As property prices fluctuate, it is essential to understand how these changes can affect shared ownership. In this article, we will explore the implications of increasing and decreasing property values on shared ownership using two example scenarios.
Shared ownership is a popular option for first-time homebuyers in the UK, as it offers an affordable means of getting onto the property ladder. With shared ownership, a buyer typically purchases a percentage of a property and pays rent on the remaining share, which is owned by a housing association.
Increasing Property Value and Its Effects on Shared Ownership
When property prices rise, shared ownership can become more advantageous for the buyer.
In our first example, Jane purchased a 75% share in a property with an initial value of £300,000. As the property’s value increased to £325,000, Jane’s share appreciated by £18,750. If Jane decides to sell her share or staircase to a higher percentage of ownership, she can benefit from this appreciation in value.
In this scenario, the housing association’s 25% share also increased in value. If Jane wishes to purchase additional shares, she would have to pay the current market value for those shares. This means that staircasing in a rising market can become more expensive, but it also allows Jane to further benefit from the increasing property value.
Decreasing Property Value and Its Effects on Shared Ownership
A decline in property prices can have different implications for shared ownership.
In our second example, John purchased a 75% share in a property initially worth £300,000. Over time, the property’s value decreased to £275,000, resulting in a £18,750 depreciation in the value of John’s share.If John decides to sell his share or staircase to a higher percentage of ownership, he may face a loss due to this decrease in value.
However, the housing association’s 25% share also decreased in value. This means that if John wishes to purchase additional shares, he would pay the current market value, which is lower than the initial price. This can present an opportunity for John to increase his ownership percentage at a lower cost, potentially recouping losses if the property value increases in the future.
What happens to my shared ownership mortgage if property prices drop – am I at risk of negative equity?
Negative equity is where your mortgage balance is higher than the value of your property. In shared ownership, you can be in negative equity; it can happen.
For example, if your home is worth £300k and you bought a 25% share worth £75k, a 10% drop in value reduces your share to £67.5k. If your mortgage balance is higher than that figure, you are in negative equity. Your housing association owns the remaining share of the property, meaning they are impacted by the same price drop at the same time. You have not borrowed that share from them, as they own it outright.
However, if you are not looking to move home straight away and you keep up with your mortgage payments, negative equity does not actually affect you.
While the long-term trend for house prices is historically upwards, you cannot solely rely on that, because there are no guarantees prices will always rise. If you find yourself in negative equity when you come to remortgage, your only option may be to stay with your current lender rather than switching providers.
As long as you are not planning to sell, that negative equity will not cause issues. If you do want to sell, there is a direct impact, because you will get less than your mortgage balance. You will still owe that remaining mortgage amount, and you will have to pay the lender back the difference.
How does staircasing work, and is it worth buying more shares in a rising market?
Staircasing means buying more of the property from the housing association. If you own 25% today, for example, you might want to increase it to 50%, 75%, or 100%.
The purchase of the additional share will be based on the market value today rather than what you originally paid, meaning you could be paying more for the increased share. In a rising market, the downside is obvious. The longer you wait to do this, the more expensive it is going to be to buy your share.
It is important not to buy the share just because you want to own more of the property, as it needs to make financial sense. You need to compare what the additional mortgage cost each month will be versus how much rent you will save on the share you no longer own.
You also need to factor in other costs like valuation costs, legal costs, and the admin fees that you will get charged by the housing association. Mortgage fees and potential stamp duty liability – these all need to be thought about.
Can I remortgage a shared ownership property, and how does the process differ from a standard remortgage?
Yes, absolutely. You can remortgage your shared ownership property in much the same way as a standard home. You can switch to another lender, stay with your existing provider, or change your mortgage term and product.
The process is slightly more complex, because not all lenders accept shared ownership properties. Those that do will assess your application differently by factoring in the rent you pay and looking at the value and percentage of the share you own.
Your lease also needs to be checked to make sure the lender is happy with the type of lease you have. This means there can be additional paperwork and extra legal costs involved.
We often see people choose to remortgage and staircase at the same time. You can slightly increase your share when you remortgage, but you just need to look at the maths to see whether that makes sense for you.
A shared ownership remortgage is not necessarily difficult, but there are a lot more moving parts. You are dealing with a lender, a solicitor, and the housing association. Because of this additional step, it is worth starting the process earlier. There can be more hurdles along the way that need to be overcome, meaning it can take a bit longer than a normal remortgage.
Conclusion
Changes in property prices can have varying effects on shared ownership.
| Scenario | Initial Property Value | New Property Value | Share Purchased | Initial Share Value | New Share Value | Value Change | Cost of Additional 5% Share |
|---|---|---|---|---|---|---|---|
| Increasing Value | £300,000 | £325,000 | 75% | £225,000 | £243,750 | +£18,750 | £16,250 |
| Decreasing Value | £300,000 | £275,000 | 75% | £225,000 | £206,250 | -£18,750 | £13,750 |
In the “Increasing Value” scenario, Jane benefits from the appreciation of her share and faces a higher cost for an additional 5% share due to the increased property value. In contrast, the “Decreasing Value” scenario shows that John faces a loss in his share value, but he can purchase an additional 5% share at a lower cost due to the decreased property value.
An increase in property value can lead to appreciation of the buyer’s share and potential profits when selling or staircasing. Conversely, a decrease in property value can result in a potential loss for the buyer, but may also present an opportunity to purchase additional shares at a lower cost. It is crucial for individuals considering shared ownership to remain aware of market fluctuations and their potential impact on their investment.
Your home may be repossessed if you do not keep up repayments on your mortgage.
