Q. Can you tell me something about shared equity schemes, and how they work?
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A. These days, it is frequently one of the conditions of planning permission being granted for new residential developments (under what is called a Section 106 Agreement) that they must include a certain percentage of units designated for social housing. While some of these will be set aside to meet general social needs, a proportion is usually earmarked for purchase on preferential terms – either specifically for the benefit of key workers such as nurses or policemen, or for those on low incomes and lacking the hefty deposits which lenders now generally demand. Shared equity is the preferred mechanism for helping the latter group – people who for one reason or another wouldn’t otherwise be able to afford home ownership.
As the name implies, shared equity basically allows someone to purchase a percentage share in a property, while paying rent on the remainder – usually to a housing association. In most cases only a very small deposit will be required, if any at all.
How does it work? Well, to keep the sums simple, let’s look at a property valued at £100,000. The buyer takes out, let us say, a £50,000 mortgage to purchase half of the equity, and pays rent on the remaining half. If this sounds more expensive than repaying a full £100,000 mortgage, it’s worth remembering that the rent payable in these cases is not based on normal market rates, but on the prevailing rate for social housing in the area concerned, which is naturally a lot lower.
But what happens if or when you want to move, and you only own half of your current home? Well, the answer is that you sell your half pretty much in the normal way – except for the fact that the purchaser must be acceptable to the housing association.
A variation on this basic model exists whereby you may be able to buy a bigger and bigger share of the property as your own income level increases. This is known as “stair-casing.”