Shared Ownership Right to Buy Mortgages

Housing Association Right to Buy

In September 2019 it was announced by the government that all housing association tenants would be given a “right to buy” their homes.  This is the latest in a long line of housing policies designed to help those on lower incomes to make their way into home ownership.

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What is Right to Buy?

The Right to Buy scheme has been in place for many years, until recently this has purely been designed for council tenants to purchase their property in full at a heavily discounted price. Provided a tenant has rented from the council for three to five years, it may be possible to obtain a discount of 35% of the open market value of the property. For tenants looking to purchase their house, after 5 years the discount goes up by 1% every extra year you’ve been a council tenant. For tenants looking to purchase their flat, after 5 years the discount goes up by 2% every extra year you’ve been a council tenant.

The maximum discounts on both houses and flats is 70% of open market value, or £82,800 across England. With exceptions in London boroughs, where it’s £110,500. This figure increases each year in April coinciding with the consumer price index (CPI).

What is a Housing Association?

Housing associations are generally classified by the property industry as “registered social landlords”.  Broadly speaking, a Housing Association is a not-for-profit organisation which owns, lets and manages housing. As a not-for-profit organisation, all funds that are raised via rent are used for the further acquisition of properties and maintenance of existing properties.

Housing associations are often but not always registered charities.  Some have a particular target audience that they aim to help such as, older or disabled people. Rent is usually provided at a discount although the level of discount can often vary. Properties owned by a housing association are more commonly known as “social housing”, which generally consists of government-owned council housing and other affordable accommodation.

Who is their accommodation for?

Everybody. There is not one particular group which social housing is generally targeted at although, the whole concept of social housing was developed in order to help make accommodation available and affordable for all. Recently those in the lower-income brackets or those deemed to be of a more vulnerable nature (such as the elderly or those with a disability) have been viewed as the most in need of social housing. However, with the increasing house prices over the last few decades, housing association properties, both for ownership and rental schemes increasingly offer an opportunity for younger people to find a home in a desirable area.

As the number of council rented properties reduces, housing association is often utilised to provide more affordable housing for rental purposes. Many tenants are referred to a housing association via their local authority, especially if the initial application for a council rental is not successful either through lack of supply or not meeting certain criteria.

What type of schemes do Housing Associations offer?

Typically, a Housing Association will assist by either offering a property at a discounted rent to the full market value, or by supporting a buyer to purchase a property on a shared ownership basis.  Shared ownership works by allowing an individual or individuals to purchase a percentage of the property.  For example, if the full market value of a property was £200,000 and the share available to purchase was 50% then the purchaser would need to raise the funds to purchase for £100,000.  This can be via a shared ownership mortgage with a deposit (with lenders often being able to accept as little as 5% of the value of the share being purchased) or via a cash purchase.  Rent would then be paid to the Housing Association for the remaining share of the property which is not being purchased, often at a reduced rate to full market value.

How does this new scheme work?

What this new scheme aims to achieve is to help those who rent through a registered Housing Association to join Local Authority tenants in being able to purchase a percentage of their property.  Under the plans, those tenants living in new housing association properties will gain the automatic right to purchase a share of their property from as little as 10% of its value.  They will also have the right to buy a larger share of the property in the future so that over time full ownership of the property can be obtained. It is hoped that a suitable offering can be made for those living in existing Housing Association properties, with the government keen to work with housing associations so the new Right to Shared Ownership is offered to as many people as possible.

In an example given by the government when the details of the scheme were first released, a housing association tenant renting a property worth £200,000 could buy an initial 10% share in the property for £20,000, whilst continuing to pay a subsidised rent on the remaining 90% of the property. The intention is for it to be possible to fund the purchase of the 10% share by obtaining a mortgage, such as a 90% mortgage (£18,000) with a 10% (£2,000) deposit.  It is hoped that these figures would offer those on lower incomes the ability to purchase a property which may otherwise prove to be unaffordable.

What about existing schemes?

The government announcement also outlined additional measures aimed at making all shared ownership homes more affordable. To achieve this the minimum initial stake required to purchase property is to be reduced from 25% to 10% meaning that smaller mortgages and lower deposits would be required to fund the purchase.  Additionally, the new rules would allow further shares in the property to be purchased in increments of 1%, instead of the 10% currently required.  A reduction in the fees charged for these incremental purchases is also outlined.