shared ownership negative equity staircasing?

eddddy

elliotwave wrote: »

but only in as much as you were paying capital + interest on the higher valuation for the length of time before you staircased. It's not like if you move and sell and have to wrap up the mortgage and actually pay any neg equity shortfall. So you're not actually losing any money and you are increasing your % age at a lower valuation ... so I would still say that you want that negative equity?

You have definitely lost money. You are worse off.


Based on the numbers earlier in the thread:

- You bought 50% of a property some time back for £50k.
- (You now plan to buy another 20% for £16k)


If you had not bought some time back...

- Today you could buy 50% of the property for £40k
- (Plus the extra 20% for £16k)


i.e. Your investment has dropped in value. You have lost £10k of your original £50k.

elliotwave

eddddy wrote: »

You have definitely lost money. You are worse off.
Based on the numbers earlier in the thread:
- You bought 50% of a property some time back for £50k.
- (You now plan to buy another 20% for £16k)
If you had not bought some time back...
- Today you could buy 50% of the property for £40k
- (Plus the extra 20% for £16k)
i.e. Your investment has dropped in value. You have lost £10k of your original £50k.

Yes, but that's using hindsight. My point is that, whilst it would be true that my 50% equity is now valued at £40K, because I am staircasing I am not physically having to pay the £10K negative equity shortfall to staircase that I would if were moving to another SO property. So with SO, the 'option' to buy in the future at a lower price provides some protection against negative equity.

Moneycantbuyyourhappiness

The key question is why staircase now when it might fall even further ? Prices are crashing everywhere. Just do a quick check to see how long does it take for properties to sell in your area.

Bogalot

elliotwave wrote: »

Yes, but that's using hindsight. My point is that, whilst it would be true that my 50% equity is now valued at £40K, because I am staircasing I am not physically having to pay the £10K negative equity shortfall to staircase that I would if were moving to another SO property. So with SO, the 'option' to buy in the future at a lower price provides some protection against negative equity.

You're massively overcomplicating this.

If you don't sell your house then negative equity is irrelevant. It only becomes an issue if you want to sell.

Are you wanting to staircase or is this some random hypothetical?

rtho782

elliotwave wrote: »

Yes, but that's using hindsight. My point is that, whilst it would be true that my 50% equity is now valued at £40K, because I am staircasing I am not physically having to pay the £10K negative equity shortfall to staircase that I would if were moving to another SO property. So with SO, the 'option' to buy in the future at a lower price provides some protection against negative equity.

The negative equity is relevant, as your mortgage company won't let you take out a new mortgage over 100% LTV. Unless you have the money to buy the 20% share in cash outright, there is no way around the fact that you can't borrow more against this asset when you already owe more than it is worth.

You can't have a 110% mortgage (negative equity) on the 50% share and another smaller 90% mortgage on the 20% share.

Your lender may well block you doing anything until the negative equity is cleared.

ReadingTim

ok, let's break this transaction down into its component steps (staircasing and remortgaging) and for the sake of simplicity assume you're on an interest only mortgage, haven't made any additional savings, and the banks will lend up to 95% LTV.

• You have a deposit of £5k and get a £95k mortgage with Bank A for 50% of a £200k property.
  
  
• Your house falls in price to £160k. Your share of the house is worth £80k, but you own Bank A £95k. You therefore have £15k of negative equity, and no savings.
  
  
• You want to staircase to 75% ownership by remortgaging with Bank B. 75% of the property's value of £160k is £120k, but Bank B will only lend you £114k. You therefore need £6k to give to Bank B to allow them to pay off your mortgage with Bank A to make the transaction happen, which you don't have.

Shared ownership, by its very name, shares the cost of buying a property, and the benefit of selling it for more than you bought it for. It also shares the risk of a falling market, and selling it for less than you bought it. What it does not do however, is transfer all of that risk to the HA or the banks. Using the example above, you have gone from +£5k of savings to -£6k, or lost £11k.

elliotwave

Bogalot wrote: »

If you don't sell your house then negative equity is irrelevant. It only becomes an issue if you want to sell.

Are you wanting to staircase or is this some random hypothetical?

This is my point, you are not selling but re pricing your mortgage to a lower valuation, taking advantage of falling prices, whilst at the same time increasing your equity percentage. so in a falling market. SO looks like a pretty good deal. I think the market maybe is beginning to correct, so I am considering SO.

It begs the question... "Does the HA loose money and if so are they more likely to try to value the property higher in a falling market in order to minimise losses? Is there anyway to ensure that, if you are staircasing in a falling market (and in negative equity as a result), the HA valuation is independent and not in any way favourable to them?

MyOnlyPost

elliotwave wrote: »

This is my point, you are not selling but re pricing your mortgage to a lower valuation, taking advantage of falling prices, whilst at the same time increasing your equity percentage. so in a falling market. SO looks like a pretty good deal. I think the market maybe is beginning to correct, so I am considering SO.

It begs the question... "Does the HA loose money and if so are they more likely to try to value the property higher in a falling market in order to minimise losses? Is there anyway to ensure that, if you are staircasing in a falling market (and in negative equity as a result), the HA valuation is independent and not in any way favourable to them?

You can pay for an independent valuation of the property, but the mortgage lender would usually require a valuation anyway and would arrange it at your cost.

You are missing the point that becuase the value of you house has fallen your ability to lend against it has fallen too. Your new mortgage first and foremost has to raise the £45k to pay off your old mortgage, regardless of the current value of what you initially bought. It then has to raise the money to buy the additional 20% at £16k, therefore you would have a £61k mortgage on 70% of a property with a total value of £56k which clearly no lender would go for.

You owe £45k (assuming £5k deposit), that does not change because the house price has dropped.
You need £16k to purchase a further 20% (assuming no further money from you)
Your new lending total is £61k

HOWEVER

The house is now worth £80k
Your 50% is only worth £40k, but you still owe £45k for it
Your 70% after purchase would be worth £56k
Typically a lender would only lend £50k against this valuation

Moneycantbuyyourhappiness

ReadingTim wrote: »

ok, let's break this transaction down into its component steps (staircasing and remortgaging) and for the sake of simplicity assume you're on an interest only mortgage, haven't made any additional savings, and the banks will lend up to 95% LTV.

• You have a deposit of £5k and get a £95k mortgage with Bank A for 50% of a £200k property.
  
  
• Your house falls in price to £160k. Your share of the house is worth £80k, but you own Bank A £95k. You therefore have £15k of negative equity, and no savings.
  
  
• You want to staircase to 75% ownership by remortgaging with Bank B. 75% of the property's value of £160k is £120k, but Bank B will only lend you £114k. You therefore need £6k to give to Bank B to allow them to pay off your mortgage with Bank A to make the transaction happen, which you don't have.

Shared ownership, by its very name, shares the cost of buying a property, and the benefit of selling it for more than you bought it for. It also shares the risk of a falling market, and selling it for less than you bought it. What it does not do however, is transfer all of that risk to the HA or the banks. Using the example above, you have gone from +£5k of savings to -£6k, or lost £11k.

HA and the bank does not take any of the risk. HA usually get the land really cheap from the council, and you still pay rent based on the original purchase price (if you cannot staircase when the price drop).

And bank usually ask for a LTV of minimum of 75% for shared ownership. Do you think your bank would lend you more money to buy more shares when the price begin drop? :rotfl: