Rupi Hunjan, CEO of Censeo Financial, explains how the financial side of buying a shared ownership property works and why it is now a market leader
We know that in the UK there is a severe shortage of housing, with low supply and high demand for “affordable” properties. As a result, traditional ways of purchasing a home are becoming unsustainable.
For some 30 years now, shared ownership has been posited as the bridge between renting and the outright purchasing of homes. In many ways it represents the best of both worlds, allowing for a more sustainable environment for the UK’s growing population. Ultimately, it makes much better sense for people to own part of an asset rather than nothing at all. What’s more, if people are already paying high rents, it is better to be paying the same amount but split between the investment of buying a first home and a subsidised rent to a housing association.
With this in mind, we recognise that shared ownership is now the bona fide “Fourth Tenure” of property ownership in the UK, which will go a long way to improving financial inclusion.
Let’s take a closer look at the facts
We know that the number of first time buyers getting on the property ladder with a mortgage is now at its highest level since 2006. According to the trade body UK Finance, mortgage providers advanced £62bn to this sector of homebuyers last year.
Across the UK, around 368,000 new buyers secured mortgages in 2018, up from 360,000 the previous year. In addition, recent figures suggest first time buyer levels now represent 50% of all homes bought with a mortgage.
The eligibility criteria for shared ownership is that the purchaser is a first time buyer, or someone who used to own but can’t afford to now. Annual household incomes need to be below £80,000, or £90,000 in London.
According to the Ministry of Housing, Communities and Local Government, on average, people buying shared ownership properties are 35 years old. And overall, the Council of Mortgage Lenders has estimated that 200,000 UK households now live in shared ownership properties.
To summarise, low mortgage rates, high levels of employment and Government schemes such as shared ownership and Help to Buy have all helped first time buyers become a much greater sector of the market. In addition, the recent Stamp Duty change is likely to continue stimulating growth by reducing the costs associated with taking the first step on to the ladder.
Lenders and products
Initially, lenders were cautious about entering the shared ownership market and most had few staff who understood how this sector operated. As a result, buyers had little choice about who would provide them with a mortgage. Housing associations which were (and still are) under pressure to provide more homes, were finding that their prospective customers were not getting the most cost-effective rates or couldn’t get the finance necessary to make a purchase.
However, this section of the mortgage market is now seen as an attractive proposition for lenders, especially now that affordable housing is attracting more affluent buyers with larger deposits who are often turning to the Bank of Mum and Dad for assistance. Indeed, as first time buyers are no longer seen as risky, the mortgage rates are the same as for other tenures.
Over the past few years, we have seen the availability of mortgage lenders within the shared ownership market increase to 30 across the country, with a number only lending regionally. Elsewhere, high loan-to-value mortgage availability is at an all-time high, with 16 of the lenders offering between 90% to 95% loan-to-value products.
Censeo Financial has spent the past 10 years building relationships with lenders, advising them on the shared ownership market and helping them put together products which are suitable for first time buyers. This has helped to bring in leading banks and building societies who otherwise would not want to lend to this sector. As a result, there is now a wide range of products available to first time buyers. So, whether you are self-employed, buying a new build house or flat, buying alone or with a partner, or looking to staircase, there are financial institutions out there willing to lend.
As with many areas of financial services, it is worth pointing out that the lower the deposit, the higher the perceived risk, which is reflected in the cost of funds. In short, the larger the deposit, the cheaper the interest rate. So, if you can put down a 40% deposit, you’ll be able to take advantage of an interest rate of around 1.45%, compared with around 1.75% with a 20% deposit and a rate of around 3% with just a 5% deposit. Most of these rates are for two-year fixed deals but there are some five-year deals available, at a slightly higher rate.
Censeo Financial also believes that in order to have a truly inclusive environment for homeownership here in the UK, everyone should have the option not only to get a toehold on the housing ladder but also ultimately to own their own home outright.
A popular way to do this is by staircasing. Here, people who have bought a share in a property through shared ownership can purchase further shares so they staircase up to owning their homes outright. This is not only good for homeowners but also for housing associations which can plough back the income into building new properties.
Interest rates for staircasing are similar to those for people purchasing a property for the first time. Many people with shared ownership properties don’t realise that even after staircasing up to a greater share in their home, they could still be saving on their monthly outgoings. That’s why it is always a good idea to talk to a specialist adviser who understands the market.
Helping first time buyers
Censeo Financial has long recognised the issues of affordability and access to credit facing first time buyers. The company also recognises the challenges facing housing associations – the need to sell properties quickly and efficiently, ensure customers can access funding and, of course, help as many customers as possible on to the housing ladder and help those who have bought through shared ownership to increase their stake in the property.
That’s why we believe that first time buyers should have proper customer service from both lenders and intermediaries – one which reflects shared ownership’s status as the new Fourth Tenure of ownership. Gone are the days of prospective home owners meeting brokers in pubs. Similarly, lenders will now treat those buying through shared ownership with the same level of support as those buying in the traditional manner.
We understand what it’s like for today’s first time buyers. They will often spend months trying to find the right property, but the priority is about getting the right financing in place. That’s where there is often a quagmire of uncertainty and our job is to guide them through this as quickly and as painlessly as possible. That is why we have created a seamless process for our customers. We use modern technology like apps, online portals and Skype-enabled meeting rooms, alongside knowledgeable advisers, to provide a modern approach to what is probably one of the most important financial decisions you will ever take.
We need to be moving towards a more customer-centric model. Shared ownership will end up being THE major tenure of homeownership here in the UK, so the buying process needs to reflect this.
We live in the age of Amazon, apps, social messaging and instant feedback from brands – the homebuying process needs to be geared towards this world and today’s millennial customers. At the same time, while technology can be a liberating influence and allow people to get information at the touch of a button, buying a home is an emotional decision that needs human input. We call this a “bionic approach” where smart technology and data processing is used in harness with experienced human interaction in the form of professionally qualified advisers.
At present, when someone wants to buy a home, they have to fill in six or seven different forms which contain 70-80% of exactly the same information. There must be a way of simplifying this process and that’s where the frictionless customer experience for homebuying, which Censeo has pioneered, comes in. We believe that new innovative products need to be developed, which combine equity release or second charge, a fixed rate and the option of a flexible early repayment. Then there are “inter-generational” products which are made possible by the Bank of Mum & Dad.
The world is changing and so should personal finance. Today’s buyers need a simple legal framework and application process. The ideal scenario would be similar to writing a cheque, which is payable against a slice of the property’s equity.
The closer we can get to this situation, the greater the help for first time buyers and the more likely we’ll see a revolution in the way wealth is transferred from generation to generation.