Purchasing a Shared Ownership Property

With the credit crunch obliging many lenders to make the criteria for borrowing more restrictive, first-time buyers are facing a new hurdle to overcome this month (September 2007). But in looking further afield for a way to get onto the property ladder, they will undoubtedly unearth a number of different schemes designed to help borrowers get a foot onto the property ladder.

According to Savills residential research director Jim Ward, current market conditions will make the likes of shared ownership mortgages more popular.

"It's a more sensible way of getting in, rather than taking on a mortgage that's too big for you," Ward comments.

However, there remain a number of variables to look at when considering taking out a shared ownership mortgage, relating to both the types of deal available and the potential pitfalls to be aware of.

Shared ownership schemes essentially involve buying a share in the property and renting the rest from a landlord or housing association - typically buyers purchase between a quarter and three quarters of the property themselves and rent the rest.

The government's HomeBuy scheme remains the most obvious path to shared ownership but even this is divided into two main sections - New Build HomeBuy and Open Market HomeBuy. The first option sees a buyer purchase a share of a property from a housing association and pay rent on the rest.

Open Market HomeBuy, meanwhile, extends the scheme to any property, and provides buyers with two equity loans worth roughly 12.5 per cent of your home courtesy of your mortgage lender and the government itself.

A third scheme, launched just a couple of months ago, provides either £50,000 or 17.5 per cent of the home's value via a single government loan. There is no interest on the government loans, but a buyer will have to share any increase in value when they eventually pay the money back to both the lender and the state.

This third scheme has been introduced in an attempt to encourage more first-time buyers to join - take up has been limited to just 80,000 since 1997, according to the Mortgage Introducer - and also allows applicants to purchase the rest of the property whenever they can afford to do so.

Criteria for entry can be quite strict, however, and you will need to be either a council house or housing association tenant, key worker or on a preferred list of prospective first-time buyers to qualify.

Other things to look out for if opting for New Build HomeBuy is the belief in some quarters that new builds don't retain their value, with Naomi Heaton of the London Central Portfolio having asserted recently that new builds are often sold at over-inflated prices before ultimately falling below the market level in terms of value.

But if those options don't work out then there's always the potential to look at schemes offered by developers or building societies, though these will usually be quite similar. There are so many shared equity options available that it's important to seek out mortgage advice in order to be sure you're opting for the best deal for your specific circumstances.

Another reason for seeking mortgage advice would be to avoid confusion over related terms, such as shared appreciation mortgages. Mortgages Exposed advises that this type of product usually sees a lender advance a buyer 25 per cent of the property value, in return for 75 per cent of the appreciation of the property once the buyer has moved on.

One of the reasons why shared ownership schemes have seen limited popularity is due to a lack of publicity, but another problem is rising house prices. Higher prices make it difficult for borrowers to ever purchase their home outright, but current market conditions seem to be more favourable, with prices now widely considered to be stabilising if not falling. Prices will rise again in 2008, analysts predict, but at a steadier pace than before, potentially making shared ownership schemes more attractive to first time buyers.