Shared equity is starting to play a really useful part of getting people on the housing ladder. Lenders, especially smaller lenders and niche players have been launching a number of new products or, through creative underwriting, are helping people buy property and take advantage of some of the best mortgage rates in the market.
It’s not just lenders, but house builders and housing associations who have been getting involved.
While some schemes – like the New Buy scheme that the Government has been shouting about, are still gaining any traction in the market, the FirstBuy scheme which continues to be popular, is a shared equity scheme.
Another scheme for shared ownership is often offered by housing associations where the borrower will typically purchase a share of the property, usually 25%, 50% or 75%, with the housing association taking on the other share. The borrowers will then pay both the mortgage and rent to the housing association, which, if less than a typical mortgage payment, makes the monthly outgoing more affordable or it allows the borrower with a smaller deposit to get on the housing ladder.
When the house is sold the housing association gets back its share along with the same proportion of any uplift in the property value, so if the housing association owns 50% of the property and the house value goes up by 10%, when the property is sold the association gets back 50% of the whole value of the property.
A clever new scheme has recently been brought in by Castle Trust; called a partnership mortgage, the borrower puts down a 20% deposit and Castle Trust also puts in 20%, enabling the borrower to get a mortgage for just 60% of the property’s value, which means they can also take advantage of some of the best rates in the market which usually start at 60% or below.
The borrower doesn’t pay any interest on Castle Trust’s money, but instead pays 40% of any increase in the property value when it is sold. If prices go down Castle Trust is liable for just 10% of the property value.
Products like these of course do need some explaining to potential borrowers, and the adverse publicity that still continues years later about the shared appreciation mortgages (SAMS) that were offered by Barclays and Bank of Scotland does not help their adoption. The success of the new schemes will depend a lot on how aware borrowers are of them and also how accessible they are, but they are certainly a step in the right direction, even if the concept is not as novel as it may seem.
I remember buying my first house with the help of bank of Mum and Dad. They supplied the deposit and I promised to pay back the money on the sale of the property plus any appreciation in their equity stake. Looking back now I got away lightly as they did not get a dividend (interest on their loan) and with my Dad being a canny Scotsman I am surprised he has not caught up with me later on in life.
What surprises me is that we have not seen some entreprenial lawyers launch a pre-packed shared equity mortgage (first charge and second charge) legal packages to more formally arrange what I was able to achieve. After all, is not the Castle Trust product just an extension of my personal arrangement with my parents? They are putting 20% down and rather than charging interest they are rolling this into the capital appreciation and taking 40% of the appreciation. They are also willing to take a hit if the value of the property falls.
So shared equity has been happening for a long time just in a rather more unofficial way than it is now. At least the new schemes help to make funding accessible even to those who do not have parents in a position to help them with the deposit. Only time will tell how popular these products will be, but they are definitely a step in the right direction.
David Copland is director of TMA and Pink mortgage clubs
