Keith Osborne explains the concept of shared equity and how it could help first-time buyers get onto the property ladder.
There’s a compelling case for buying a new-build home at any time, but the plethora of shared equity schemes being offered by Britain’s housebuilders at present add another dimension to the argument for first-time buyers and those without a property to sell to consider purchasing a newly constructed property over a re-sale home.
With a shared equity scheme, the buyer has full, 100 per cent title on their property: shared equity is not the same as shared ownership in this respect. A shared equity arrangement simply means that the burden of finding the funds to pay for the property is shared by the buyer and the housebuilder. The property belongs to the buyer alone.
Typically, the buyer must find between 75 and 85 per cent of the property price with a conventional mortgage. The balance is funded by the developer in the form of an interest-free loan, usually for a period of ten years or until the property is sold, whichever comes around soonest.
A perusal of the daily news provided by specialist new homes websites and blogs demonstrates that many national and regional developers recognise that today’s new-build buyers find such schemes appealing. Since funding was withdrawn from the government-backed HomeBuy Direct scheme earlier this year, many developers have begun to offer their own versions of shared equity on a wide range of new-build properties.
There are a number of advantages for the buyer:
• The deposit requirement is substantially reduced
• Where mortgage lenders are now loaning around three to 3.5 times a person’s salary, having to fund just 75 per cent of the purchase price might make that new-build home affordable
• The interest rate payable on a 75-80 per cent loan-to-value mortgage is likely to be lower than that on a 90-95 per cent one – and that’s assuming you’d even be granted one of the latter
• An interest-free loan is of course preferable to an interest-bearing one if you’re looking to cut your monthly expenditure even further
• Buying a new property with the lower loan may well prove cheaper than renting a comparable one
It’s worth bearing in mind that the loan is in fact a second charge on your property and that your house may be at risk of repossession if you’re unable to pay up at the end of the loan period. Most people might expect to be earning considerably more, or to have sufficient savings, in order to pay back the loan at the end of that period, but it’s a risk that should be taken into consideration before signing on the dotted line.
Market movements could also take homeowners into negative equity, though one would hope that from where we stand right now, somewhere near the bottom of a property slump, over the period we’re talking about, house values would generally increase. But again, it’s a risk to consider. And bear in mind that as property values increase, so does your repayment, as it’s based on the percentage of the house value at the time of repayment.
In cases of genuine hardship, some housebuilders will consider extending the loan period if the homeowner is unable to repay them at the end of the initial term. However, the interest charges that would then apply would be some way north of base rate and pretty punitive.
Notwithstanding the risks involved, the reason that now is a great time to consider taking advantage of one of these schemes, if you believe it to be beneficial to you, is that come next year, many housebuilders may decide that in these tough economic times, they are unable to continue funding such initiatives indefinitely.
In conversation recently with Bob Weston, founder and chairman of What House? Housebuilder of the Year 2023 Weston Homes – which incidentally does not operate a shared equity scheme of its own – he told me he believes the current schemes on offer are untenable in the long run.
There are also whispers among other major developers that their shared equity programmes may no longer be offered when their 2023-2024 budgets are drawn up. After all, how many companies will be able to continue to afford to offer loans that do not provide them with any monthly income for up to ten years?
In short, if you have always considered a brand-new home beyond your means, do think again – a shared equity scheme might help you acquire the new-build house of your dreams. But leave it too late and you may miss out on the opportunity.
Keith Osborne is the features editor of whathouse.co.uk.
