of limited availability. Although at present, they are reasonably competitive. There is no guarantee that they will - if shared ownership schemes start running into trouble, you can bet the banks will club together and withdraw all remortgaging for shared ownership, forcing you onto a punishing SVR.
- Stepping up. You're free to increase your share in the property as you like. But guess who has final say on the price you pay? That's right, it's the property firm that sold you the overpriced share to start with. Be prepared to be asked to pay over the odds here again.
- Maintenance. You are 100% responsible for maintaining the property - no matter how small your share. On blocks of flats maintenance can be very expensive, and you do not get a say in whether it is done or not. If the landlord wants it doing, it gets done, and you get the bill. If it's major work like replacing external windows, then it can be a big bill. E.g. people who had bought their council flats, and had lived in them for a further 5 years, suddenly one day got a letter saying the external windows in the block all needed replacing - a bill for the work was enclosed £15k per flat, payable within 30 days. At least in a block with a high proportion of 100% owner occupiers, there is likely to be a residents association, where such matters will get appropriate discussion and residents approval, which is likely to include saving funds for several years (or a communal business loan, to be repaid over a few years). In these shared ownership blocks, or in block with large absentee landlord owners, the top landlord's decision is final.
- Landlord control. You are responsible for the maintenance, but will need to have it done to an appropraite standard. So, DIY for anything other than a coat of magnolia is going to be out of the question. Some maintenance (e.g. replacement of a boiler) is classed as structural building work (under John Prescott's energy efficiency regulations) - and you will need permission from the landlord before proceeding. Such permission will be granted with pleasure in return for £150 + VAT, per item requiring permission.
- Letting restrictions. Some schemes only permit owner occupation. You may not be allowed to let it out, if you are forced to move but don't want, or are unable to sell.
- Final sale. For reasons above, blocks of flats with such landlord control are less desirable, even at 100% ownership, than blocks with an enthusiastic residents association - this may mean a sale is more difficult.
- Equity. Most shared ownership schemes operate such that you get to keep/lose any change in price of your stake. The landlord will keep any gain, or take any loss in their stake. So, you buy 50% of a £150k scheme for £75k. You sell for £120k, you keep £60k, landlord takes £15k loss. However, this is not universal. There are a few schemes (very much the exception) where you are potentially on the hook for the landlord's loss (but don't keep the landlord's gain).
- Leasehold. This is a leasehold agreement - as such you have a deed of covenant to obey the lease. That means pay all maintenance, and rent on time. This is the same as in a standard leashold agreement - the difference is in the scale of charges. Normal leasehold ground rents are token - often around £10 per year, and even maintenance charges are unlikely to be crushing. This is not the case when you are paying these high equity based rents. If you get into significiant rent/maintenance arrears, the landlord can terminate the lease, this will leave you homeless *and* you will still have to repay your mortgage - and, as you might imagine, the mortgage lender is going to be mighty pissed that they no longer have any security over the debt. This lease termination is very rare under normal circumstances, because a court won't give the order, unless there are big (e.g. more than £5k) maintenance/rent arrears - but with shared ownership, it has happened.
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