With the current, changeable, property market, it is becoming increasingly more difficult to get onto the property ladder, either as a first time buyer, an investor looking for a quick turnaround, or even a long term property investment. With the effects of the economic downturn and the ‘’credit crunch’’ still being felt, more and more potential buyers are being squeezed and are finding themselves unable to secure the mortgages necessary to purchase a property, or even raise the larger deposits that now required to secure them. It seems that unless you have ready capital, are able to access a substantial deposit, or can obtain a mortgage under the stricter terms lenders are now operating, the chances of buying a property are exceedingly slender. With property prices tripling since 1996, the rise has far surpassed that of the ordinary wage. Research figures from the BBC suggest that the average age for a first time buyer is now 33 and he/she will likely have saved for almost 5 years to acquire their deposit. As many as 4 in 10 first time buyers now rely on financial assistance from their parents, just to break into the market.
So is there a case to be made for buying property as a Co-owner?
Whilst you may not like the idea of someone else owning a share of your property, thereby having a say on what happens in and to it, there is an argument to be made that, in some cases, Co-ownership does have a place in the property market today. As with everything it comes with benefits and potential drawbacks. Whilst is can prove to be the solution for some, Co-ownership should only be entered into after thorough research, and serious consideration. Getting it wrong could mean disaster, which is costly to get out of.
What exactly is Co-Ownership?
Okay, so you have seen the adverts and heard people talking about Co-ownership, but what does it actually mean? In a nutshell, it means you either buy the property with other investors (family, friends etc), each of you owning a percentage (share) of the property. This is commonly referred to as Joint Ownership.
Alternatively, you buy a percentage (share) of the property, and rent the remaining shares. This is what is frequently termed Shared Ownership and involves you obtaining a normal mortgage for, say 50%, plus paying rent to a housing association or financial institution for the remaining shares. This scheme allows you to purchase anything from 25% up to 75% of the property and does have the added advantage of allowing you the option to buy additional shares as and when you can afford it.
There is also a third option, where (providing you have a 5% deposit and can secure a mortgage of 80%), there are a number of schemes will provide the remaining 20%. This type of ownership is called Share Equity Ownership.
How do I decide which is right for me?
Every case is different and your decision will rest mainly upon your financial situation. Let’s look at each option in turn.
There are significant benefits to purchasing a property with a friend or relative. Costs can be split and a deposit raised more rapidly. If finance is required, a lender may offer co-buyers a bigger mortgage, enabling a larger property or more desirable area than a single applicant. If circumstances allow, the terms of a mortgage can be negotiated to obtain a better deal. And remember, it is not simply the initial outlay that will be shared; all bills and maintenance fees associated with the property will be shared between the owners. It is imperative that you use a good Conveyancer, who will draw up a Formal Agreement at the time of purchase, thus ensuring any disputes can be easily solved.
Whilst this may appear a perfect solution to the would-be buyer who is short on funds, do not assume it is all plain sailing. There may well be additional fees for the Agreement and if one of the buyers wishes to sell their share, it can prove difficult. A solid Agreement drawn up by the Conveyancer at the time of purchase, should encompass most eventualities.
Possibly the most complex, yet pivotal area to get right is what type of Joint Ownership you wish to have. It may sound confusing, but it really is quite straightforward, yet if you get it wrong, you could just end up with a co-owner who you never met, and can’t get along with.
A Joint Tenant simply means that each party has an equal share. If one of the party should die, his shares are immediately transferred to the other shareholders (irrespective of what he/she might have stipulated in a will). This type of agreement is usually made between partners, spouses and people who do not see themselves wanting their share to go to anyone else. It is the most straightforward and uncomplicated option.
Where a property is owned under the Tenants in Common agreement is a little less straightforward.At the time of purchase, the buyers each agree how much they own. If one of them dies, they have the option of leaving their share to a beneficiary (usually set out in a will). This type of arrangement is often chosen by friends, relations or business partner, since it is far easier to divide equity when selling the property.
If you are a novice to the property market, the idea of buying under a Shared Ownership scheme, may seem like a minefield, but with the correct guidance, it can be a relatively painless experience. There are a number of schemes available, but probably the most easily recognisable and (according government statistics published at the beginning of February 2015), the biggest, is Homebuy, which offers buyers a choice of either purchasing a new build, whereby you can only use the funds for a brand new property, or ‘rent to homebuy’, which permits the buyer to rent the property for five years, whilst they save sufficient funds for their deposit. At the end of the 5 year term, they are then able to purchase the property under the ‘newbuild’ scheme.
There is also a third option. Residents who are currently accommodated in social (Council) housing (and are eligible to buy under their Local Authority Regulations), but are still unable to afford the property, can take advantage of the Social Co-ownership scheme.
The major benefit of those adopting the shared ownership route to purchasing a property is financial. The low deposit of around 5% required is attractive to first time buyers and even with Mortgage/ rent combined, it is a more cost effective method than purely renting or having a single mortgage for the entire amount. In addition, whilst you may not be in a position to afford a huge share at the beginning, the option to buy further shares (staircasing) in the future is available and you can sell your shares whenever you choose. Shared ownership can also be coupled with Joint Ownership, making this a viable and affordable opportunity for single buyers. Moreover, if you are renting, the Housing Association or Local Authority is responsible for maintenance and repairs in the same way as if you were a regular Tenant.
Of course there are some drawbacks to these schemes. You cannot simply choose any property you fancy. The selection is limited and may not always be in an area that you would like. There is also no guarantee that the property will not decrease in value. If it does lose value, you lose in the same way as any other buyer. There are additional costs for this kind of purchase, mainly fees associated with the agreements at the outset.
Do not make the mistake of thinking that all lenders cater for Shared Ownership schemes and whilst you have the right to sell your shares at anytime, there will nearly always be rules of exit. You cannot simply approach an Estate Agent – you may have to give the scheme first option to buy your share. Do your homework and engage a good Conveyancer who will help you through what might seem like an insurmountable mountain of red tape.
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