Shared ownership - Should we pay off the mortgage or buy more of the house?

astar_2

hello
I don't know if anyone can help me with this, i am not very good with complicated calculations!
We currently own 50% of our house under shared ownership (50% valued at approx 77,000) and have a mortgage of 65,000. We are soon receiving around 40,000 (not redundancy or anything so it is surplus to our everyday spending). What i would like to know is whether it would be more beneficial to buy a further 25% of the house or whether to pay a lump sum off of the mortgage.
We currently pay rent of 158pcm on the 50% of the house we don't own, which would decrease to around 80pcm if we bought a further 25%
I cant work out which is the best idea financially and in terms of our next move up the property ladder (we will probably be looking to move in a year or two).
At present we pay 250pcm as overpayments on our mortgage, but if we payed off a lump sum we could probably then overpay by about 400pcm (and put away some money in savings each month)
Oh, also, as we are on a 2 year tracker I think we will have to pay about 700 penalty for paying the lump sum, but then again, if we decide to buy more of the house, we have to pay fees (likely to be about 500)
I'm soooo confused so hope that this makes some sort of sense to somone as I am also really bad at explaining things!!!

ukbill69

Id say use the whole amount to buy more of the house, cutting down on rental then.

huddsta

Agreed. Avoid buying anything other than the extra 50% share otherwise if you ever come to buy the remainder then you'll have to pay a second lot of legal fees, valuation and changes to the mortgage. Ends up being rather expensive.

aussielovell

i had a similar query to this. I am buying my first home via shared ownership. I will own 60% and homestake will own 40%. I dont pay any rent on this share. I dont know whether I should be using any surplus funds to pay off the mortgage early or whether i should put in a high interest saving account until i can purchase the minimum 20% share which is held by homestake.

My mortgage is fixed for 2 years 6.35% I suppose it depends how much value the house grows.

RufusFrog_2

Sorry I'm a bit tired at the moment (!) but (to contradict everyone else) I thought that the rental payments on these scheme were much below commercial rates so you would be much, much better off if you pay off the mortgage first (although maybe wait until the tie-in period ends). Assuming a low fix of around 5%, interest on 65k would be about £270 a month but on £25k is £105 so (ignoring repayment element because it's just too complicated to work out at 3 a.m.) you would save £165 a month - more than your whole rental?). You could then use that extra money each month to pay off the rest of the mortgage really quickly and then start saving up to buy more of the house. I would think of the rental half as a really cheap "interest only" mortgage and go for the most expensive debt first.

Bargain_Rzl

I have been thinking about this question for the future (I'm only 4 months into my mortgage, but am thinking ahead). I own 40% of my £145k flat, on a £51k mortgage (I had a £7k deposit).

I don't know how flexible your mortgage is, so you will have to think whether my answer is compatible with your circumstances.

BUT

I have a Nationwide mortgage which enables me to borrow back any overpayments at the same rate as the rest of the mortgage. What I think I would do is pay off as much of the mortgage as possible, without reducing it to zero - and then assess my circumstances. I'd have the choice between (a) extending my mortgage to staircase to 100%, (b) extending my mortgage to staircase to an intermediate share (probably 70%) or (c) continuing to pay off the existing mortgage to leave myself with a permanently low rent on the remainder.

Advantages of (a)
I would then own the entire property and would be able to sell it on the open market, or let it out.
Assuming that (in the long run) house prices will rise, I would be buying into the remainder of it at the earliest possible market value.
I would be staircasing in one go, therefore incurring only one set of additional valuation and legal fees.

Advantages of (b)
TBH the only advantage is that I'd have a greater stake in the property!
There are many disadvantages:
I'd still have another 30% to purchase at (probably) a higher market value.
I'd still have another set of legals to pay.
I'd probably find it more difficult to sell the flat, should I need to, as it would no longer be as "affordable" for the target FTB shared ownership market.

Advantages of (c)
I would have no further fees.
I would leave myself with a monthly rent of £217.50 (plus inflation) which would give me the flexibility to make big changes in my life, such as taking a salary cut in order to change career.
I should find the flat easy to sell to somebody in the target FTB shared ownership income bracket.

As you can see, I really think (b) is a bad idea. I'm currently hoping that I might really be able to throw money at my current mortgage over the next 5 years or so, to clear it down to a level where I can then afford to staircase to 100% or not at all.

Bargain_Rzl

Sorry, forgot to say this: in the current climate, I would be inclined to pay off the majority of my mortgage to avoid rising interest rates, then sit on it for a while and see what happens. I WOULD NOT buy any more of my flat in the next couple of years. I would want to see what happens to interest rates, and more to the point, what happens to property values. There is a fair chance there will be a dip if not a crash. The remainder of your house will be sold to you at its current market value, which could be lower in five years time than it is today...

Midas

Agree with Bargain Rzl. Pay all of the money off your mortgage, and continue to pay the same amount each month of the remainder of your mortgage (inc. overpayment). This way your mortgage will be cleared very quickly. You can then save all of this money each month until you have enough to buy the remainder of the equity. The only advantage of buying more of the equity now would be that you would gain more of any rise in house prices... but equally you'd be hit harder by a fall, which IMHO is more likely over the next 3-4 years.

Bargain_Rzl

Sorry, I missed the part in your first post about the fact that you would like to move house in the not too distant future.

In that case I would DEFINITELY say to pay the lump sum off your existing mortgage (if there's a way you can do this gradually that works out cheaper than incurring an early repayment penalty, so much the better).

If you buy the rest of your house now, then the property market slumps, you stand a good chance of ending up in negative equity which will make it very difficult for you to move.

If you buy part of the rest of your house now, when you come to move you are likely to find that your property does not appeal to shared ownership FTBs (who will either be unable to afford the mortgage element on 75% of the property, or will choose to buy another property outright on the open market for only fractionally more, without the implications of shared ownership).

Get your mortgage down nice and low and you'll be in a good position to move, no matter what the housing market does!

astar_2

Thanks for the advice everyone. just to let you know that we have decided to pay off a lump sum of the mortgage.
Thanks once again*