3yr Fixed Term due to end on shared ownership house...advice needed

lauraza

Hi,

I purchased a shared ownership home in early 2006, 50% rent, 50% mortage with a 3 yr fixed term. I am now open to either continue this arrangement or buy the other half of the house. My 3 yr fixed term mortage on 50% of the property ends in March 2009. Under current conditions, how advisable would it be to purchase the other 50% of the property?

I am keen on this idea as it means in a few years I will be able to sell on the open market as opposed to through the HA, but worried about the implications of buying 100% of the property.

Any advice on this would be much appreciated.

Thanks :rolleyes:

lisyloo

I am keen on this idea as it means in a few years I will be able to sell on the open market as opposed to through the HA,

You will only be able to sell if you can cover the negative equity.

but worried about the implications of buying 100% of the property.

What happens if the value drop below the purchase price?
You need to check this out.
If you need to pay 50% of the purchase price then it makes no difference really when you buy, except that you may be in a posistion of negative equity.

lauraza

Sorry I'm still a bit unclear, will selling the house in a few years definitely mean there will be negative equity?

I a real beginner with this, it is my first home, sorry for my naivety!

Really just want to know whether under current conditions it would be advisable to buy the other half, or stay as I am with 50% and renting the other half?

lisyloo

Sorry I'm still a bit unclear, will selling the house in a few years definitely mean there will be negative equity?

There are no guarantees, but house prices are falling very quickly at the moment.
For various reasons things are looking pretty bad for the housing market right now.
There is a graph here.
www.housepricecrash.co.uk

No-one knows that is going to happen but we do have very high prices right now and very bad economic conditions so it all points to house prices continuing to go down.
When will they stop going down?
Who knows but given that they have been rising for 15 years, then I personally do not expect it to be as short as 2 or 3.

Really just want to know whether under current conditions it would be advisable to buy the other half, or stay as I am with 50% and renting the other half?

You first need to find out what you are due to pay if the value declines.
No-one can answer the question until you find this out.
As an example, let's suppose the purchase price of this 50% was £50K and it is still now worth £50K.
Let's assume it drops to a vlaue of £40K.
Do you have to pay £40K or £50K?

It is cruicial to know this before answering the question.
If you get to pay £40K then personally I would wait as you could save some money (in this example £10K).
However it may well be the case that they have protected themselvses against this and set a minimum of the purchase price.

I think you need this information before you can answer the decision.
There must be a way that you can find out how much money is due.
My guess is that they have covered themselves against losses.

Once you know this information then we can help with calculating renting the house versus renting the money to see which is cheapest.

BTW - I did shared equity with a builder in 1991.
The house cost £70K.
In 1996 the value was £45K.
However the builder had put a minimum of the purchase price on their share.
So even though the 20% we purchased (£14K) was now only worth £9K, they still have a contract for us to pay £14K.
I would be very suprised if your HA haven't done something similar and put on a minimum to protect themselves.

You also haven't said how much your LTV is (that's Loan to Value).
At the moment you cannot get 100% mortgages so that would be impossible.
However if you paid a deposit then you may not be at 100%.
On the other hand , if the value declines then the situation may be that you need >100% and that would be not possible in the current climate.

essexsi_2

Hi lauraza,

I bought with the help of a Key worker loan in 2006. Now the terms of my loan are, that the HA own a certain % of the property. Lets say I bought for £100k and the HA own 25%=£25k. If the property went up in value to £200k and I sold the HA would want 25%=£50k.

My terms state that if the price were to fall then the HA would still only own 25% of the property and they do not have any entitlement to a minimum amount. So if prices were to fall alot then it may well be worth looking at purchasing the outstanding amount. You need to study the terms and conditions of your initial arrangement with the HA.

Also, look on this board or the Mortgage Free Wanabee one at a thread entitled 'overpaying on a shared ownership mortgage' as it does have some very relevant points to consider.

All the best Si

lisyloo

So if prices were to fall alot then it may well be worth looking at purchasing the outstanding amount

Ideally at the "trough" i.e. lowest point.
This will be difficult to estimate precisely, but it's almost certainly not now.

essexsi_2

Hi lisyloo,

Completely agree with you, I did not mean to insinuate that the OP should buy now. As with anything its all about timing.

Cheers Si

lisyloo

I did not mean to insinuate that the OP should buy now

Sorry, didn't mean to imply that you had :-)

It's impossible to time the market precisely but it's better to be approximately right rather than completely wrong.
If you buy when prices are falling there is always a chance they could fall further.
So if I were doing it I would aim to buy when I knew there was a definite pick up.
It impossible to pick the exact moment.

I am suprised they don't set a minimum, but if that's the case then take advantage and buy at the minimum price.

The only problem is the LTV (and negative equity on the other part), so the buyer may have to put some deposit in to purchase the other 50% to get the overall LTV down. At the moment you need to be at least 90% I believe.

lauraza

Thank you for all your replies that is really helpful, I am going to start looking into this further.

The mortgage for my 50% half required a £500 deposit which was the incentive at the time, so I'm guessing my share of the mortgage is a 100% one? I was clearer on this at the time!

Thanks again for your advice.

I am not sure when buying the other half - if I get a completely new mortage for the full amount, or simply a second one, again this is something I need to look into and get in touch with my mortgage advisor again!

lauraza

Have found out that buying the other half of the property i.e. 100% ownership would be based on a chartered surveyors valuation, not the purchase price. I'm guessing this would be a good thing (in terms of buying out their share) as the value would have gone down since purchase?

lisyloo

I'm guessing this would be a good thing (in terms of buying out their share) as the value would have gone down since purchase?

The value would have gone down, but the problem is you won't be able to get a mortgage for that.
Let's try an example.
So let's say that purchase price was £100k with you talking a mortgage for £49.5K.
Let suppose that the house is now worth £90K (just an example to demonstrate).
You would need a loan for £45K to buy the other half.
Lets assume your mortgage is now £45K (as you would have paid some off on your repayment mortgage).

This give you a new potentail mortgage of £90K on a house worth £90K.

At the moment you simply won't get this because lenders are not giving 100% mortgages.
You would need to find £9K as a deposit (10%) to take out this new mortgage simply because of the mortgage products availble at the moment.
If prices fall then things get worse.

e.g house value £80K, means a mortgage of £85K, so now you need a deposit of £13K.

So financially you are better off buying the house at the "trough" (minimum value point) in house price, however you will need to save up a significant amount for a deposit.

Of course the present conditions may change and in future you might be able to get a 95% or 100% mortgage, however it's likely you will still need some "deposit".

So you need to start getting some idea of how long it would take to save the relevant amount (or whether you can borrow it elsewhere).