Shared ownership has been hailed as one of the ways to kickstart the housing market, but it will never work while mortgages on offer are so uncompetitive
There are nearly 10,000 shared ownership properties unsold at the moment. Some of this is because of market conditions, but there are other factors that make the prospect of owning property in this way unappealing. Several changes to the mortgages and rents on offer could make this ownership model more attractive.
Shared ownership borrowers should be considered a good risk as the ratio of their loan to the value of the property is often between 20% and 45%. But in fact they are being assessed as sub-prime customers. As such, they are attracting punitive interest rates. Typical shared ownership mortgages are in the region of 4% to 5%. The same lenders are offering other buyers with similar loan-to-value ratios interest rates that are between 1 and 1.5 percentage points lower.
A first mortgage charge (a mortgage that has the first claim over the property offered as security), as enjoyed by shared ownership banks and building societies, takes precedence over all other claims. Hence, lenders are exposed to little or no risk since any loss is likely to be borne by the affordable housing provider or ultimately the Homes and Communities Agency (HCA).
Typical shared ownership mortgages are 5%. The same lenders offer others 1.5 less
But if the government or the HCA is genuine in its desire to kickstart this market sector, then it should offer shared ownership mortgages guarantees. This would pose no added risk and would encourage lenders to offer more competitive interest rates.
Some housing associations charge annual rents as high as 2.5% to 3% on unsold equity, which is nearly as high as the cheapest mortgages. Perhaps we should consider not charging rent in the early years or a rent of no more than 50% of the mortgage rate. Shared ownership properties do not come with the incentives that the housebuilders offer, such as free legal fees, so the product often fails to meet the needs of potential clients.
Finally, it seems silly that local authorities are asking for more shared ownership homes to be built when the existing homes are not selling…
Julian Thompson is managing director of chartered surveyor and affordable housing consultant Jolliffe and Flint