Shared ownership in London and negative equity

bombata

I bought a 35% share of a shared ownership flat at the peak of the market in May 2008 which was valued at 308 000 at the time.

Its in zone 2 and right between the City and Canary wharf so I thought even if it lost some of its value it should not be too bad because its London and there ought to be demand? (the flat was probably overpriced in the first place)

Since I bought the flat my boyfriend came into some inheritance and the plan was to staircase up to 75%. Because he has a big deposit our mortgage and rent would go down by about £300 a month. We want to move out of London within the next 3-4 years to start a family.

I got the flat valued again and the price has fallen to £270 000. That is a big drop of about 12% and meant that share has fallen in value by about £13.5k!

I am obviously bummed about that especially since I only had paid of 8k so definatley would have lost around 5 k if I had decided to sell.

However the question is?

Shall we just buy the rest of the flat since its so low and hope the market will go up again in the next 3 years?

I am scared that in 3 years we will still be in negative equity; that the house price might fall even worse and that my boyfriend will loose his money as well, and that I will find myself in a situation where I have to stay in the flat rather than starting a family in the commuterbelt?

What is you advice?

richardw

There's probably some caveats in the lease or agreement with the HA, that have an influence on what you can do now.
Perhaps best to have a thorough read of the small print to ascertain the restrictions.

Did you have it valued by an EA or RICS surveyor/valuer?

poppy10_2

bombata wrote: »

I got the flat valued again and the price has fallen to £270 000. That is a big drop of about 12% and meant that share has fallen in value by about £13.5k!

I am obviously bummed about that

I thought that was part of your master plan when you bought the house?

SerenaGoode wrote: »

bombata wrote: »

If I buy that 30% share in that flat I would only pay about 900 saving me 300pounds a month. The idea was just to buy 30% and then buy more when the prices have fallen.

So if you save £300 a month in the short term and lose £20K over the next few years, will you think you made a smart decision? Does the amount you have to pay to up the %age ownership fall in proportion to house prices in the area, and who is the arbiter of that decision? And in any case, if the original price is outrageously high, as I would assert that it is, what good does it do you long term if you can buy more? You have still paid way over the odds and can't escape from that property without reconciling that overpayment at some point.

bombata

I know its sounds stupid now!

I admit that I obviously miscalculated the risk. This was when I was 25 and thought I had the masterplan for the rest of my life thought through! And now I am in the situation that everyone has warned me of!

My question though is if there is any way of salvaging the situation?

poppy10_2

bombata wrote: »

I know its sounds stupid now!

I admit that I obviously miscalculated the risk. This was when I was 25 and thought I had the masterplan for the rest of my life thought through! And now I am in the situation that everyone has warned me of!

My question though is if there is any way of salvaging the situation?

Staircasing up your ownership of the property often seems like the best idea but can actually make your property harder to sell - will potential buyers be able to afford a 75% share rather than a 35% share? Sometimes the better option is to put the money into paying off as much of the mortgage as you can, and getting out before house prices tumble further.

Richard_Webster

You also have to realise that lenders will only lend on the value of the whole 75% and this takes into account any existing loan.

The sum is not: "40% costs £108,000, we've got £10,800 and lender will lend us 90% - another £97,200." They will only lend their present LTV ratio on the whole 75% including any extra amount.

Suppose you got a 100% mortgage when you bought the 35% - that would have been £107,800.

75% of flat now worth £202,500 on your figures. So if a lender would lend up to 90% of valuation of share then max loan is £182,250 from which you would have to deduct the £107,800 existing loan leaving £74,450 additional loan available. It costs £108,000 (40% of £270K) to buy the extra share - so in that case you would have to find the difference of £33,550.

Obviously that assumes you took out a 100% loan to start with - if it was only 90% then the figure would be less using the same kind of calculation.

Also as others have hinted, it is the HA's official valuation that usually matters - not one you got form an estate agent.

JonnyNewBuild

This is interesting as it looks like you're about a year ahead of me. I have a 40% share of a 2 bed flat in Stratford, East London which I bought in July 2009.

How did the scheme that you joined calculate the asking price. Under the Newbuild Homebuy Scheme that I'm on, the property was orginally valued by the developer at £265k, but the final asking price was determined by an independent valuation which came in at £220k. Was this what happened with your scheme?

I'm due to remortgage soon which will no doubt involve a valuation. Now you've made me slightly nervous as to which it could come in at!

brit1234

As poppy said concentrate on paying down the mortgage, let the Housing Association take 70% of any future loses. I also think it is far more likely your property will go down rather than up in the next 3 years.

Also the smaller the share you own the easier it is to sell. What ever you do don't staircase any more, pay the mortgage off first.

bombata

Thanks for all the replies.

I bought the flat at 35% for £107,800.0 but I had a 30k deposit so had to take out a mortgage for £ 77800 now it stands at about £69000.

I currently pay £540 rent and £130 service charge. However my boyfriend has another 70-80k that he could invest into the flat.

Our inital thought was now to maybe staircase up to 40% because then the housing associaton will pay the evaluation cost and 1500 towards any other cost. It will also mean that the rent will go down as it should go down by 13% like the rest of the value of the flat.

That would mean that we staircase up without (or a very small mortgage) and be able to save the £410 a month that I currently pay on the mortgage which amount to nearly 15k in 3 years.

If he puts in a bond or so he could get about 2 k in interest.

The money on the lower value of my share is gone anyway and may or not may be recuperated in the next 3 years but if the value falls even lower then at least we do not take the brunt of it.

I had my flat valued by an independent valuer who was organised by the housing association. He did indicate that he would give us a favourble valuation due to our plans of staircasing... but 38k would be very generous indeed and now just made me panicked.

He said that the prices will fall even more after the Olympics in East London. Also in my area they keep on demolishing 300 flat council estates and building 500 flats on the same plot which means that the area may soon be overpopulated with new build flats.

What does everyone think about this plan?

vax2002

The main problem is you did not buy a share in a flat, you bought a lease, someone else owns the flat, you own a bit of paper that lets you live there.
Leases are the New endowments and they are in for one almighty crash, for all you own is the paper its written on, the equity is owned by someone else and is traded on goodwill and will be used as secured bonds for debts, they will get called in. .

brit1234

bombata wrote: »

I had my flat valued by an independent:question: (Yeah Right) valuer who was organised by the housing association. He did indicate that he would give us a favourble valuation due to our plans of staircasing... but 38k would be very generous indeed and now just made me panicked.

The housing association want you to have a bigger share as you take a bigger hit on the falls and they take a lesser hit.

bombata wrote: »

He said that the prices will fall even more after the Olympics in East London. Also in my area they keep on demolishing 300 flat council estates and building 500 flats on the same plot which means that the area may soon be overpopulated with new build flats.

I actually believe this as well especially as they convert the Olympic village into residential homes and greedy landlords who hiked their rents for it have problems.

Even more reason not to stair case further and pay off the existing mortgage reducing your mortgage payments.