A problem shared

Home-owners know how painful an increase in the mortgage rate can be, and May’s rise was the fourth in 10 months. But shared owners are usually better placed to withstand these rises. It is not just that they have smaller mortgages. Their other main outgoing, rent, is strictly regulated so that it cannot bring sudden unmanageable burdens.

May’s base-rate increase of 0.25 per cent was not a surprise, given that inflation is running way above target at 2.5 per cent. Nevertheless, it is hard for cash-strapped home-owners to budget for. The interest rate on an average repayment mortgage has risen from 5.48 per cent to 5.73 per cent, adding £42 to the £1,240 monthly repayments on a £200,000 loan.

Most first-time buyers, including shared owners, opt for fixed-rate mortgages to protect themselves against these rises.

But this protection often lasts only two to three years. Home-owners with fixed-rate deals nearing their end will soon face higher repayments. Obviously, shared owners face these rises, too. But if you only own 25 per cent or 50 per cent of your home, their impact is less. And, while the Bank of England reviews interest rates every month, the rent shared owners pay on the percentage of their home they do not own is guaranteed to rise only once a year.

Rent reviews

Rents are capped by the Housing Corporation for the first year at three per cent of the value of the unsold equity.

According to Olivia Powis of the London Housing Federation, which represents the capital’s housing associations: “Most are set lower, between 2.5 per cent and 2.75 per cent.” Rent cannot rise arbitrarily. The lease will tell owners exactly when to expect a review. And the actual increase is pegged to the Retail Price Index plus 0.5 per cent.

According to the Housing Corporation, this year’s rises are in line with the September 2006 RPI of 3.6 per cent. Jim Munson of Metropolitan Home Ownership agrees that regulated subsidised rents make the outgoings for shared owners “more reliable and predictable”.

Using data from property researcher Hometrack, he compares the weekly costs of owning 25 per cent of one of the £215,000 two-bedroom New Build HomeBuy flats in Metropolitan’s latest development, Methven Court, Edmonton, with buying a similar property on a 90 per cent mortgage in the private market or renting privately.

Munson’s figures (based on a 6.5 per cent mortgage rate) show that while the private home-owner pays £226 a week and the private renter £196, the shared owner pays only £184 — nearly 20 per cent less than the private buyer. And Munson adds that the care housing associations take in assessing the finances of potential shared owners prevents them from over-extending themselves — mortgages of five- or six-times earnings are out.

Staircase down

Of course, if your earnings do not keep pace with inflation, you may still have problems, even with shared ownership. Nurses and other key health workers are up in arms about a pay rise of 1.9 per cent, which does not equip them to cope either with higher mortgage rates or rent rises based on a 3.9 per cent RPI. Says the Royal College of Nursing’s Bernell Bussue: “Shared-ownership accommodation is often not a solution to the high cost of living in London.”

But the London Housing Federation’s Powis points out that, if shared owners do get into difficulties, some housing associations will let them “staircase down” — reducing the portion of their home that they own — something not available from mortgage lenders. On the open market, you would simply be forced to sell up or face repossession if you couldn't keep up with repayments.

‘It is so much better than having to pay off a mortgage’

Local government worker Kevin McCutcheon bought a 30 per cent share of his two-bedroom flat in Peckham a little more than two years ago, when the Metropolitan Home Ownership property was valued at £195,000.

He borrowed the full £58,500 for his share at 5.29 per cent on a fixed-rate mortgage, a two-year deal that ended in March.

The new rate is 6.69 per cent, but he is shielded from interest-rate rises, such as this month’s, for another two years. “Because my mortgage is relatively low,” he says, “I can live with a higher percentage and it’s not punitive.

“The Government subsidises the rent. Obviously if inflation races ahead, that affects the RPI. But it’s still much better than having to pay off a mortgage. And they notify you well in advance of any increases.”

Where to get help

* Tower Homes: 0800 056 3601; www.towerhomes.org.uk
* Metropolitan Home Ownership: 020 8920 7777; www.mho.co.uk
* For more information about these and other shared-ownership homes, visit www.housingoptions.co.uk