Shared Ownership and the mechanics of aquring additional equity:

johnnyfind

Question:


I purchased 40% of the equity on a shared ownership basis for a two bedroom flat back in September of 2007. At the time the new build had a market value of £325,000.

Rather luckily I acquired a tracker mortgage with the Woolwich + 0.58% base rate (with no collar). I also didn’t need to pay a deposit or any fees when taking out this mortgage.

[£325,000 * 0.4 = £130,000]

At the time I had my family living in social housing (1 bedroom flat) with a housing association and was shocked to hear that the minimum wait was seven years for an upgrade. I also dropped a hundred places after a year on my local councils waiting list. Hence to say I was relieved to be getting a shot of a bigger place.

Times have been good and I have made modest overpayments on my current mortgage and have also managed to save £20,000. Now is the time to start thinking about acquiring the remaining equity.

Although I am a little uncertain with the mechanics:

I believe when you staircase, a new independent valuation is carried out on the property and the sums worked out pro rata for the new price.

So if house prices continue to drop, holding fire on acquiring the remaining equity will work in my favour? This is only possible if the above statement was correct.

Now I also realise that the tracker mortgage I am currently on is like gold dust, I doubt the lender will allow me to continue with this particular mortgage deal. Can anyone confirm this?

How does one calculate the deposit necessary for acquiring the remaining equity? Is it from the whole or the additional amount I need borrow?

Any guidance will be gratefully appreciated.

Wickedkitten

Did they not give you any documentation on how this works when you joined whichever scheme you are on?

johnnyfind

The only information in regards to staircasing; was that it had to be done in a maxium of four steps. :mad:

Richard_Webster

How much is outstanding on your present mortgage and what extra percentage do you want to purchase? Any idea what the property is worth now (100%)?

johnnyfind

I currently have £124,000 outstanding on my current mortgage.

I believe the property now has a total market value of around £280,000 and ideally I would like to purchase a minimum of 40% of the the remaining equity.

I am not sure if I will have enough of a deposit to take the full equity in one swoop and the best tactic to employ to make best use of the current "stamp duty holiday" in place.

For instance it may be best to wait another six months, while prices continue to fall and raise another £10,000 deposit and staircase the full equity, hence only paying one valuation fee and utilising the stamp duty holiday to best effect.

Richard_Webster

Lender will calculate what it will lend as a percentage of the present value of the share you acquire, taking into account the amount presently owing. For instance if they would lend 90% LTV then if you acquire a further 40%, 80% of £280K is £224K and 90% of that is £201,600 from which you deduct £124,000 and you would get a further advance of £77,600 but you need 40% of £280K (£112,000) to buy the 40%, so you would need to find £34,400 of your own money.

If in 6 months time the value of the property has fallen to £260K then it costs £156000 (60%) to fully staircase. 90% of £260K is £234K less the £124K you owe and they would lend £110K so you would need to find £46K.

Obviously the figures will vary depending on the LTV ratio your lender will be prepared to go to - it might be 75% only or because it is SO, they might still do 95%. Also I am only guessing at future price falls.

The SDLT issue is another one however. I'm not sure I understand why you think the SDLT holiday will help you, as there are special rules for SO properties set out at:
http://www.hmrc.gov.uk/sdlt/transaction/shared-ownership.htm#4

When you bought I imagine you had a choice of either paying £1,300 on the share you bought or £9,750 on the full value (3% of value as over £250K). I am assuming you opted for the £1,300.

If you buy up to but no more than 80% no more SDLT is payable. (This is a quirk, which I don't understand, but you need to know about.) So if you went ahead on the figures I have used above and paid £112,000 for a further 40% then there would be no SDLT on that.

If you then waited until the property had gone down in value to £260K to buy the remaining 20% share this would cost you £52K. This is where the SDLT gets nasty. They add up the total amount that has been spent on buying the shares: £130K + £112K + £52K = £294K to determine the rate of SDLT payable. So as you have gone over the 3% threshold you have to pay 3% of £52K = £1,560 SDLT on that 20% share.

If you waited as in my second example above and bought the whole 60% for £156K then £130K + £156K = £286K which is greater than £250K so 3% applies, but they charge you 3% on the whole £156K = £4,680!!!!

The moral is to staircase up to 80% first so you don't pay SDLT on that transaction.

johnnyfind

Thank you so much for explaining those options in such detail.

You have been more than helpful.

The current SDLT "holiday" threshold clearly does help me if I staircase up to the 80% mark, but not how I envisioned.

Now the question I have to ponder; would it be best waiting a full twelve months in the hope prices drop even further before acting.

Richard_Webster

The current SDLT "holiday" threshold clearly does help me if I staircase up to the 80% mark, but not how I envisioned.

I don't see how, because the rules say that if you staircase to no more than 80% no more SDLT is payable so it doesn't matter if the amount you pay to do that is over or under £175K or £125K.

The holiday only helps if the amount you pay for the remaining 60% doesn't take the total amount paid for the property to over £175K, which would mean it could only be £45K, (£175K-£130K) which would mean that the value of the 100% share would have had to have reduced to a mere £75K, which is not very likely, even in the present market!

A reduction in the total value to £200K would mean that the 60% would only be worth £120K which means the total you would have paid would be at the 1% threshold so you would pay £1,200 SDLT on that and if you were able to do it in two goes while the value remained at £200K you could staircase to 80% (no SDLT) and then buy the remaining 20% for £40K which would involve payment of £400 SDLT.

I think you will find there is usually a compulsory time gap between acquisition of further shares so if it was at £200K when you got to 80% it could have gone up again by the time you bought the remainder. So pay no SDLT when you buy the next 40% for £80K but if value has increased to £225K when you buy final 20% then total amount paid = £130K + £80K + £45K = £255K, over 1% threshold and therefore 3% of £45K is £1,350!

Equally if you bought the 80% at a time when the values were higher, you would still have to take the higher value into account in calculating any SDLT on the final 20%. So if you paid 40% of say £225K = £90K - no SDLT on that and then the total value falls to £200K it would cost you £40K to but 20% but £130K + £90K + £40K = £260K therefore over threshold for 1% and you pay 3% = £1,200 on final 20%!

nattyb1982

hi sorry for jumping in here but hoping you might be able to help me - i purchased 50% of a 1 bed flat in northampton for £42,500 on a 100% interest only mortgage. I have now moved in with my boyfriend and tried to sell this a year and a half ago when the housing market was ok, i had no bites then (due to an increasing amount of shared ownership schemes popping up in northampton) and at the time it was going to cost me £4k just to come out of my mortgage (i wouldnt be moving it across to another property). I have been granted permission by the housing association to rent it for a short period of time as i owe them back rent but this will finish in Oct 09, my current mortgage runs out in Aug 09. I have asked to buy the other 50% as i have been told that it will be easier to sell 100% rather than 50%, i dont want to make any money from the sale i just want to get rid of it, unfortunaly i dont have any savings so i cant afford to sell for less than whatever my mortgage would be.
I have spoke to my housing association and they have said i can buy the extra 50% but i need to get it valued and they will half that and thats how much more i would pay, however I have just been having a look around on the internet and 1 beds in my block are going for around £30k for 50%, I have agents coming round this week who will give me their valuations too but having spoke to my mortgage company they wouldn’t lend me the money as I would already be in negative equity (in the sense that I already have a mortgage of £42k so borrowing another £30k values the property at £72 when its market price is only £60k). I also have no money for a deposit. Does anyone have any advice for what i can do? my plan was to buy the 50% and rent it out till things imporved and i could sell again and draw a line under it but now this wont happen. Its very depressing for me as i just want to move on with my life and be able to not have this dead weight on my shoulders.