Fractional Ownership Mortgage Clarification – Forbes UK Advisor

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If you’re struggling to amass a deposit big enough to get on the real estate ladder – or the numbers just don’t add up when it comes to what you can afford – a co-ownership scheme may be an option.

Here’s everything you need to know about how fractional ownership mortgages work, including how to get one.

What is shared ownership?

You need a fractional ownership mortgage if you are buying a home with a fractional ownership scheme.

The scheme helps new buyers or those on lower incomes buy a house (or move up the real estate ladder) by buying only part of the property, not all of it.

Buyers only need small deposit to get a fractional ownership mortgage and increase your ownership interest over time.

How does cross-ownership work?

Fractional mortgages offer new buyers an affordable way to buy a home, which is why this scheme can also be called “part lease, part buy”.

Traditionally, buyers could purchase between 25% and 75% of a property by taking out a fractional ownership mortgage to cover that amount.

But after changing the rules of shared ownership in April 2021, the minimum share you can buy is now just 10%. However, you are usually encouraged to buy a larger share if you can afford it.

The remainder of the property (the part that the buyer does not own) belongs to the housing association. The rent is then paid to the housing association to cover that amount.

Rental rates are usually lower than on the open market – usually around 2.75% of the value of the property per year.

Here’s an example. If you buy a 25% property worth £ 200,000 it will cost £ 50,000 and you will take out a mortgage for that amount.

The Housing Association will own the remaining £ 150,000 from which the rent will be paid. At a rate of 2.75%, the rent would be £ 4,125 per year or £ 343.75 per month.

To get a fractional ownership mortgage, a deposit of only 5% or 10% of the purchased share. So, if your share were worth £ 50,000, you would only need to invest between £ 2,500 and £ 5,000.

What kind of property can I buy?

You will not be able to use shared ownership to buy a home that is being sold on the open market. This should be a purpose-built fractional ownership property, most of which are newly built.

Alternatively, you can buy a property that was originally purchased under a shared ownership scheme that is now being resold by a housing association.

Fractional property is always leased, which invariably means there will be an annual maintenance fee and land rent. However, this is true of rental properties in general, whether they fall under this scheme or not.

What is a ladder?

Co-ownership schemes give you the ability to buy a large share of your home from a housing association at any time. This is called the “ladder,” and after the April rule change, you can now buy additional shares in installments for as little as 1%, up from the previous 10%.

You can usually keep doing this until you own 100% of the property. However, some housing associations limit the number of stair climbs to three, so you need to plan carefully.

The value of the next share you buy will depend on the market value of your home at the moment. The assessment will be carried out by the Housing Association’s own surveyor team – and will be charged.

Who is eligible?

You can buy a shared home if your family earns £ 80,000 a year or less, or £ 90,000 a year or less if you live in London.

Any of the following should also apply:

  • you are buying for the first time
  • you used to have a house, but now you cannot buy it
  • you are the existing common owner.

If you are 55 or older, you can buy up to 75% of your home under the Senior Shared Ownership (OPSO) scheme. If you own 75% of the property, there is no rent.

If you have a long-term disability and other property assistance programs do not meet your needs, you can apply for a scheme called Long-Term Disability Home Ownership (HOLD). This allows you to buy up to 25% of your home.

How do I apply for cross-ownership?

To buy a fractional home home, you first need to contact Help buy agent in the area in which you want to live.

As part of your application, you will likely be asked about your income and whether you have had any problems repaying the loan in the past.

What about developers?

While most of the shared ownership schemes are run by housing associations, some major developers offer shared ownership schemes as well.

Both Barratt Homes and Bovis Homes, for example, have partnered with the government-backed Home Reach fractional ownership scheme.

This allows you to buy a 50% to 75% stake in the new building, with the remainder owned by the landlord Heilo.

An annual rent of 2.75% of the unsold value is then paid to heylo in monthly direct debit.

Who offers equity mortgages?

Once you have registered as fractional ownership, you can begin your search for properties for sale under this scheme. The next step is to find a fractional ownership mortgage.

The choice is more limited than buying on the open market, but not overly.

Many large large lenders offer fractional ownership mortgages within their standard range of first-time buyers, while some of the smaller building societies have their own specific fractional ownership deals based on a regional level.

Some lenders offering fractional ownership mortgages include:

  • Barclays
  • Leeds Building Society
  • Lloyds bank
  • Halifax
  • Virgin money
  • Skipton Building Society
  • Newbury Building Society
  • Loughborough Building Society
  • Ipswich Building Society.

Whichever lender you choose, you will go through the same process as if you were applying for a mortgage outside of a fractional ownership scheme.

This means that your income and expenses (including housing association rent and maintenance fees) will be scrutinized, as will your credit score. As always, the better your credit score, the more likely you are to be accepted at the best rates.

Can I sell a shared home?

If you still only own part of your home, the Housing Association has the right to buy it out first — this is called a “first waiver”. The Housing Association also has the right to find a buyer for your property.

Only when you own 100% of the home can you sell it yourself.

Co-ownership in Scotland

Fractional ownership rules in Scotland are slightly different.

You will be able to buy 25%, 50% or 75% of the shares in a house or apartment owned by a housing association, usually in a new building.

You then pay a reduced rent for the portion of the house that you do not own, and after a year you have the option to purchase additional shares until you acquire the entire home.

Priority is usually given to residents of municipalities and housing associations, as well as to those on the waiting list of the council or housing association. While private tenants can apply, they tend to be limited to new buyers only.

To inquire about fractional ownership schemes in your area, contact your housing department. local council or your local housing association.

Joint ownership in Northern Ireland

In Northern Ireland you can buy a share of the property and rent the rest from Joint ownership, a registered housing association.

Under this scheme, you can buy property in a new building worth up to £ 165,000 as a co-owner.

Initially, you can buy from 50% to 90% of the property value, but you can increase your share at any time in 5% increments.

The Department of Community Affairs (DfC) sets rent and any annual rent increases.

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