Shared ownership is a common property method in the United Kingdom, and it is now becoming increasingly common in Australia. You don’t have to share the house with anyone else. You buy a portion of the value of the house and the developer, a finance company, or a non-profit institution holds the remainder. This is a solution to the problem of house prices rising beyond the reach of the people who need those homes. The main driver in Australia for this purchase option comes from state governments and community housing associations, who have started up their own finance guarantee companies to make shared ownership available.
Problems for Buyers
You may find that the properties that meet your needs are too expensive for you. Just about everyone needs a mortgage to buy their home, and banks have rules that lock some people out of becoming homeowners. First, the bank will only lend you a percentage of the value, and rarely go above 95 per cent. This factor is called the loan to value ratio. Banks give better interest rates to people who need loans that cover 70 per cent or less than the value of a property.
Another problem is that you can only get a loan that is a certain multiple of your income. This is called the loan income ratio. Most Australian LTIs are up to 4.5 time income. In some deals, banks will go up to an LTI of 6 time income for first time buyers. You may find that the amount you can save for a deposit falls far short of the bank’s LTV rules and your income isn’t big enough to cover the purchase price of the house you need.
LTI and LTV requirements are increasingly filtering more potential buyers out of the market in Australia. This is because house prices have risen faster than wage growth over the last decade. This concerns an economic factor called “affordability.” In 2014, the IMF reported that Australia had the third most unaffordable housing market in the world. Unaffordable house prices block people with required skills moving to the areas where all the jobs are. This creates a situation known as “structural unemployment.” This has become such a potential problem that the government of Western Australia has jumped in on shared ownership itself with a scheme called SharedStart. This program is also a good solution for those with no credit history, or a bad credit record. Developers are also keen to make their homes affordable and offer their own schemes.
Getting Shared Ownership
With a standard shared home ownership plan you buy a stake in the property. Typical percentages for that stage are 25 per cent, 50 per cent and 75 per cent. The developer, or the finance company owns the remaining portion, and you have to pay them a rent for that part. The big benefit of this scheme is that if you only buy 25 per cent of the property the deposit you need to save up is drastically reduced. The bank’s LTV and LTI are calculated on the 25 per cent of the property’s asking price, not the full value.
The holder of the remainder of the property title will not sell it on to anyone else but you. When your income increases and you can afford to buy out another portion, you can remortgage the house and increase your stake. Alternatively, you are entitled to sell on your portion to someone else. Then the developer or institution that holds the remainder of the title will reserve its stake for sale to the new owner and your obligations will be completely acquitted.