Shared equity and shared ownership - the pros and cons
Published: 7 May 2014 | Author: Bernard Clarke
The recent growth of house prices in London has again highlighted the issue of housing affordability. It has re-ignited a debate about what can be done to help those on the margins of owner-occupation into sustainable home-ownership, and which policy measures deliver the right kind of assistance most effectively.
Although recent house price growth is concentrated in south east England, property values remain elevated relative to incomes in large parts of the country. In the decade to 2012, the average UK house price at mortgage completion stage rose by 72%, according to the Office for National Statistics (ONS). Over the same period, the ONS reported an increase in household incomes of 25%. This divergence has made it more challenging for many households to move into home-ownership, even though borrowing rates remain at an all-time low.
Over the last decade, affordability pressures have contributed to the first significant reversal of the long-term trend of growth in home-ownership. Aspirations to own a home remain as strong as ever, with our surveys continuing to show that around 80% of people want to be owner-occupiers in the long term. But the proportion of home-owners has declined from 70% in 2002 to 65% in 2011.
This mismatch between aspirations and reality had led policymakers to focus afresh on measures that could help households bridge the affordability gap. This article looks at two types of scheme that can provide assistance: shared equity and shared ownership – although sometimes there is confusion among commentators between these two distinct approaches. We have therefore just published new factsheets comparing and contrasting the typical features of shared equity and shared ownership schemes.
In essence, both types of scheme lower the initial cost of home-ownership, while offering the potential for the borrower to own the property fully in the long run. Each has its attractions, and is supported by lenders. And each type of scheme has pros and cons for borrowers, lenders and policymakers.
The shared equity option operates in the new-build market and enables the borrower to buy with the help of an equity loan covering part of the value of the property. Buyers typically provide a deposit of at least 5% of purchase price, and fund the remainder through a combination of a mortgage, usually for a minimum of 75% of the value of the property, and an equity loan of up to 20%.
At the end of the mortgage term, the equity loan must be re-paid in full (although it can be paid off earlier). The amount paid back is the proportion of the property’s value covered by the initial equity loan, so a 20% loan requires a repayment of 20% of the property’s value. In money terms, it may be higher or lower than the amount originally borrowed depending on whether the value of property has risen or fallen in the intervening period.
The first limb of the government’s Help to Buy initiative, launched in April 2013, involved a 20% equity loan, although there had previously been similar schemes, sometimes designed and offered directly by developers themselves. As a consequence of the launch of Help to Buy equity loan, however, some of these earlier schemes have now closed.
Government figures released last week show that more than 19,000 borrowers have so far bought homes through the Help to Buy equity loan scheme. Those purchases have been spread across the UK, with 87% being completed by first-time buyers. The government now intends to extend the equity loan element of Help to Buy until 2020, opening it up to what it hopes will be an additional 120,000 households. Overall, this part of Help to Buy could help finance 200,000 transactions.
Buying under a shared ownership scheme usually involves purchasing a share of between 25% and 75% of the property, with a deposit of at least 5% of the share being purchased. The buyer also pays rent, usually at a lower than market rate, to a local authority or housing association landlord that continues to own the proportion of the property not covered by the mortgage and the borrower’s deposit.
Over time, buyers have the opportunity to increase the share of the property they own, either by borrowing more from the lender and increasing the size of their mortgage or by making a cash payment – a process known as "staircasing". Ultimately, borrowers may staircase to full ownership of the property, although in practice they may not be able to afford this. The key features of shared equity and shared ownership schemes are summarised, and can be compared, in Table One.
Table One: Shared equity and shared ownership: typical features – at a glance
|Shared equity||Shared ownership|
|Initial share of ownership||100%||Less than 100%|
|Tenure||Freehold and leasehold||Leasehold only|
Open to all, including movers.
First-time buyers only.
|Minimum buyer deposit||5% of full purchase price||5% of share being purchased|
|Mortgage requirement||A minimum of 75%||Between 25% and 75% of the property value|
|Equity loan||Up to 20%||
|Buy-out of equity loan||
In part or in full at any time during the mortgage period, or in full at the end of the term or on the sale of the property
|Cost of buying out equity loan||
Valuation and legal fees. Price paid reflects property value at the time.
|Rent to landlord||n/a||Payable on share not owned by borrower|
|Buy-out of landlord||n/a||Purchase of more shares, up to 100%|
|Cost of buying out landlord||n/a||
Valuation and legal fees fpr each new share purchased.
|Costs and other outgoings||
Service charge and ground rent for leasehold properties.
Maximum price caps and income multiples.
Normally a maximum income (£60,000 outside London; £60,000-£80,000 inside London).
The characteristics of the two types of scheme, outlined in Table One, mean that there are pros and cons to each for buyers and for lenders. Choosing the best option will depend on the buyer’s circumstances. The main advantages and disadvantages are summarised in the infographics below.
Whichever scheme is chosen, one of the main advantages for buyers in the short term is that they get greater purchasing power for the size of their deposit without having to bear from the outset the full cost of a mortgage on the rest of the property. It can enable them to take out a mortgage that is affordable and gain the benefits of home-ownership, instead of delaying their purchase while they save a bigger deposit. But there are, of course, costs in the future in repaying the equity loan or for shared ownership borrowers who want to increase the size of the share they own at a later date.
A particular advantage of the Help to Buy scheme is that the equity loan does not have to be repaid until the end of the mortgage term, although borrowers have to pay interest on the equity loan after five years. Borrowers are also able to remortgage without repaying the equity loan, enabling them to shop around between lenders for better rates and deals.
Help to Buy shared equity mortgages are readily available, with many lenders offering a range of mortgages that are broadly similar to those for customers with a much larger (25%) deposit. It is possible, however, that the overall cost to the customer is higher than for a standard mortgage with a larger deposit, because the value of the equity to be repaid will increase if the value of the property prices rises.
An advantage of shared ownership is that it can open owner-occupation to households with lower incomes than might be required for a shared equity option. Such households then enjoy the security and permanence of home-ownership. And additional shares can be bought as the buyer is able to afford them.
Issues for lenders – and policymakers
The pros and cons of shared equity and shared ownership schemes mean that there are options for different borrowers in different circumstances. A key underlying principle for both types of scheme should be that they widen access to home-ownership, but only where it is sustainable.
More generally, there is a range of issues for policymakers in devising shared equity and shared ownership schemes, and for lenders in deciding whether to work with them:
- A multiplicity of schemes – and differences between them – can make it unnecessarily complicated for lenders to participate. Within regulatory limits, lenders are free to set their own eligibility requirements, but generally find it more difficult to deal with the complexity of different types of scheme. Sometimes there are variants on standard schemes that are aimed at different groups of customers, perhaps with options for older or disabled people. There are also variations of the Help to Buy shared equity scheme in England, Scotland and Wales.
- Restrictive covenants are another potential source of complexity, which makes it more difficult for lenders to participate. Some shared ownership schemes require owners to live or work locally. That can make properties more difficult to sell, and lenders more reluctant to offer a mortgage.
It is often simpler for lenders to support shared equity than shared ownership as it operates more like a standard mortgage. Where lenders support shared ownership, they prefer schemes that operate on a standard lease. Any departure from this may take a scheme outside the scope of a firm’s lending policy. A similar problem may arise with innovations that are intended to encourage greater uptake, but may end up having the opposite effect. Measures like offering ownership stakes of less than 25%, for example, or seeking to combine shared ownership with Right to Buy may be well intentioned, but are sometimes introduced without heed to lenders’ requirements or concerns.
- Lenders have to hold capital against the loans they advance, and measures that raise the cost of doing so may affect their willingness to participate in different schemes. Prudential Regulation Authority requirements that mean that lenders have to hold more capital for a shared ownership loan than for a shared equity option may deter them from participating.
- In the small number of cases where buyers cannot meet their mortgage payments and the lender has to seek possession, the firm can only claim against the mortgaged share of the property under shared ownership, whereas under shared equity schemes the lender has first charge over the whole property. Under the Help to Buy scheme, the lender’s advance is protected by the equity loan. With shared ownership, a clause in the standard lease is intended to safeguard the additional costs to the lender. But variations to the lease can be a problem with some landlords, particularly in how they treat rent arrears on the share of the property not covered by the mortgage.
- Policymakers will also take into account the cost of public funding for measures seeking to extend home-ownership. Housing associations generally support shared ownership because they believe it is a more cost effective option for them of promoting owner-occupation.
- Another issue is the effect of schemes on housing supply. One of the key aims of the Help to Buy equity loan is to increase the supply of new homes, but it is difficult to assess the extent to which housing construction has increased as a result.
Both shared equity and shared ownership have their place in the range of options for borrowers and lenders. Each can help widen access to sustainable home-ownership, which remains overwhelmingly the tenure of choice.
Firms are free to devise their own lending policies and decide for themselves whether or not to lend within shared ownership or shared equity options. Lender participation is, of course, crucial to the success of these schemes. We therefore urge policymakers to take into account lenders’ concerns, and we remain ready to work with the government, housing authorities and firms to deliver the best possible outcomes.