Shared ownership/equity is a scam.

richardw

Horror stories can happen on 100% ownership in the private housing market.

ste_w

I see the first buy scheme (shared equity) isn't very popular. My partner and I are in the process of buying a new build under this scheme. Seriously considering backing out after reading this thread. What would people suggest to this:

House value £103,995
shared equity 20%
Deposit: £5200
Mortgage: £77,995

Interest on the equity loan is payable at 1.75% after 5 years. In each year thereafter, the interest is influenced by the retail price index plus 1%.
The term of the equity loan is 25 years or on the sale of the property.
Staircasing is possible at the open market value at the time.

This is what we have been offered and our joint income is £19,000 per ann. (part time workers)

Any thoughts, as we feel now the deal may not be as good as it first appeared

Thanks

ste

brit1234

ste_w wrote: »

I see the first buy scheme (shared equity) isn't very popular. My partner and I are in the process of buying a new build under this scheme. Seriously considering backing out after reading this thread. What would people suggest to this:

House value £103,995
shared equity 20%
Deposit: £5200
Mortgage: £77,995

Interest on the equity loan is payable at 1.75% after 5 years. In each year thereafter, the interest is influenced by the retail price index plus 1%.
The term of the equity loan is 25 years or on the sale of the property.
Staircasing is possible at the open market value at the time.

This is what we have been offered and our joint income is £19,000 per ann. (part time workers)

Any thoughts, as we feel now the deal may not be as good as it first appeared

Thanks

ste

It will be 2013 when we start to see the real shared equity horror stories (5 year equity loans). There is a 5-10 year time bomb which SE purchasers will be hit by when their loans needs to be repaid. By then the properties (which were over valued at purchase) would be in negative equity and mortgage rates will be up. So their repayments will be far higher and likely purchased onto even higher rates as they can't remortgage due to the lack of equity.

I think there will be a lot of trouble in the shared equity in the not to distant future. I strongly recomend you avoid and concerntrate on raising that deposit as prices fall in 2012. Don't worry about a few national figure rises in the next couple of months because after that it will be all the way down. We are going to have a tempoary bump up with the delay in the figures from the stamp duty rush but after that the higher mortgage rates and transaction collapse will kick in.

Good luck and getting saving.

ste_w

Thanks for your advice. I can see how people will fall into that trap as the scheme does look very tempting. If thats the case I count myself lucky I will only be losing £200 on the reserve of the plot and not thousands in the future.
Any other views on this?

Ulfar

ste_w wrote: »

I see the first buy scheme (shared equity) isn't very popular. My partner and I are in the process of buying a new build under this scheme. Seriously considering backing out after reading this thread. What would people suggest to this:

House value £103,995
shared equity 20%
Deposit: £5200
Mortgage: £77,995

Interest on the equity loan is payable at 1.75% after 5 years. In each year thereafter, the interest is influenced by the retail price index plus 1%.
The term of the equity loan is 25 years or on the sale of the property.
Staircasing is possible at the open market value at the time.

This is what we have been offered and our joint income is £19,000 per ann. (part time workers)

Any thoughts, as we feel now the deal may not be as good as it first appeared

Thanks

ste

when you say the new interest rate is "influenced" by the retail price index plus 1%, does this mean that your interest rate is RPI + 1%, or increases by RPI + 1%, or something else entirely different.

This sounds a dreadful deal. If it is the first you are looking at 7% interest rates, the second well that is a stairway to madness.

What happens if RPI shoots up to 50%.

I would be running a mile from this one.

poppy10_2

Ulfar wrote: »

when you say the new interest rate is "influenced" by the retail price index plus 1%, does this mean that your interest rate is RPI + 1%, or increases by RPI + 1%, or something else entirely different.

The interest rate starts at 1.75%, and then rises by RPI+1% each year.

So, for example, assuming RPI stays constant at 4% for the next ten years:

Interest rate on the loan :
Year 1 =1.75%
Year 2=1.75% +[5% of 1.75]=1.84%
Year 3=1.84%+[5% of 1.84]=1.93%
Year 4= 2.03%
Year 5= 2.13%
Year 6= 2.23%
Year 7= 2.35%
Year 8= 2.46%
Year 9= 2.59%
Year 10=2.71%

ste_w

Yeah that sounds right. The more I dig deeper, the worse this scheme sounds.
Whats so frustrating is they won't just give me a £20000 loan and I can see exactly what I'd pay back. Instead its a percentage, so who knows what I would be paying back if the RPI rockets.

Thanks for the help

Idiophreak

ste_w wrote: »

I see the first buy scheme (shared equity) isn't very popular. My partner and I are in the process of buying a new build under this scheme. Seriously considering backing out after reading this thread. What would people suggest to this:

House value £103,995
shared equity 20%
Deposit: £5200
Mortgage: £77,995

Interest on the equity loan is payable at 1.75% after 5 years. In each year thereafter, the interest is influenced by the retail price index plus 1%.
The term of the equity loan is 25 years or on the sale of the property.
Staircasing is possible at the open market value at the time.

This is what we have been offered and our joint income is £19,000 per ann. (part time workers)

Any thoughts, as we feel now the deal may not be as good as it first appeared

Thanks

ste

ste_w wrote: »

Thanks for your advice. I can see how people will fall into that trap as the scheme does look very tempting. If thats the case I count myself lucky I will only be losing £200 on the reserve of the plot and not thousands in the future.
Any other views on this?

Firstly, and ironically, I'd advise against following the advice of anyone on the internet about such a big decision. If you've concerns, why not contact an IFA to talk the thing through and not have to worry about your responses being biased by other people's agendas.

That said, a few things to think about:
1) Is the asking price fair? Look at recent sale prices for similar properties and ensure they're not overcharging. Paying too much in the first place is the easiest way to end up losing money.

2) You'd be borrowing quite a lot relative to your income, meaning saving may be tough. Are you anticipating your wages being stable for the next few years? Are you anticipating your wages rising (don't count on it though!)? Any chance of working full time? Any chance of someone giving up work for a baby?

3) Either way, do the maths. Work out how much your mortgage repayments would be and how much you'd be able to save. Can you clear the equity loan before you start paying interest? Would you be able to save more, more quickly, by staying in rental?

4) How important is home ownership to you?

Having read the thread, you probably know that I'm a supporter of shared equity in certain circumstances, but I have to say, this seems like a fairly complex version of the scheme...may be worth shopping around and seeing if there are any better versions available locally.

ste_w

Thanks for the replies. Yes I went to see an IFA yesterday and they hinted under our current circumstances it would be better saving and going the traditional mortagage route. Owing 100% of the property is important to us. I don't feel very confident in the company we are buying off, and the first buy terms and conditions are 61 pages long! I'm definately backing out of this one.

Idiophreak

ste_w wrote: »

Owing 100% of the property is important to us.

Just in case the IFA wasn't perfectly clear about this. On a shared equity scheme, you *do* own 100% of the property from day 1. The loan is simply marked as a second charge on your mortgage.