The risk of buying a shared ownership property
While many are benefitting from the government’s Funding for Lending Scheme and Help to Buy, there is an initiative which predates both of these – Shared Ownership.
Shared Ownership enables people to purchase a property by part-buying and part-renting with a housing association, other social landlord or a property developer. The buyer obtains a mortgage for the share of the property they buy (typically 50%) while paying rent to the landlord on the remaining share.
Shared Ownership is often cheaper than paying for a full mortgage on the property as ordinarily the rent is lower than the equivalent mortgage payment. It also helps the buyer struggling to raise a high deposit. The buyer is then able to increase their share of the property until owning it outright through a process known as ‘staircasing’.
However shared ownership can come with its fair share of risks, as the case of Richardson vs. Midland Heart highlighted.
In 1995 Rebecca Richardson acquired a 99 year shared ownership lease of a property from Midland Heart Housing Association paying half its then market value for it and paying rent on the remaining half to the housing association. However when she later fell into rent arrears, the housing association was able to bring possession proceedings which not only saw her evicted from her home but also left her with no legal right of return of the £29,950 she paid for her share. Although Midland Heart was under no obligation to do so it did, in fact, repay Mrs. Richardson the premium she had originally paid for the lease.
Licensed Conveyancer, John Jones, explains the legal issue:
“Under the current legislation surrounding shared ownership, the landlord remains the owner of the property until the tenant has purchased the full 100% - even if they don’t own the majority share – as the shared ownership lease is treated as an assured tenancy.
“This means that, under the Housing Act 1988, should the tenant fall into rent arrears of 2 months/ 8 weeks or more the landlord is able to apply for an order of possession and, if necessary, enlist the help of a court bailiff to evict the tenant.
“There is however some protection for tenants,” John continues. “While not applicable in the Richardson case [the tenant did not take out a mortgage for her share], typically the mortgage lender would step in and settle any rent arrears, adding them plus any associated charges to the mortgage loan.
“We understand the growing frustration and impatience of wannabe homeowners. However it is essential that, before committing to a property, the buyer is fully aware of all the financial considerations including future affordability. A mortgage broker or independent financial adviser (IFA) can help explain all of this. It is also essential that anyone looking to take out a shared ownership lease fully appreciates the legal implications of doing so by taking expert advice from a specialist property lawyer so as to ensure home remains home sweet home.”
Content correct at time of publication