First step on the property ladder: Help to Buy or shared ownership in London — the pros and cons for first time buyers

AVAILABILITY AND LOCATION

Help to Buy: developers are increasingly adopting Help to Buy to shift homes, particularly in outer London boroughs.

The scheme, five years old this month, has so far doled out more than £1 billion in equity loans to London homebuyers.

Latest data flags up West Wickham, near Croydon, as a Help to Buy hotspot. Some 85 per cent of the new homes sold there in the last two years went to buyers bolstered by a 40 per cent Government equity loan.

“You are likely to have bought in a wholly private block,” says David Galman, sales director of Galliard Homes. “When you are coming to sell you will find this easier than if you are in a shared-ownership block, because there is still a bit of a stigma there.”

Shared ownership: fewer than 7,000 affordable homes were completed across London in the last year, official Government figures show, with more than a third of boroughs offering fewer than 100.

“Affordable” means subsidised rentals as well as shared ownership, and demand far outstrips supply.

Shared-ownership homes can come up anywhere in London, usually concentrated around regeneration zones, such as Elephant & Castle and Canary Wharf.

Debbie Small, sales and marketing director at Hyde New Homes, says shared-ownership schemes tend to be oversubscribed and buyers need to be quick off the mark.

“It’s best to be registered ahead of the scheme launch date so you get to see the new homes as soon as they become available,” she adds.

ELIGIBILITY

Help to Buy: first-time buyers can get Help to Buy, as well as homeowners looking to move. No restriction is placed on earnings, or where you currently live, so if you want to move to Manchester, fine.

“Help to Buy has really opened up the market to a demographic which otherwise would not have been able to afford to buy,” says James Barton, a partner at Knight Frank in the City and east London.

Shared ownership: anyone with a household income of less than £90,000 (in London) who does not already own a home.

Most schemes give priority to those already living and working in the local area. “If the local demand is there, we should be doing what we can to keep those communities intact,” said Kush Rawal, commercial director of Thames Valley Housing.

Hyde New Homes research found the average shared-ownership buyer is 35 with a household income of £43,848. Women outnumber men by 60 per cent to 40 per cent.

ENTRY COSTS

Help to Buy: a minimum five per cent deposit. If you bought a £600,000 home, the maximum allowed under the scheme, you would need £30,000.

Shared ownership: 10 per cent of the share of the property you buy. So if you bought 25 per cent of a £600,000 property, the deposit would be £15,000 — ie 10 per cent of £150,000.

MORTGAGES

Help to Buy: a five per cent deposit plus a 40 per cent Government loan leaves a mortgage requirement of 55 per cent — or £330,000 on a £600,000 home.

Most lenders will still allow about three-and-a-half times annual income. So to borrow £330,000 you would need a household income of about £94,000.

Shared ownership: you only need to pay for the proportion of the property you buy, which in London nowadays is usually 25 per cent. For a £600,000 property this would mean raising £150,000 minus your 10 per cent deposit.

This puts shared ownership well within reach of someone with an income of £38,500. And because you are only buying a proportion of a property, you are likely to fall below the £300,000 stamp duty exemption level and pay no tax.

RUNNING COSTS

Help to Buy: for the first five years you simply pay your monthly mortgage and service charge.

Knight Frank’s James Barton points out that buyers with a five per cent deposit will likely end up paying higher interest rates than those with bigger deposits.

“But with the shared-ownership model you have got only a certain selection of lenders to look at,” he added. “With Help to Buy it is a 100 per cent private sale, so there is more choice.”

Shared ownership: you repay your mortgage, and also pay rent to the housing association for the proportion of the home you don’t own.

Though you only own a share of the property you pay full service charge — and these have been increasing in recent years — plus council tax.

This tends to work out slightly more expensive than being an outright owner, but housing associations deliberately make costs less than renting an equivalent new-build property in the same area.

Thames Valley Housing’s Kush Rawal says housing associations control monthly costs when setting their rent levels, and study mortgage costs on a scheme by scheme basis.

The more expensive the scheme, the lower the rent, because associations have to keep prices affordable to those earning a maximum of £90,000.

EXIT STRATEGY

Help to Buy: you can sell on the open market whenever you like. You pay no interest or fees on the government equity loan for the first five years, so in that period you only have to worry about your mortgage.

However, in the sixth year you will be charged 1.75 per cent of the loan amount. So if you had borrowed the maximum £240,000 — that’s 40 per cent of the maximum property value of £600,000 — you’d have to find an extra £350 a month.

In year six the fee rises by inflation based on the Retail Prices Index plus one per cent each year. Last year’s RPI was 2.8 per cent, so this is not to be sniffed at.

Your costs will really start to stack up after five years, and not everybody is going to be able to afford to stay put.

And these fees do not go towards paying off the government loan. When you sell you repay the equity loan plus a share of any increase in the value, leaving you with your original stake plus any profit “earned” on your portion of the property.

If you can’t sell you could be really stuck. “More people bought in the second year of Help to Buy than in the first,” says James Barton. “It will therefore be April next year when we see how people deal with the extra payments.”

Both Barton and Galliard’s David Galman suspect that whatever the challenges, most buyers will find a way. “You are going to see a bit of remortgaging going on. People will pay the Government off or at least reduce the loan in that way,” says Galman.

“We have not seen a flood of homes on the market as yet. I think people will find a way to pay it off.”

Shared ownership: you can stay as long as you like, but your rent does increase annually. If you want to sell, your property will be independently valued.

Then, for between six and eight weeks — different housing associations have different rules — the flat will be marketed at this price to people registered with the housing association.

If nobody bites, you can then sell on the open market using an estate agent. When it sells you get your proportion of any profits plus your original deposit back.

As an alternative and if property prices go up, buyers can remortgage and increase their stake in the flat, in a procedure known as staircasing, eventually buying out the housing association altogether.

“The vast majority — 90 per cent or more — of our shared owners move on to full ownership,” says Kush Rawal.

THE VERDICT

It’s horses for courses, but shared ownership is cheaper to get into and more secure in the long term, so it’s great for risk-averse, low to medium earners.

Help to Buy offers more flexibility in terms of where and what you can buy, and is also likely to be cheaper month to month — although you need a bigger mortgage and therefore a bigger income to get started.

Moving on from shared ownership is a well-trodden and largely successful path. But for Help to Buyers there is a big question mark over affordability once the Government loan repayments kick in and it is payback time.

No doubt some will be forced to sell but their home could have made a healthy profit.