Shared-ownership mortgages: Niche but on the increase

Shared-ownership mortgages: Niche but on the increase

UK consumers’ aspirations to own their own home remains as strong as ever, according to a Council of Mortgage Lenders (CML) survey, but there is also an increasing awareness of how difficult it is to fulfil that aspiration. 

According to the survey, 72 per cent of adults want to be homeowners in two years’ time. However, two thirds of those believe that such an outcome will be very unlikely.

The survey referred to “a strong consensus” that it is “very difficult, or the hardest it has ever been, for young households to get on the housing ladder”. Not surprisingly, cost was at the top of the list of reasons. 

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Figures from the Department of Communities and Local Government suggest that homeownership in the UK, which is widely acknowledged to be in decline, peaked at just less than 70 per cent in the early 2000s. 

In a reflection of consumers’ aspirations to own their own homes, over the past few years government-backed initiatives have clearly switched from supporting those in the rental market – with greater emphasis on the private rental market and fewer subsidies – to helping would-be homeowners to buy. Schemes such as Help to Buy, for example, appear to have helped boost the number of first-time buyers (FTBs).

FTBs on the rise again

The stricter criteria of the Mortgage Market Review regime have changed the shape of the market and hampered some first-time buyers (FTBs). Nevertheless, there has been a gradual rise in the availability of higher loan-to-value (LTV) deals. At the peak of the market, there were around 500,000 FTBs a year. Figures tailed off after the credit crunch, but are beginning to rise again from around 72,000 in 2009.

The Halifax estimates that the number of FTBs in the first half of 2016 was around 154,000.

Shared ownership initiatives are also on the rise. In autumn 2015, then-chancellor George Osborne unveiled a range of housing initiatives, including a pledge to build 135,000 homes under a new shared ownership scheme.

Typically, shared ownership involves a buyer purchasing between 25 per cent and 75 per cent of their home, while the remaining share is retained by a housing provider – usually a housing association. The buyer pays a mortgage on the part they own and pays rent on the part belonging to the provider.

Changes have made the sector more attractive to lenders. New shared ownership schemes no longer give local authorities and housing associations the right to prioritise certain groups of people, with the exception of military personnel, and income restrictions have been relaxed, meaning any household with income under £80,000 pa (£90,000 in London) is eligible.

Another other big change has been the introduction of the mortgagee protection clause, which protects the lender’s interests in the event of default. If the sale price of the property does not cover the value of the outstanding mortgage and the housing association’s share, the lender is repaid first, with the association receiving anything that may be left over.

Capital weighting

One sticking point remains that, for capital requirement purposes, the Prudential Regulation Authority requires lenders to calculate the LTV ratio on the buyer’s share of the property only. Shared ownership lending is effectively non-prime, 100 per cent lending, giving it a higher capital weighting and making it more expensive for, and less attractive to, lenders.