Shared Ownership “Staircasing”

Uncle_Pennybags

I haven’t been able to sleep because I’m mulling this over. Even if I don’t get any answers from this thread, at least I will have vented by creating it. 

I bought 40% of a two bedroom leasehold flat in 2016. Since then, my property payment per month has been:
*Mortgage : £197
*Rent on the 60% : £245 (pro rata £408 per month)
*Service charge : £108
Total : £550
Next year, the mortgage is up for renegotiation and since 2016, my salary increased by 75%. For these reasons, I’ve started to think about buying the remaining 60% from the social landlord. I like the flat and it’s in a good area in one of the most attractive and expensive small cities in the UK. 

Also since 2016, the value of the flat has increased 5% per year. As I own less than 50% of it, this represents an increasing potential expense. The upper estimate of the flat’s full value would mean I could be paying around £1000 per month on a 20 year mortgage term. This would represent 42% of my net salary. The contrasts with only 21% of my take home being spent on rent and mortgage and service charge now. 

From what I’ve tried to explain, is it worth surrendering the subsidised rent on the landlord’s 60% and the good resultant monthly cash flow for the equity from an increased mortgage which will decrease my cash flow?

Normally its better to buy to avoid market rents but the rent I’m paying is subsidised so one of the main arguments for buying might not apply here. I might be better investing my surplus monthly cash elsewhere instead of mortgaging myself to 42% of my take home salary. 

Any thoughts about my fairly unique situation? Might it be worth to see a financial advisor who would see more context than a mortgage advisor?

yllop1101

I bought 100% of a shared ownership property (unique situation- I was already renting it off the owners so got first dibs) and we considered buying part or all of it, and decided on all of it. 
I think a bit more info, or thinking about the bigger picture, may help you. How long do you plan on staying in the flat for? Is the area one that you think will continue to rise? With all your outgoings, can you afford the potential mortgage?
 If it was me, and I could afford it, I would be tempted to buy it all in one final sweep (as each stair casing process, with valuations and legal fees, is expensive). This will give you then the full benefits of any increase in value over the years, and also more autonomy when it comes to selling it (usually- although check your contract- once you own 100% you can sell it open market, which often means getting a better price, although again, depends on the block you're in, ie. is it lots of social housing which is likely to put other buyers off). 

Uncle_Pennybags

Hi thanks for the reply. 

I think I’ll stay in the area for another 6 years. My fixed mortgage is up for renegotiation next year and I’ll stay another 5 years after this. The area is sought after. I would not have afforded a flat on the open market. Typically domestic property rises 5% per annum so less than a 20 year index tracker. 

My cash flow would halve if I took on the 100% mortgage and it would be higher than the open market monthly rent of a comparable flat up the road. My mortgage repayment would only dip under my current outlet in year 18 of a 20 year mortgage. 

Another option is to pay off my mortgage of the 40% that I own. 

Phill143

I staircased to 100% of a shared ownership property in a couple of transactions; this was 6 years ago, so the rules may have changed in the interim.
Some thoughts from my experience, which may or may not apply to your situation:
1) One of the main reasons I did it in several stages (other than saving for deposit/general affordability) is that stamp duty was only payable on either the final transaction, or on a staircasing purchase taking you over 80%. So a significant saving in stamp duty by first staircasing to 75%, then up to 100% - even when factoring in extra legal fees. 
2) Keeping the LTV low opened up better mortgage rates and made the mortgage cheaper than if I'd done it in one step. 

Potentially, an interim step - like 75% - could reduce the downside exposure to house price rises, whilst not fully taking on the 'hit' of increased mortgage vs rent cost. 

Uncle_Pennybags

Staircasing to 60% plus ownership is another option as it would put me on the right side of local house price rises at least. A 100% purchase would put the LTV over 80%. 

When the comparable flat went up for open market rent, I realised just how much of a subsidy I’m receiving for the rent of the unbought 60%. Pro rata to 100% my rent in only £450 per month when the full market rent up the road is £850. 

By taking on a much larger mortgage to live in the same place I’d be surrendering this Rent subsidy and this would represent a huge negative swing on my monthly cash flow. 

Uncle_Pennybags

Quick one: should the initial mortgage repayments be below or at most equal to renting a comparable property nearby?

i ask because a comparable flat has come up for rent at £850 per month and it’s of a higher specification to mine. It’s 50m up the road. My initial mortgage repayments will be around £1.1k per month over 20 years.