An introduction to shared ownership
Concept of shared ownership
In the heart of UK's housing landscape, shared ownership stands as a hybrid tenure, blending elements of renting and buying. The shared ownership model offers a ladder to home ownership for those who might struggle to afford to buy a property outright on the open market.
Shared ownership scheme in the context of affordable homes programme
As part of the affordable homes programme, shared ownership schemes are run by housing associations or registered providers. These schemes allow potential homeowners to buy a minimum initial share in a property, usually between 25% and 75%, while paying rent on the remaining share to the housing association. Gradually, they have the opportunity to purchase more of the property, a process known as 'staircasing', until they become the outright owner.
Shared ownership vs. traditional home ownership
Shared ownership and traditional home ownership can appear as different sides of the same coin.
While both are pathways to owning a home, shared ownership allows for a more accessible initial entry. This is particularly beneficial for first-time buyers or those who do not have the necessary deposit or income to afford a property on the open market.
Traditional home ownership, on the other hand, involves buying the property outright with a mortgage or personal funds.
In shared ownership, the shared owner pays rent on the share owned by the housing association, a cost not incurred by an outright homeowner.
Understanding shared ownership leases
Amid the property prices of the United Kingdom, shared ownership leases emerge as an alternative, allowing more individuals to step onto the property ladder. This section unravels the concept of shared ownership leases, dissecting it for your better understanding.
Definition of a shared ownership lease
A shared ownership lease is a hybrid type of tenancy that combines features of leasehold ownership and home ownership. This lease, unique to the UK, allows the shared owner to buy a certain percentage of a property and pay rent on the remaining share. The shared ownership lease sets out the terms of the shared ownership, and as such, it's considered as the legal document that binds the shared owner and the housing association together.
Comparison: shared ownership lease vs. ordinary long residential lease
When contrasting a shared ownership lease with an ordinary long residential lease, notable differences come to the fore. The shared ownership model is designed to facilitate home ownership, not merely rent.
Differences in terms of lease extension and leasehold interest
An ordinary long residential lease, or a house lease as commonly known, typically lasts for a significant duration - often 99 or 125 years. The lessee holds an interest in the property for this term, with the ability to sell, extend the lease or even purchase the freehold under the Leasehold Reform Act.
However, with shared ownership leases, the landscape slightly alters. Shared owners can usually extend their lease after owning 100% of the shares, yet the rules are more restrictive than with a full leasehold property. For example, if a shared owner chooses to extend their lease before 'staircasing' to 100% ownership, they might be required to buy additional shares in the property. This is because the value of the property and the leasehold interest are intricately linked in shared ownership properties. The fundamental clauses of such leases often reflect these differences, which we'll delve into further in upcoming sections.
Key components of a shared ownership lease
While shared ownership leases vary, they are bound by several common components. Among these are fundamental clauses, initial fixed term, and lease variation possibilities. Each element plays a distinctive role in the shared ownership model and dictates the shared owner's rights and obligations.
Understanding fundamental clauses
Fundamental clauses are a pivotal part of shared ownership leases. They help in defining the rights and obligations of a shared owner and the housing association. Fundamental clauses can vary significantly between different leases but there are some clauses common to such leases.
The mortgage protection clause
The mortgage protection clause, a customary provision in shared ownership leases, offers a safety net to mortgage lenders. This clause ensures that if a shared owner fails to meet their mortgage payments and the property must be repossessed, the mortgage lender can recover the full amount of their loan before any remaining money is divided between the shared owner and the housing association.
Nomination period and four week point
Another noteworthy clause is the nomination period, a stretch during which a housing association has the right to nominate a buyer for the shared owner's share if they decide to sell the property. This period typically extends up to the four week point from the time the shared owner informs the housing association of their intention to sell. After the four week point, the shared owner can usually sell the property on the open market.
Initial fixed term and lease variation
Shared ownership leases commence with an initial fixed term, generally for a term of 99 or 125 years. This period begins from the date of completion of the lease and not from the date when the shared owner first moves into the property.
Over time, certain circumstances may warrant a variation to the shared ownership lease. Common grounds for lease variations include adding a new owner to the lease (usually after a marriage or civil partnership), removing an owner (after a relationship breakdown), or extending the lease term. Remember, however, to engage a solicitor when considering lease variations, as the process can be complex and carries legal implications.
Financial aspects of shared ownership leases
Stepping into the world of shared ownership properties requires a firm grasp on the financial considerations. Your journey as a shared owner will likely include a host of monetary commitments, from paying rent on the owned share, dealing with mortgage payments, to understanding service charges. Further, appreciating the concepts of market value and stamp duty is key to a sound investment.
How to calculate and pay rent on the owned share
In shared ownership schemes, you own a portion of your home and pay rent on the remaining share. The rent is typically calculated as a percentage of the housing association's share of the property's value, commonly between 2.5% and 3%. This rent is reviewed annually and is usually linked to inflation as measured by the Retail Price Index.
Understanding annual rent and initial rent
Initial rent is the amount you pay when you first purchase a share of a shared ownership property. This figure is set out in the lease, which will also describe how the rent will be reviewed annually. The annual rent often increases according to the Retail Price Index plus a certain percentage, allowing for adjustment in line with living costs.
Mortgage payments for shared ownership property
Mortgage payments are another key element of shared ownership lease financial obligations. The amount you pay each month depends on the percentage of the property you own, the mortgage interest rate, and the duration of the mortgage. It is important to have an honest discussion with your mortgage lender about what you can comfortably afford before signing up for a shared ownership scheme.
Service charges: what they are and when they apply
Service charges come into play for shared ownership properties when there are communal areas or services, like gardens, lifts, or maintenance work. These costs are usually collected by the property manager and are not part of your mortgage payments or rent.
External or structural walls charges
Charges for repairs to external or structural walls of the building are typically included in service charges. However, it's important to verify this with your housing association as costs can vary widely, and unexpected repair bills can quickly become a significant financial burden.
Understanding market value and the full market value concept
When it comes to shared ownership homes, the term 'market value' frequently arises. The market value of a property is the price it would fetch if it were sold on the open market. In shared ownership, 'full market value' refers to the total value of the property, not just the percentage you own.
Role of an independent surveyor appointed in determining market value
An independent surveyor plays a crucial role in establishing the market value of shared ownership properties. They assess the property’s condition, location, and comparable sales data to determine its worth. Their valuation is used when selling or purchasing additional shares in your home.
Stamp duty: when does a shared owner need to pay stamp duty?
Under certain circumstances, shared owners may need to pay Stamp Duty Land Tax (SDLT). This tax is typically due when purchasing a share of a property over the current threshold, currently £125,000 for residential properties. However, 'staircasing' can impact SDLT obligations and the rules can be complex, so it's wise to seek advice.
Purchase price and the buyer pays principle
In shared ownership schemes, stamp duty is typically calculated on the purchase price of the buyer's share, rather than the full market value of the property. This means that shared owners can often benefit from paying less stamp duty than outright buyers, although this will depend on the exact details of your lease.
Securing and increasing your equity in a shared ownership property
The journey of shared ownership properties often begins with an affordable, yet small stake in the house. Yet, over time, shared owners may choose to invest further into their property, creating opportunities for increased equity and greater control.
Staircasing: stepping up to full ownership of the lease
For shared owners, 'staircasing' refers to buying additional shares in their shared ownership property, potentially up to full ownership. The housing association typically offers the opportunity to purchase additional shares after a set period from initial acquisition. The cost of buying additional shares is based on the property value at that time, as assessed by an independent surveyor appointed. Therefore, if property values have increased, so too will the cost of additional shares.
In contrast, downward staircasing, where a shared owner reduces their share, is a concept that is not generally recognised under the shared ownership model. However, if financial circumstances change dramatically, shared owners should contact their housing association to discuss potential solutions.
Extending the lease on your shared ownership home
As a shared owner, extending the lease of your shared ownership home is an important consideration to preserve the value of your stake in the property. While the initial terms of shared ownership leases are often lengthy, as the remaining term decreases, so too can the property's market value.
The Leasehold Reform Act provides shared owners with the right to extend their lease after owning the property for two years, typically adding 90 years to a flat lease and 50 to a house lease. However, it's important to understand that extending a lease comes at a cost, linked to the value of the property, and this cost increases as the remaining lease term decreases.
Remember, while it is possible to navigate the complexities of extending a lease alone, seeking professional advice from a solicitor or lease extension specialist can help ensure the process is completed correctly, potentially saving time and reducing risk.
Selling your share in a shared ownership property
There comes a time when a shared owner may wish to move on from their shared ownership property, be it for personal reasons or to take the next step on the property ladder.
Selling process for shared ownership properties
When selling a shared ownership property, the lease typically stipulates that the housing association has the right of first refusal. This is often referred to as the 'nomination period', typically lasting eight weeks, during which the housing association has the option to find a suitable buyer.
After this period, if the housing association has not found a buyer, the shared owner is usually free to advertise the property on the open market. However, it's important to note that the remaining share of the property is still owned by the housing association and the new buyer would need to meet the criteria for shared ownership.
Remaining term of lease and its effect on selling
The remaining term on your shared ownership lease can impact the selling process. A short remaining lease can deter potential buyers and mortgage lenders, reducing the pool of potential purchasers. Extending the lease can add to the market value of the property and make it easier to sell.
Moving house: how it impacts your shared ownership lease
Moving home can impact your shared ownership lease in a variety of ways. If you wish to purchase a new property, your housing association may allow you to transfer the equity from your current shared ownership property to a new one under their management. This is often referred to as 'porting'. However, rules around porting vary between housing associations, so it's important to check the specific terms of your shared ownership lease.
Remember, whether staircasing, extending your lease, or selling your shared ownership property, each step can be complex. While it's possible to handle these steps alone, engaging a professional can offer peace of mind, potentially saving time and reducing risks.
Rights and obligations under shared ownership leases
With shared ownership leases, there is a distinctive balance of rights and obligations between shared owners and the housing association. These are fundamentally designed to protect both parties and ensure the smooth running of the shared ownership scheme.
Housing rights of shared owners
Shared owners possess many of the same housing rights as outright homeowners. This includes the right to live in the property without interference, as long as the terms of the lease are adhered to. Shared owners also have the right to make certain types of alterations to the property, subject to the housing association’s permission. Additionally, in certain circumstances, shared owners can challenge service charges through a county court if they believe them to be unreasonable.
Can a shared owner sublet their home?
Subletting a shared ownership property is not typically allowed, in line with the principle that these properties are to serve as the shared owner's main residence. However, exceptions can be made under certain circumstances. For instance, if a shared owner needs to temporarily move for work or other reasons, they may request permission to sublet. The housing association has the discretion to approve or deny such a request.
Certain circumstances under which subletting is allowed
Shared ownership leases often state that subletting is only permissible under certain circumstances. These can include a temporary job relocation or a significant life event that requires the shared owner to leave their home for a period of time. It is important for shared owners to discuss any proposed subletting arrangement with their housing association to avoid breaching the terms of their lease.
Succession rights to a shared ownership home
When a shared owner dies, the rights to the shared ownership lease may be passed on, or 'succeeded' to a spouse, civil partner, or a family member who has lived in the property for at least 12 months. This depends on the terms of the lease and certain conditions being met.
Complaining about a housing association or other social housing provider
Shared owners have the right to make a complaint if they are dissatisfied with the service provided by their housing association or other social housing provider. The first step is to follow the provider’s internal complaints procedure. If the complaint is not resolved satisfactorily, it can be escalated to the Housing Ombudsman Service.
Shared ownership lease and freehold ownership
Distinguishing between shared ownership lease and freehold ownership is a significant aspect of the shared ownership model. Each offers different levels of control over the property and carries different responsibilities.
Understanding freehold vs. leasehold ownership
In freehold ownership, the homeowner owns the property and the land it stands on outright. In contrast, leasehold ownership, such as with shared ownership leases, means the homeowner owns the property for a fixed period (the length of the lease), but the land on which the property stands is owned by the freeholder, usually a housing association.
Leasehold Reform Act and its implications for shared owners
The Leasehold Reform Act provides leaseholders, including shared owners, certain rights. For instance, it grants shared owners the right to extend their lease or buy the freehold under specific circumstances. However, shared owners must own 100% of the shares in their property before they can exercise these rights under the Act.
Collective purchase of the freehold in a shared ownership building
In some cases, it may be possible for shared owners in a building to collectively purchase the freehold. This process is known as collective enfranchisement. It allows leaseholders to gain more control over the management of the property, but it can be a complex and costly process. Professional advice is recommended to explore this option.