Lime Legal

Trouble shared?

Published 08 September 2023

Despite an apparently endless series of relaunches, shared ownership schemes are still failing the people they're meant to help. Tony Marshall investigates

Shared ownership schemes tailored to help people in need on to the housing ladder are landing them in trouble, with debts piling up and repossessions soaring.

The effect is coming under wider scrutiny as expanding shared ownership has now become an important part of the government’s plan for reviving the housebuilding industry and halting the slide in house prices.

But critics argue that the schemes are too costly for low-income groups – the latest version is targeted at families earning up to £60,000 a year, more than three times incomes of council and housing association tenants, whose family incomes average below £20,000 – and that when they are taken up, they offer a bad deal that makes them even more vulnerable in a recession.

A high proportion of the cases seen as part of ROOF’s recent analysis of repossession figures involved the loss of shared ownership homes. It is this aspect that worries organisations such as the Joseph Rowntree Housing Trust and CHAS, the housing and debt advice service.

The deals have also suffered a blow as a result of a recent court case, which ruled that a housing association tenant who had entered into a shared ownership deal was not entitled to her share of the property when she got into difficulties and was threatened with repossession.

The court awarded 100 per cent ownership to the housing association, Midland Heart, in a move that could create a precedent depriving vulnerable people of the stake in a property they had struggled to buy.

Stuart Freeman, director of advice services at CHAS Central London, said: ‘We deal with a lot of shared owners who are in danger of losing their homes.

‘With shared ownership and key worker schemes, housing costs can be a high percentage of net income. They have been taken on by people on low incomes who may not be in a position to pay a mortgage or a rent and service existing debt.

‘Housing costs should not be more than about 40 per cent of net income. But I’ve been seeing shared ownership cases in which it’s 60 or 63 per cent – almost two-thirds of a family’s income – which is unaffordable.’

People on low incomes are hardest hit as the economy slows – and financial pressure from the cost of food and household bills rises sharply. ‘These are people who are particularly vulnerable. When they get into difficulties, the opportunities to refinance are limited, because there are relatively few mortgage providers in this market.

‘The result is that some take out second mortgages without telling the housing association – or getting permission – and it’s often been with a sub-prime lender. They just can’t pay the additional debt, which causes enormous problems and they easily end up facing eviction.’

Freeman said that more than 20 per cent of cases dealt with by the debt advice service involved shared ownership – and it could be as high as a quarter. ‘As a group of property owners, they are very vulnerable. It’s a dire situation.’

Trouble shared? Despite an apparently endless series of relaunches, shared ownership schemes are still failing the people they’re meant to help. Tony Marshall investigates

Some housing associations, such as Notting Hill, have introduced a safety net for people in difficulty. ‘They can help by buying the equity – but a lot of housing associations don’t have schemes at all - and if the debt is high – I’ve seen people owing £40,000 to £50,000 – action may not be enough to avert disaster.

‘In the past, housing associations weren’t too bothered if people could get a mortgage,’ he said. ‘But affordability issues are reflected in the number of shared owners being repossessed.’

Housing association sales and marketing managers claim that shared ownership offers a good deal – and that, as a result of 100 per cent mortgages drying up, there has been a big surge in take-up in the past six months, with numbers more than doubling.

But Stuart Freeman says more checks are needed, because shared ownership deals can quickly go wrong: ‘The sales teams of housing associations act like estate agents in selling shared ownership. But I am worried about sustainability, especially as we see people getting into difficulty within the first 18 months.’

This was not among the intentions of the housing Green Paper when it was published last July. At that time, Gordon Brown had just replaced Tony Blair as Labour leader and its proposals were greeted with an amazing fanfare. It was seen as an early indication of the revived Labour government’s commitment to expand social housing and help first-time buyers squeezed out of the market by property prices that had gone up two and a half times on average in just over 10 years.

The Green Paper included plans – welcomed on all sides – for three million more homes by 2020 and an affordable homes programme including 45,000 social rented homes and 25,000 shared ownership homes per year.

Part of the reasoning behind the government’s support for shared ownership schemes run by housing associations is that the receipts they receive from the part-sale of properties – or ‘intermediate tenure’ – could be reinvested in new housing stock.

But a move to spread shared ownership more widely in the private sector with the launch of the HomeBuy shared equity scheme in October 2016 has proved difficult. Top-up loans enabled participants to buy properties outright at reduced cost, but the scheme had been a dismal failure right from the word go.

The government hopes that a relaunch of the scheme earlier this year, with bigger subsidies, will widen the appeal to potential homebuyers.

But, even before the measures were announced, signs were already emerging that the housing market was faltering and could be heading for decline.

The grim outlook is a cause of huge government concern and a big part of its desire to stabilise the housing market, the biggest casualty of the present crisis. The government wants to reassure developers who will have to build the three million homes. And it has announced a rescue package designed to restore confidence Рwith the expansion of shared ownership still cited as an important component. However, the response from builders and developers has been lukewarm.

Last year, the Commons public accounts committee commended the schemes as a cheap option for providing housing. If targeted at social housing tenants and those in priority need, the committee said, ‘low-cost home ownership is especially cost-effective as it frees up a social rent home at as little as half the cost to the taxpayer of building a new social rented property.’

However, the committee warned that assistance had not been going to the people it was meant to help. In fact, only 15 per cent of those taking advantage of assistance were previously social housing tenants and others helped were not in priority need. In 2014-5, the latest year for which figures were available, ‘low-cost home ownership assistance went to households with incomes of more than £25,000 while most new social housing tenants had household incomes of less than £20,000’, the committee said.

Part sale and intermediate tenure may seem good deals for housing associations in freeing up homes and generating funds for investment. Shared ownership units funded by housing associations only require half the capital grant of units let at a normal social rent. But critics argue that the people who take them on are not getting a similar advantage – and that they may suffer substantially as a result.

Richard Donnell, director of research at housing market analyst Hometrack, said: ‘The government is throwing money around and trying to get things to happen. But whether shared ownership works depends on local markets. If the cost is too high in an area – be it Harwich, Harlow or Crawley – you’ll have a lot of grant tied up and it’ll be housing few people because hardly anyone will take the offer up.

‘In the past few years, two-thirds of shared ownership properties have been built in areas where it works. But that still leaves a third that hasn’t – and that’s a hugely inefficient use of scarce resources.’

He has undertaken a detailed analysis of housing costs throughout the country – and come to some alarming conclusions about the viability of shared ownership schemes in areas where private sector rents are low.

‘When people are looking at housing, they ask themselves how much they can afford out of their pay packet. In a growing number of local authority areas, private renting is cheaper than shared ownership,’ he declared.

In its latest pronouncements, the government is clinging to its housebuilding target – and pinning hopes on HomeBuy extending home ownership as a lifeline for developers. But as Richard Donnell pointed out: ‘The schemes are aimed at young people, but is there a demand for them to buy if the market is falling? A 10 per cent drop in prices could tempt people back in, but mortgages have also gone up and the effect of that is likely to be greater. People are still priced out of the market.’

A recent survey by Moneycorp found that three-quarters of first-time buyers had put their plans on hold, and another survey by a classified advertising website found that 71 per cent of tenants were happy to remain in rented accommodation and were reluctant to take on a mortgage burden.

However, defenders of shared ownership deals argue that they may offer a great opportunity right now. Falling prices mean the value of your 25, 50 or 75 per cent share will have fallen – but if you wanted to take a bigger stake in the property and ‘staircase up’, the cost could be considerably less than you would have paid a few months ago.

The problems is that housing associations are refusing to pass on the fall in value, which would reduce the worth of their portfolios and affect their capacity to borrow money.

For many critics, the wisdom of buying a shared equity home is still in doubt. It might be possible to purchase a property outright if property prices continue to fall and you can get a mortgage – even if you have to wait a year or two while you save for a deposit. After the 1990s slump, shared equity properties were slow to recover because first-time buyers ignored that option when they had the opportunity to get a firmer step on the housing ladder.

And the number of shared ownership properties being repossessed is not encouraging. The Joseph Rowntree Trust recently warned that shared ownership had been targeted at people who would not normally be in a position to buy, people who are simply too poor.

‘Arrears are more common in this market than for outright home ownership,’ the trust warned. The group is the most vulnerable in a recession – and the number of repossessions among this group is sharply rising.

Donnell said: ‘The trouble is the government has linked the delivery of affordable housing to the performance of the housebuilding industry – and if housebuilders cut back affordable housing will suffer‚Ķ’

But the Commons public accounts committee also condemned housing associations for being slow to reinvest gains from the part-sale of properties in social housing. Their current stake in low-cost home ownership properties, the committee pointed out, was valued at between £610 million and £720 million, which is only a drop in the ocean. The associations should use their equity stakes to raise extra borrowing from commercial lenders, the committee said.

And some of the government’s latest moves have an air of desperation. If the plans are intended to assist housing associations sell properties, they are bound to fail in areas where there is a concentration of low income families and house prices and rents are low.

In such areas, where a surplus of properties exists – for example, on Merseyside – developers are cutting prices and offering deals with free kitchen fittings and carpets to tempt buyers, but housing associations do not have this option.

Before the crash the government saw how much housing associations were making from shared ownership and encouraged them to build more for part sale. The associations went ahead, assuming (against what many forecasters were saying) that the housing market would remain strong.

Now, that is no longer the case, and people on low incomes who were persuaded to invest in part ownership schemes that they could ill afford are paying the price.

Buyer’s 50 per cent stake turned out to be worthless

A warning that some shared ownership deals with housing associations could be worthless Рif individuals entering into them are threatened with eviction Рhighlights an extra danger of the drive to increase the part-sale of association properties.

A ruling in the High Court in Birmingham could result in victims losing their entire stake in the home they were struggling to buy.

One form of ‘intermediate tenure’ allows individuals to buy a share of a property’s leasehold from a housing association. The association retains the remaining share and charges the buyer a rent on this portion of the lease.

But now it appears that a loophole in the law means that anyone entering into such an agreement could find that their portion of the lease Рwhich is usually 25, 50 or 75 per cent of the outright value Рcould, in fact, be worthless if they are threatened with eviction.

Rebecca Richardson bought a 50 per cent stake in a property owned by Focus Homes, now part of the Midland Heart housing association. She paid rent on the other 50 per cent.

But after threats to her and her family, Richardson moved to a refuge. A year later her housing benefit was stopped.

With rent arrears piling up, she attempted a sale of the property to recoup cash to pay off her debts. But the bid was unsuccessful. The housing association took her to court to obtain possession and won an order to end the tenancy agreement.

But Richardson was hit by a fresh blow when she tried to claim her 50 per cent interest in her former home. Judge Jonathan Gaunt ruled that the landlord – the housing association – was entitled to 100 per cent of the property and not just the share it had been renting out.

Midland Heart repaid Ms Richardson, but the court ruling meant it was under no obligation to do so. The amount was equivalent to her original stake. If the value of the property had increased substantially, using this formula the extra cash would have been lost.

Simon Bagg, of solicitor Lewis Silkin, says: ‘People think when they enter into one of these deals that it is like joint ownership and that the split of the equity would be in accordance with the shares in the property, so that when the arrears – the amount owed to the housing association and the mortgage lender that financed the leaseholder’s share of the deal – are paid off that anything left over would be split with the leaseholder, but it’s not.

‘When an individual enters into one of these agreements they are granted a long lease and an assured tenancy agreement. What this case means is that if the lease is ended because of possession proceedings, the leaseholder loses entitlement and with it a share in the property.

‘When the lease falls, the leaseholder has no right to remain in the property and loses whatever stake they’ve put in. In the past, mortgage lenders have usually paid the arrears when people have got into difficulty because they’re sitting on a nice pile of equity. But in the present climate they’re starting to look at that more carefully.

‘If mortgage companies take a tougher attitude, housing associations will be forced to look at recovery and maybe take proceedings more often.’

Bagg said there was evidence that housing associations are toughening their stance.‚Ää‘That’s an increasing risk. If a leaseholder can’t afford the lease and mortgage costs and the mortgage lender isn’t prepared to pay arrears, it’s got to come from somewhere‚Ķand one way is through repossession.’

Drawbacks are hidden by blurring shared ownership and shared equity schemes

When shared ownership was introduced almost two decades ago, it was a ragbag – with local authorities offering cash incentives to council tenants to buy homes in the private sector.

But it was given fresh impetus with the growth of intermediate tenure schemes run by housing associations that allow tenants to buy a share of a property’s leasehold with a mortgage. The housing association keeps hold of the remaining share of the lease, and the buyer pays rent on this part to the association. The initial purchase could be 25, 50 or 75 per cent of the cost of the lease, but the scheme lets participants ‘staircase up’ and increase their percentage stake when their income rises and they are able to afford it.

The HomeBuy shared equity scheme is different and was aimed at boosting private sector home ownership. The purchase price is funded partly by a mortgage and partly by a loan. Borrowers only pay interest on the loan – and are not required to repay this share of the equity until the property is sold.

Originally, a buyer had to find 75 per cent of the price with a mortgage from a bank or building society. The other 25 per cent was paid for with a loan (originally interest free for the first three years) from a housing association or private lender or a combination of the two (at first, the 25 per cent was made up of two 12.5 per cent loans, one from the housing association and one from the government).

But critics argued that the cost was uncompetitive – payments were little better than interest-only mortgages that were freely available at the time – and the eligibility criteria restricted take-up to just a few first-time buyers and was aimed at new-build properties.

Another disadvantage for the buyer only emerges when the property is sold. With an interest-free mortgage, the owner gets 100 per cent of any rise in the value. With HomeBuy, the rise is split with the lender of the loan, so any profit is reduced.

When HomeBuy was relaunched in April, the aim was to extend the number of people who can qualify by raising the limit on household income to £60,000. Given that the average family income is around £33,000 a year – and that the income of social housing tenants is less than £20,000 – the scheme is targeted at few of them. Critics argue that its main goal is to prop up developers and give them an opportunity to offload unsold properties – particularly the glut of empty new-build flats in major city centres.

When Open Market HomeBuy was originally set up in 2016, three of the biggest mortgage lenders, Nationwide, HBOS and Yorkshire Building Society, signed up. But doubts were raised just two months before the initiative was launched when a fourth lender, Abbey, withdrew, saying it would only help a small number of families. Abbey is now a participant in the revised scheme.

Open Market HomeBuy was intended to lure 100,000 new homeowners in five years. But in its first six months of operation, completions of property sales had reached only about 200, a fraction of the anticipated number, and by 18 months it had risen to only about 2,000.

The relaunched scheme is aimed at addressing some of these difficulties. Confusingly, all the schemes – shared ownership and shared equity – have now been brought under the HomeBuy umbrella. The old schemes have been replaced with three new ones – New Build HomeBuy, Open Market HomeBuy and Social HomeBuy.

New Build HomeBuy is a repackaging of the part-purchase/part-rent scheme run by housing associations.

Social HomeBuy is aimed at social housing tenants wanting to buy their home from a council or housing association, who cannot afford outright purchase. It is not available from all social landlords, but where it is, the tenant is also given a discount. The minimum share that can be bought is 25 per cent and the maximum discount varies between £9,000 and £16,000.

The biggest change in the scheme is the revised Open Market HomeBuy. The amount of the loan to the potential homebuyer has been massively increased to 50 per cent. It means that someone wanting to buy a £200,000 property will have to find a mortgage of just £100,000 – and they will get a top-up loan for the remaining £100,000. The loan will not be interest-free from the beginning, but will be charged at a below market rate of 1.75 per cent, increasing to the annual RPI inflation rate plus 1 per cent (which would make it currently around 5 per cent, just below the current mortgage rate).

Relaunched homebuy set to attract the better off

Since moving into their shared ownership flat near Camberwell Green in London, Rhiannon Davies and her boyfriend Calvin Reid have been spending a lot of their spare time wielding paintbrushes and rollers.

‘There was nothing wrong with the place when we moved. It had a new bathroom, fitted kitchen and boiler, but the colour scheme in the living room – red on one wall and yellow on the others – wasn’t to our taste,’ Rhiannon says.

‘I work for a photograph agency and want to put pictures on the walls, so I‘d like the room to look really good.’

Rhiannon, 28, from Bristol, works for the Magnum agency, and Calvin, 27, from London, is studio manager for a small record label. They’d been living in a rundown block near the Elephant and Castle, but noise from neighbours forced them to approach Southwark council for help – and prompted the search for another place to live.

The council advised them to contact Tower Homes, one of eight housing associations operating as loan providers under the MyChoiceHomeBuy scheme, which offers funding to families with annual incomes of up to £60,000. Rhiannon was reluctant to disclose the couple’s earnings, but it was less than the then limit of £53,000 a year.

Tower Homes financed the £213,000 cost of the two-bedroom flat with a shared equity deal consisting of a £126,000 mortgage and an £87,000 loan to cover the rest. The mortgage is a standard Abbey mortgage costing about £800 a month, but the couple only pay a fee of £126 a month on the 40 per cent of the cost covered by the top-up loan, making the total less than £1,000 a month. A standard interest-only mortgage for the full amount would cost about £1,150 a month.

Without the help from Tower, Rhiannon says, their dreams of home ownership would have been dashed.

‘The flat cost more that we could have afforded. We didn’t have savings and so we needed 100 per cent of the purchase price – the big incentive when we went to a seminar organised by Tower was that they offered to cover the entire £213,000 cost.And what was great was that they gave us a £1,500 cashback to help towards legal fees.’