The concept of shared ownership is simple. There are three types. In the most common, an individual who cannot afford to buy a home on the open market buys a share – usually 25-50% – of a property and rents the remaining share from an RSL. As time passes, the buyer increases their share until they become the outright owner of the home. The idea is to reduce the cost of homeownership by about 30%, though the issue of what constitutes affordability is a thorny one and some RSLs providing shared-ownership schemes say more research needs to be done on the subject.
The second type of shared ownership is the Homebuy scheme. In Homebuy, an individual buys a home and a social housing provider pays 25% of the purchase price. Then, when they sell up, the purchaser must pay back 25% of the value of the home at the time of sale, which will theoretically be higher than at the start.
There are also programmes aimed at key workers, such as nurses and teachers, funded by the Starter Home Initiative. The SHI has provided equity loans, interest loans and shared-ownership programmes to key workers since 2001. Government funding for the SHI is about to dry up, but the ODPM is to announce a new programme shortly.
It's not just the buyer who benefits from shared ownership. Providing such schemes alongside traditional social housing creates a more mixed community and aids the regeneration of an area as the buyers tend to be earning even though they aren't able to save or haven't quite enough income to meet the cost of buying a home in their neighbourhood.
But, although simple in principle, shared-ownership schemes can be fiddly to operate, especially where rents are concerned. And, as homeowners, shared owners have different expectations from tenants in rented homes and will demand a high level of service from the social landlord concerned.
Some housing groups have set up a separate arm dedicated to managing shared ownership: for example, London & Quadrant's Tower Homes, which is dedicated to managing shared-ownership schemes. Many others run their schemes alongside their general renting services and have a small team in charge of shared ownership. But don't be daunted; the basic principles of running share schemes are easy to learn.
1. The money
The good news is that shared-ownership schemes qualify for public funding. Social housing grant is available from the Housing Corporation and you can also draw on your recycled capital grant fund, the money received after an existing shared owner buys out a property from the RSL.
Thames Valley Housing Association has more than 2200 shared homes. Homeownership manager Howard Dawson says social housing grant and recycled capital grant fund cover about 30% of the cost to the RSL of a shared property; the remaining 70% is funded by a mortgage taken out by Thames Valley with a commercial lender. Once the association finds a purchaser for the property, that individual will take out a separate mortgage to cover their share of ownership. As the purchaser's share increases, the association's mortgage is reduced.
Shared-ownership properties can also be funded through planning gain, the system under which private developers agree to provide social housing alongside homes they are developing for profit as a condition of planning permission.
Linda Fauscher, head of homeownership at Acton Housing Association, says developers often prefer shared-ownership schemes to affordable housing in this context: "This is not to say that affordable housing isn't provided at all, but we find developers are more cooperative when it comes to providing shared homes."
This, she believes, is because some developers feel buyers would rather live next door to shared owners, who earn an income, than to social tenants who may be on benefits, so such schemes will be easier to market.
Banks and the shared owner
Potential shared owners may need help to find a mortgage. Most big-name lenders – the Royal Bank of Scotland and Abbey to name but two – do not offer mortgages for shared ownership, and many of those that do will not offer a 100% mortgage so buyers have to save for a deposit.
This means buyers will need some advice about where to go for a loan. Richard Stone, director of independent financial adviser Sherwins Mortgage Services, says smaller, regional lenders are more likely to offer 100% mortgages to shared owners: "It's a restricted lending market," he says. "I suppose the big banks' reluctance to lend to shared owners goes back to the 1980s when the schemes were aimed at people with very low incomes who were considered a high risk by the banks. They don't seem to have caught up with the fact that shared owners are often young professionals who simply face very high property costs."
We find developers are more cooperative about providing homes for shared-ownership through planning gain agreements than other types of housing
Linda Fauscher, Acton Housing Association
2. The mechanics of shared ownership
Staircasing
Usually, a 25-50% share of a home is sold to the purchaser when they first buy into the property; increasing this share is known as "staircasing". Currently, owners are required to staircase up in tranches of 25%, although it is up to the purchaser to decide when they can afford to increase their share. Most housing associations with shared-ownership schemes do not allow purchasers to staircase down, but the Joseph Roundtree Housing Trust is an exception to this rule.
The trust, which has more than 500 shared-ownership homes, allows homeowners to staircase downwards even to the point of 100% renting. This helps the RSL to reduce the risk of losing property – if a purchaser were to fall into mortgage arrears, their lender has every right to repossess the building and recover the value of the loan. The trust would be able to recover the value of its share in the property but could be liable for the costs of repossession and resale. It is far better to "roll with the purchaser's financial situation" than face property losses, says Julie Cowans, policy and practice development manager at the Joseph Roundtree Foundation.
The trust also sees this flexibility as essential to fulfilling its longer-term regeneration goals. Cowans says: "In 30 years we want a mix of incomes in the areas we have developed and homeowners are crucial in adding to this mix. Even if they need extra help at times with meeting their home's costs, in the long term their income has a benefit on the local economy."
Setting the rent
Getting the rent level right is the crux of making a shared home an affordable home. Usually, the rent charged on the unsold share of the property is 2%-3.5% of the value of the unsold equity per year, depending on the type of scheme it is in. A rent of more than 4% will render the scheme too expensive, and bear in mind that the combined cost of mortgage and rent should be lower than the mortgage costs of buying on the open market (see "The sums").
Rents should also reflect the fact that the purchaser takes on full repair and maintenance costs even though they own just a proportion of the property. Most housing associations have a blanket rent rate, but L&Q's Tower Homes has variable rents, ranging from 1% to 3.5%. It all depends on the cost of the home to Tower: a scheme funded entirely through a planning gain agreement will incur fewer costs than a scheme built in competition with private developers. Tower chief executive Steve Walker says: "On cheaper schemes, we look to pass the benefit on to the customer."
Service charges
Service charges are less significant to shared owners who have a house and more important to those in flats that have communal maintenance charges. On average, service charges amount to about £50 a month for those owning flats.
Explaining the service charge can be difficult because people find the number work complicated and legal terminology hard to follow. The format of the service charge contract is set by landlord and tenant legislation but you can explain the charge in additional literature.
Here is an example showing how Thames Valley Housing Association would explain a £50 per month service charge in a block of flats that has no lift service to maintain:
- communal cleaning and grounds maintenance = £7 per calendar month
- communal lighting costs = £6 pcm
- repairs to communal areas = £20 pcm
- sinking fund provision for future works, for example cyclical decorations such as
- painting = £10 pcm
- admin fee and management costs = £7 pcm
- total = £50
Selling the property
Some housing associations worry about maintaining their housing stock numbers when shared owners come to buy out their share. To avoid a shrinking stock level and the costs of creating new stock, always retain the right to first refusal on buying the property.
Joseph Rowntree's Julie Cowans says: "Everything we sell we have the first chance to buy so that we don't lose out on stock. Of course, we buy at the market rate so the owner doesn't lose out."
How to explain shared ownership
Shared ownership is a complex procedure.
To save on tenants' queries later, it is worth explaining staircasing, how rent and service charges are calculated and which services the RSL provides.
Thames Valley's solution was to produce an easy to read residents' handbook. Homeownership manager Howard Dawson says: "The key is to ensure that shared owners are clear about their rights and responsibilities and that the RSL provides clear information of their responsibilities. This allows you to better serve your customer."
It can be an uphill struggle to get the information you need about potential shared owners
Howard Dawson, Thames Valley
You could also:
- Give numerical examples of how rents are calculated – these are easier to follow than long, descriptive texts
- Follow the example of Tower Homes and set up a freephone line dedicated to answering your shared-owner customers' queries
- Provide, in the form of a brochure, a breakdown of how service charges are worked out. How much goes to repairs, maintenance and management? If the charge changes, inform homeowners immediately and explain the reason for the change.
The sums
Shared-ownership schemes are there to make homes more affordable and the consensus among RSLs is that shared ownership should be 70% of the cost of buying on the open market. These figures demonstrate the savings that shared-ownership customers make on a two-bedroom flat with an open market value of £121,500:
- 50% share at 5% mortgage rate payable over 25 years = £355 per calendar month.
- 50% share rent at 3% of the unsold equity = £152 pcm
- Total amount payable = £507pcm, excluding service charges.
If the individual had a 100% mortgage, the amount payable per month would be £710, so he or she is making a cost saving of almost 30%.
3. Finding a buyer
Most new shared-ownership homes are sold to buyers nominated by their council. A benchmarking exercise carried out last year by London-based RSLs found that 80% of new shared owners were existing social housing tenants or on a council waiting list.
Thames Valley takes advantage of this by writing to the people on waiting lists about three months before a scheme is ready. But, says Howard Dawson, "it can be an uphill struggle to get the information you need". Some councils' housing waiting lists are very thorough and include people's salary details. But often there are housing benefit claimants on the list who do not qualify for shared ownership.
Lindy Morgan, homeownership manager at Newbury-based Sovereign, says often, people will see adverts for a scheme and contact Sovereign. However, they have to go the council and get put on the waiting list before they can be considered. She also says it can be tricky to decide who has most need for shared ownership when a scheme gets a lot of attention. Last year, when the association completed 53 two-bedroom flats in Swindon, it held an open day at a local college to promote the project. By 11 am, Morgan had had 125 enquiries. The units were allocated straight away.
It is not always that easy to find buyers. Sovereign has another shared-ownership scheme in a village near Swindon called Wroughton. It comprises 10 two-bedroom flats and was built under a planning gain agreement. It was completed in November and advertised in the local press – but the homes are selling slowly. "Maybe that is because the location is less popular," says Morgan. "Maybe it is partly because the developer is selling the units for too high a price. But recently, it dropped the price and so we hope that will improve the image of the scheme. A lot of people must have assumed it would be too expensive.
"It's frustrating, though. We know that potentially there are a lot of people who need properties like these."
Setting the criteria for eligibility
Source
Housing Today
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