Despite recent talk of the property bubble bursting, house prices are continuing to rise. The average house price hit £354,564 in March 2022, pushing the annual rate of increase to 10%. That’s good news for property owners, but it doesn’t help ‘generation rent’ – the large number of prospective first time buyers, who are struggling to save the £59,000 needed for the average deposit in today’s market. That’s a task made only harder by the increasing rise in the cost of living this year.
For many of those first time buyers, Shared Ownership is an affordable option to help them get on the property ladder, without such a large deposit. And as the cost of living continues to rise, interest in Shared Ownership is only set to grow.
That means increased demand in Shared Ownership mortgages. As a specialist product, consumer awareness of the lending options is lower. Therefore mortgage brokers should be prepare for an increase in shared ownership enquiries.
Brokers have an important role to play in increasing that consumer awareness and educating buyers. But what are the benefits of shared ownership mortgages and things to consider when advising consumers?
Calculating the benefits of Shared Ownership mortgages
Not all high street lenders offer Shared Ownership products, so it’s important to understand how they work and what is available to consumers.
As the homebuyer is only buying a share of the property, the mortgage covers the share they will own, while they pay rent on the remaining portion. Deposits can also be as low as 5% for a shared ownership mortgage, but we recommend to buyers that it’s always advisable to pay a larger share of that deposit if they are able to, as this will increase the lending options and rates available.
While this does mean a slightly large lump sum up front, it is still a lot less than a residential mortgage and works out cheaper over time if you’re able to access lower interest rates.
One of the most frequent questions we get is around the expenditure of the mortgage on the share of the property combined with rent on the remaining share.
But with the average rent now at around £1,000 a month, we commonly find that the mortgage and the rent will be less than what they were paying as a tenant. Plus it’s more beneficial in the long run as they will own part of the property by the end.
Brokers can also assess their finances to recommend they purchase the largest share they can afford. Because the larger the share, the less the rent.
Assessing credit histories
Brokers should also be able to recommend the best product for the customer, based on their circumstances and their credit score.
This is particularly important for those with complex credit histories. Of course this is important for all mortgages, but with Shared Ownership seen as a more affordable option, we do see customers with lower credit ratings applying for lending.
Many consumers are unaware of their credit score and even one missed card payment can impact it. But it’s the most important tool in order to get access to the best interest rates. Although many online mortgage calculators will show you the best rates, these aren’t available to all customers, particularly in the case of complex credit, so brokers should advise of the importance of raising the credit rating, or being aware of the options available to you. Again, increasing the deposit, by 5% chunks (such as 10%, 15%) can also help to access better rates to offset this to some extent.
Climbing the mortgage staircase
Once the buyer has their mortgage and are in the property for a few years, they may think about purchasing a bigger share. Here, brokers can advise buyers how to staircase their share of the property when the time comes. Staircasing is the process of increasing the share of the property in stages, or ‘stairs’.
Although the Government has promoted the introduction of the staircase option a lot recently, it’s important for consumers to understand that the next step up the staircase usually only occurs when your income or savings grow.
So, if the buyer has a promotion or new job with a larger salary, has inherited money or has a pot of savings over time, they will be able to reassess their mortgage and their share to increase.
Again, a broker can assist in advice here as in some cases it may be more beneficial for the customer to remortgage rather than increasing the level of their existing finance.
The Shared Ownership path
Shared Ownership allows first time buyers to get on the property ladder and gain long-term stability without overstretching their finances. It’s clearly popular with buyers as well. So far, the Share to Buy website – which lists Shared Ownership schemes around the country, has clocked up one million enquiries.
With more awareness of the mortgage products available, brokers are a vital tool in helping those consumers find the right financing to get them on the Shared Ownership path.