Solution to allow buyers on to the property ladder is questioned
It’s a solution designed to help those who wouldn’t otherwise be able to buy a stake in a property, but could shared ownership schemes force these buyers into greater debt? It’s a question that’s been raised by industry professional, Roxanne Barthram, concerned that a single mother is being encouraged to take a debt that she cannot afford.
Barthram, a conveyancer, has highlighted the case of the woman, who is being bought out of a property due to a relationship breakdown. “She works part time and is now a single parent to three young children and she wishes to uses a chunk of the money to purchase a 25% share in a property, rather than going down the route of renting without stability,” Barthram said.
The site office dealing with the shared ownership property she enquired about sent her details to its mortgage broker, who carried out an affordability assessment and advised that she could purchase a 50% share with the assistance of a mortgage. “They have said they will not consider her offer to buy the 25% share with cash, unless they feel she has good reason, as ‘under the shared ownership scheme, the share you purchase must reflect your financial affordability’,” Barthram said. “Can they effectively force her into taking on a larger share and taking on the liability mortgage when she doesn’t want or need one, especially when she likely will not be able to afford mortgage payments in her current circumstances?”
It's a curious question, particularly in the light of Consumer Duty, introduced to improve consumer protection, with an expectation that brokers should deliver good outcomes for clients. On that basis, surely advisers shouldn’t encourage a client to get into greater debt than they wish to do so?
David Hollingworth (pictured left), associate director at L&C Mortgages, acknowledges that while it’s impossible to get too specific about individual cases, buying a bigger share would often be the preference and gives a greater stake in the house. This would be beneficial if prices climb. “It will also reduce the amount of rent payable on the remaining share of the property retained by the housing association,” Hollingworth said. “That would at least help to offset the additional cost of a mortgage. The crux of this is whether the buyer may be in a position to buy a bigger share. Although concerns about taking a mortgage or increased borrowing have been raised, there would need to be a broader overview taken to see how that would impact their overall position. It may mean taking a mortgage but we don’t know if it would also eat into the remaining lump sum.”
Guidance from the government’s housing and regeneration agency, Homes England, points to encouraging a buyer to purchase as large a share as is suitable but that should take into account their individual circumstances, Hollingworth notes. “It also goes on to state that individuals shouldn’t be encouraged to overcommit,” he said. “Whilst the case in question will probably want to argue what is and isn’t affordable with the association, shared ownership is overall a really positive opportunity to buy for those that would otherwise find it out of reach. Borrowers will still need to feel that it’s the right decision for them from an affordability perspective before they embark on buying a property. Buyers are often more likely to be anxious as to whether they can borrow enough to meet the affordability requirements and get a mortgage to buy their first share in a property.”
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The importance of being fully aware of shared ownership
Nicholas Mendes (pictured centre), head of marketing at London broker John Charcol, points out that shared ownership can be a useful option for many clients, but as with any product or scheme, borrowers need to be fully aware of the specific benefits and considerations involved. “Some schemes - like shared ownership - come with additional implications, not just at the point of purchase but also when buying further shares or eventually selling,” Mendes explained. “Each stage presents its own set of factors to consider. In this particular case, I would recommend that the individual seeks a second opinion to ensure they fully understand their options and any potential risks.”
Broker Bob Singh (pictured right), director of Chess Mortgages, agrees that a homeownership application can be rejected if not congruent to the applicant’s financial ability. “This may force people to borrow more at a time when they may not want to due to their own situations,” Singh said. “On the reverse side, they are gaining a larger share and paying a lower rental as well and stand to gain more from an eventual sale. It would be great if you could start off at 25% and work your way up, but the current policy may force people into higher levels of debt.”
Does Singh agree that shared ownership criteria should therefore be reviewed? “I do - this restrictive policy will force people to take on additional debt when the time may not be best suited to do so,” he said. “The rent however will be that much lower on a 50% shared ownership deal, so in reality the two may balance each other out.”
