Share crash

The concept was renamed "shared ownership" in the 1980 Housing Act. It thrived during the 1970s and 1980s as roller-coasting inflation and desperate uncertainties engulfed the mortgage scene, culminating in the late-1980s property crash that traumatised the market for the first half of the next decade.

But today property prices are rocketing and interest rates are historically low and relatively stable. Does this mean shared ownership is past its sell-by date? Is the system worth propping up, or should the government instead spend the money on imaginative new ways of taking advantage of the low interest rates that are – it is hoped – here to stay, and helping yesterday's shared-ownership candidates to buy homes outright? This is, after all, what the Starter Home Initiative is about.

The evidence in London and the South-east is that these days, the complexities and costs of managing housing association properties mean that buying a property outright in the private sector can often cost only slightly more, if not the same amount, per month, as buying a 25% share of a similar property in a shared-ownership scheme and paying rent on the remainder.

Take Metropolitan Home Ownership's Union Point development in Tottenham, north London, for example. Open-market prices there start at £95,000 for a one-bedroom flat. Shared-ownership applicants have been buying a 50% share for £47,500 and renting the remainder from MHO. The mortgage and rent payments, including a service charge, amount to around £461 a month.

But according to calculations from independent mortgage adviser Charcol Online, monthly repayments on a 25-year repayment mortgage of £95,000 at 4.75% interest would be only marginally higher at £542.

For buyers looking for the cheapest entry into the mortgage market, Simon Tyler, of financial adviser Chase deVere, calculates that a borrower wanting to buy a £95,000 property outright would have monthly repayments of only £292 on a discounted, interest-only, mortgage. Most people, however, would want to take out an endowment policy on top of this.

The figures on another MHO property, Century House, a six-storey annexe of the former MI6 headquarters building on Westminster Bridge Road, tell a similar story.

A 25% share deal on a one-bedroom flat valued at £250,000 costs £1023 a month, including rent on the remaining 75% and £166 a month for service charges.

Charcol Online estimates that the monthly cost of a 25-year repayment mortgage of £250,000 at 4.75% would be £1425, while an interest-only mortgage would cost just £989 a month, excluding an endowment policy.

Another advantage of owning a home outright, of course, is that on selling, the owner reaps the full benefit of any profit. But there is a downside to this, too, as prices can go down as well as up. Mark Lupton, policy analyst at the Chartered Institute of Housing, points out that shared ownership has the advantage of carrying less risk: "Any purchase will have a risk attached, but to an extent you are minimising the risk because if you are only buying 50% of the property, you are only taking 50% of the risk."

Sharing can be good
Shared ownership continues to be popular and there are currently 107 schemes in operation by housing associations (see "What is shared ownership?", page 16).

In defence of the system, an MHO spokesman says: "The mortgage repayment figures quoted for the Union Point example are prudently conservative and do not allow for aggressive first-year-only discounts – which are also available for shared ownership – or for longer payment periods. Many [shared-ownership] buyers will pay less."

People may be paying more under the shared ownership scheme because their rents were set in the past

Steve Wilcox, York University

In addition, whereas some service charges can be high, the MHO spokesman says service and management at Union Point costs £75 a month and anyone buying a similar property would have to pay comparable or even higher charges on top of the mortgage.

The other main advantage of shared ownership is that the mortgage lenders' income rules only apply to the mortgaged share. This means that to buy a 50% share of £95,000 flat a buyer would need an income of about £16,000, just half of the £32,000 he or she would need to earn to buy the whole flat on the open market.

Mind the funding gap
The reason why mortgages are now often more affordable in monthly terms than shared-ownership deals is that, compared to the time when shared ownership was launched, interest rates have fallen and, crucially, housing association grants have dwindled, forcing associations to raise rents to plug the cash gap.

"People may be paying more under the shared ownership scheme because their rents were set at a point in time when interest rates were at a different level," explains Steve Wilcox, professor of housing policy at York University. He points out that homeowners with fixed-rate mortgages also lose out, paying more when interest rates fall than people who took out a flexible-rate mortgage.

The case for reform
For many in the housing sector, shared ownership can only truly work if grants are increased so housing associations can reduce rental costs. "The current shared-ownership system is past its sell-by date because property prices have risen so dramatically," says Peter Hibbert, former assistant chief executive of Network Housing Association, which is based in north London.

"The model is driven by market value and, in order to accommodate the increase, the proportion of grant has to be significantly increased. In central London non-prime sites, if you are looking at buying an average property you need to have a salary of £50,000-£60,000 to afford the traditional shared model. It needs to be reviewed."

Steve Walker, chief executive of south-east London's Tower Homes, says that without increased levels of grant, the housing association would not have been able to offer some shared-ownership deals. "I have no examples of shared-ownership schemes that have been negotiated without some form of additional – albeit small – level of grant. In theory we could have undertaken non-grant-funded schemes but they would not, in our opinion, have been affordable."

Tower has sold 25% shares of two-bedroom houses in Lambeth, with open-market values of £240,000. The buyer needs only a £60,000 mortgage and pays 2% rent on the unsold equity. The total outgoings are about £669 a month. Walker estimated this as "less than 40% of buying outright".

Walker is candid about the situation: "Each deal for us is slightly different. However, with prices running away with themselves, it will be harder to produce shared ownership in the general marketplace. The reality is that a cash grant of around £60,000 a home would be needed to make shared-ownership homes costing on average £160,000 affordable to buyers on incomes of around £23,000."

A money pit?
So, is the government spending millions supporting a once-useful path to home ownership that has outlived its usefulness?

No one is questioning the admirable motives behind shared ownership – the conventional income multiples used by banks and building societies mean that people who could afford higher monthly repayments simply cannot borrow the money for a mortgage. But in cases where shared ownership is more expensive or the same price as a monthly mortgage, it is hard to see the attraction. Lenders, though, should not relax their policies in individual cases; they probably would not do so anyway, given the risks and nasty experiences of the late 1980s.