Overpayments on a Shared Ownership Mortgage

Mac_Sami

At present I have a £55,000 mortgage at 6.17% on a 40% share of a Shared Ownership property. My monthly payments are approx. £360 on the mortgage, and the term is 25 years. My rent, service charge etc. comes to around the same.

I can make overpayments of up to £500 per month without penalty.

I'm keen to buy more of the property in the future, but also keen to pay off my mortgage. However, I'm not sure how I should proceed:
- If I make overpayments on the mortgage and pay it off, I'd then have to take out another mortgage to buy the rest of the property. Of course I'd already have equity, but doesn't that defeat the object of paying off the mortgage as it essentially puts me back to square one?
- If I save and pay the standard on the mortgage, I can use my savings to staircase and buy more of the property over time. However, I'm then paying the "maximum" for the mortgage I've taken out.

My initial thoughts were to save, but given that my 6.5% ISA is only .33% better performing than my mortgage, I'm not making any real financial gain (except to have money to buy another, say, 10% in the property at a time). Now I'm leaning more towards paying off the mortgage early, with overpayments of around £350 a month. However, I'd then need a mortgage in the future to buy the rest - but I could always then apply the same logic, and overpay that - so in other words the mortgage is just allowing me to make a large purchase, but I'm able to pay off more where possible.

Any thoughts would be much appreciated!

Mac_Sami

... anyone?

dimbo61

you need to look at the terms of your shared ownership agreement !
you are paying £360 a month for 40% ownership and £360 a month in rent, srevice charges for the rest.
What is the property worth in todays market ? can you buy more equity cheapily now and can you afford the extra mortgage EVERY month.
I would be inclined to fill my ISA each year ( as long as rate is higher than mortgage rate )and build up an emergency fund of 6/9 months income at least and then overpay the mortgage for the next couple of years and see how the market goes.
If property priced continue to fall and you have cash in the bank at the bottom of this recession then you may be able to buy more equity in your home at a cheaper price.
Check the terms and see if there is a set price to buy the other 60% of your property. GOOD LUCK

Mac_Sami

Thanks for your advice.

The 60% can be bought either in one go, or staircased, minimum 10% purchases. It's at the market value determined at the time of the purchase - so I am thinking that if property prices come down, and I save, I'd then be in a position to buy more of my property at a cheaper price.

However, I'm also keen to keep the mortgage amount down. At the moment there's no issue of whether I can afford overpayments - I can, and will likely continue to do so. I plan to keep a small bank in case of bad times, but I'm just wondering whether overpaying off the mortgage would be a good thing, to ensure I avoid negative equity. At the moment, my mortgage is £53k on a £65k share (65k when I purchased in May 08).

dimbo61

carry on the good work if you can fill a CASH ISA each year and overpay by £500 a month you will owe £47k this time next year plus the small amount which
whould have come off your mortgage and because you have overpaid you would also save interest on your overpayments so therefore reducing the interest you pay and reducing the capital even quicker !
Once you have reduced the mortgage you can then decide to take on more equity when you feel comfortable increasing your debt.
I hope you are in a long term fix and if you can clear £12k in 2 years and save 2x£3600 in ISA,s then look at buying 20/30% then if you want !
GOOD LUCK

Bargain_Rzl

dimbo61 wrote: »

I hope you are in a long term fix and if you can clear £12k in 2 years and save 2x£3600 in ISA,s then look at buying 20/30% then if you want !
GOOD LUCK

NOOOOO - don't do that!

Ask yourself these two questions, if you haven't already:
1) who, in the future, would you be able to sell a 60%/70% shared ownership property to? Chances are, if somebody can afford to raise the mortgage on a majority share as well as the rent, they will be in a position to buy outright somewhere else, and won't be interested in buying your flat.
2) if you were to pay off the whole of your existing mortgage and NOT buy any more, thus halving (roughly) your monthly outgoings on your home, would you be able to invest your newly disposable income more productively than by ploughing it into your home?

Also, don't forget that whenever you decide to staircase, you'll be paying the fees - so the more times you do it, the more it will cost you in administrative costs.

BTW, I am in a very similar position (40% shared ownership, similar size mortgage) and have been researching this in detail. For me it's a question of getting my existing mortgage down as quickly as possible, keeping an eye on the market and PERHAPS deciding to staircase all at once to 100% if prices come down sufficiently to make it worth my while (if they don't, I'll pay off my mortgage, continue with my rent payments and make other investments). The one thing I think would be very foolish is to staircase to an intermediate percentage, because as I've said above, I believe it would make my flat impossible to sell.

Bargain_Rzl

One more thing: the OP mentioned being able to overpay up to £500p/m without penalty, which leads me to suspect (s)he's with Nationwide, like me. In which case:

dimbo61 wrote: »

I would be inclined to fill my ISA each year ( as long as rate is higher than mortgage rate )and build up an emergency fund of 6/9 months income at least and then overpay the mortgage for the next couple of years and see how the market goes.
If property priced continue to fall and you have cash in the bank at the bottom of this recession then you may be able to buy more equity in your home at a cheaper price.

Nationwide allows you to borrow back overpayments at any time, so by overpaying now you are STILL building up cash in the bank which can be drawn upon if you want to buy further shares in the future. Similarly, you don't necessarily need an emergency fund in a separate account, because you can draw upon your overpayments fund in case of an emergency (and as it's a tax-efficient place to put your money, it works similarly to an ISA).

sc0u8100

Hi Mac Sami,

I've got a Shared Ownership property too and I've also looked at the figures regarding mortgage/rent/staircasing.

I also own 40% of my property and have a mortgage of £69,000 @ 5.89%.

I've decided to try to overpay my mortgage and clear it asap. But at the moment, I pay more in interest payments ever month than in rent, so I've decided that regardless of how long I stay here for, etc.. I'm never going to get another mortgage out to pay for another share in the property.

If I do want to buy any additional shares, I'll try to buy it when the prices are low, with cash. Although, I'm not sure it's worth even doing that, as my rent is so low, it may be cheaper to rent (I pay around £3,000 a year in rent). - Controversial, but I think it might be cheaper.

But I would be interested in anyone else's views on this!

Jo

dimbo61

Ok guys you are the experts on shared ownership because you both have
a shared ownership property and have more information on the subject
than I do.
I would still consider having money in ISA,s to cover you for several
months if you were made unemployed or off work ill.
Having all your money tied up in the mortgage might not be the best investment.
What happens if ISA,s go up to 8/9% because of inflation tax free and
the OP has 15/20k overpaid on the mortgage saving 6.17%
Keep 6/9 months of income at least in ISA,s until you can afford to buy
rest of property and good luck to all three of you becoming mortgage free.

sc0u8100

Thanks for the advice!

As I have £1,000 in an ISA (that I'm not going to touch), long-term sickness cover with my employer, 12 mths cover which will pay for my mortgage & standing charge, and 3 mths notice & redundancy payments if the worst happens and I loose my job I think (and hope) I'm pretty well covered!

I completely take your point about what if interests go up though. I know (from this website) that interest rates have to be 7.1% before I benefit from saving cash rather than paying off my mortgage early. So for the time being I'll try to pay off my mortgage, but this plan may change..

Also, as I've got 4 yrs left of my 5 yr fixed rate, I want to have paid off a lump sum, just in case negative equity appears, so I can get a new mortgage at the end of my fixed rate. - I'm hoping this isn't the case, as I live in Zone 2 in London, bought at Aug 2006 prices and only had a 90% mortgage, but you never know..

Does this all make sense? Does anyone think this is illogical/logical??

tootallulah

Makes perfect sense to me. You don't want to spend piles of money on fees so wait for the prices to come down and save as much as you can before you purchase any more..

I have a shared ownership flat and paid off the mortgage (50% share) six years ago and bought a house "oop North" where I go every week-end. I am now over-paying my northern mortgage as much as possible and hope very much that in two or three years I will have enough overpayment in the north to buy the rest of my flat for a rock-bottom price. It's part of my retirement plan as hopefully London will bring in a decent amount as a buy to let in fifteen years time.