Shared Ownership staircasing to 100%, stamp duty, rent, remortgaging & "First Refusal"

p4nd

Hello all,
I'm hoping someone could impart some advice on a Shared Ownership flat I am about to complete on. 

Currently looking at owning 60% of said flat. Housing Association (HA) informs me that at 85% I would no longer pay any rent. At 100% I have the ability to sub-let. My solicitor wants me to confirm if I want to pay SDLT on the 60% share (which is currently nothing thanks to the holiday) or several thousand on the 100%.

Is there any real incentive to actually achieve 100% ownership? On reading about SO, it seems there is no simple answer: if you own 100% you in effect by-pass the HA's "First Refusal" (which I still don't understand why it seems to strike fear into potential SO sellers).

Is it not better to pay stamp duty to the value of 85% and never own beyond this? To staircase, assuming that you have no further cash reserves, the only way you raise the cash is through remortgaging the property asking for a bigger mortgage to in effect buy another tranche. But the bigger the mortgage the bigger your repayments so surely the more you want to staircase you're going to be like a dog chasing its tail? That is unless you get a new, better-paid job, or that wealthy relative you never knew existed departs the earth and leaves you a nice cash drop.

So in summary:

• Why buy/staircase to a % share greater than the % which no rent to pay to the HO? (assuming you don't want to sublet)
• Why is the first-refusal clause a source of such aggravation to owners looking to sell?  
• How viable is staircasing solely by remortgaging (assume a steady property value rise).

princeofpounds

It depends on the scheme. You're right to say there is no simple answer as it depends entirely on the specific T&Cs. It could be better to sit at 85% for a long time, although it won't be forever.

People may really want the ability to let the property. 

People may want the ability to extend the lease through the statutory process. Watch out for this! Often you cannot do so unless you own 100%. Sometimes SO properties are sold with e.g. 90 year leases and people end up falling below 80 years and having to pay more for lease extension when they eventually achieve it.

First refusal and the involvement of the HA can be a real pain when trying to sell. Their process can slow everything down hugely, and they basically take control of what pricing you can market at. 

Staircasing by remortgaging depends entirely on property price movements, inflation and your own income etc. On a standard repayment mortgage the early years pay down less principal than the time elapsed; e.g. on a 25 year mortgage you will not have accumulated anywhere near 20% of further equity after a 5 year terms (assuming all else remains equity). 

Personally I think it's bizarre that they cut off rent at 85% ownership, but hey, if that's how it is.

TBagpuss

First refusal can slow things down very significantly - the HA has to value the property rather than relying on your estate agent and this can also cause delay, which can be a real problem if you are selling in a fairly fast-moving market.

If you own 100% then you have more flexibility when/if you want to move on.

Yes, you will pay more than if you don't staircase, but you will also have more equity than if you had not staircased, when you come to sell,  as you will have made a bigger investment into the property. This in turn is likely to give you more options when you do move on.

If it was me, if I could afford to get to 100% i would, but you are best placed to decide whether that's something which is practical and affordable for you personally,right now. 

firsttimesellerldn

At the moment lots of leaseholders in SO properties are having problems selling their flats due to cladding/related issues. Don't assume this couldn't happen to you as there is still a lot of uncertainty over acceptable levels of risk for flats and further changes are likely, eg. the Building Safety Bill. Given that context, the ability to let your flat out is valuable as the alternative is that if you want to move, you can't as no-one will lend on it and you face being trapped living there. Lots of people are facing this exact situation at the moment. 

oldbikebloke

when you come to sell (and I doubt you will spend the rest of your life there) the higher the % of the property you own, the less attractive it is to a buyer since they have all the running costs of the property yet only get a share of its value when sold.

I appreciate the no rent above 85% removes a huge stumbling block on many SO properties, but nonetheless even in these troubled times of house prices, the number of people who will want 85% is limited as that is so close to 100% they may well go look elsewhere. The alternative is you get an offer subject to you staircasing to 100% before selling it to them so they end up buying the 100% they want.

as you say, there is no simple answer, each person will have a different weighting of the issues that matter to them. As you yourself identify, those in SO are there because they have bought into the UK obsession with judging success in life by what  property you own, but by definition, they can't actually afford to buy it so are stuck in SO until they get more income with which to escape it. The closer they get to having enough income, the less interested they will be in "high" % SO properties as they could leap frog to 100% themselves, which may mean not buying yours but settling got something that may be a bit smaller/worse location because it is within their range. 

SDLT_Geek

p4nd said:

Hello all,
I'm hoping someone could impart some advice on a Shared Ownership flat I am about to complete on. 
Currently looking at owning 60% of said flat. Housing Association (HA) informs me that at 85% I would no longer pay any rent. At 100% I have the ability to sub-let. My solicitor wants me to confirm if I want to pay SDLT on the 60% share (which is currently nothing thanks to the holiday) or several thousand on the 100%.
Is there any real incentive to actually achieve 100% ownership? On reading about SO, it seems there is no simple answer: if you own 100% you in effect by-pass the HA's "First Refusal" (which I still don't understand why it seems to strike fear into potential SO sellers).
Is it not better to pay stamp duty to the value of 85% and never own beyond this? To staircase, assuming that you have no further cash reserves, the only way you raise the cash is through remortgaging the property asking for a bigger mortgage to in effect buy another tranche. But the bigger the mortgage the bigger your repayments so surely the more you want to staircase you're going to be like a dog chasing its tail? That is unless you get a new, better-paid job, or that wealthy relative you never knew existed departs the earth and leaves you a nice cash drop.
So in summary:
Why buy/staircase to a % share greater than the % which no rent to pay to the HO? (assuming you don't want to sublet)Why is the first-refusal clause a source of such aggravation to owners looking to sell?  
How viable is staircasing solely by remortgaging (assume a steady property value rise).

Looking just at the stamp duty land tax, many would say "make hay whilst the sun shines", take full advantage of the holiday and get all the SDLT paid once and for all.  That not only means you will not need to pay SDLT should you staircase out over 80%.  Should you sell the lease at say 60%, then your assignee could staircase out later without paying SDLT.  That makes the purchase of your 60% share lease more attractive.  
Also it is not uncommon to have to staircase out on a sale of the lease, so it could save you a lot of cost later if you can afford to bite the bullet now and get the SDLT paid.

p4nd

Thank you to all your responses.
The HA clarified with me that rent is paid until you reach 100% ownership.
Some very interesting points mentioned, I'm seeking confirmation with regards to the Building Safety Bill. Whilst my flat is on the 2nd floor, part of the building is 4 or 5 storeys high, and if there's no sprinkler system I assume that I'll be liable to contribute to the installation of one (I can't see in the lease paperwork confirmation of the actual height of the building, nor the materials used in the cladding). 

Based on what you've all replied with, in an ideal world, I'm going to try to get to 100% ownership, and pay 100% of the SDLT now whilst this unique turn of events is presenting the opportunity to do so.

[Deleted User]

I had a client selling a shared ownership through an estate agent.  Initial offer came in at asking price and bidding war ensues and it goes to £10k above asking. Estate agent calls the HA and they say that it has to sell for the RICS valued price and no more.   Client lost out on a lot of money because the HA have rules they have to follow.  Going to 100% puts decisions in your corner and I think thats always a good place to be

depressed4581

My advice is stay well clear of shared ownership me and my wife have owned ours for just short of 13 years and have been trying to sell for nearly 3.The HA we have has dragged there feet at every step first they have to have first refusal on the property and there not interested in buy back.Then your forced to have them sell it via there site for 12 months after this you can put it on the open market.At the point of 12 months then your allowed to sub let.
our rent is more than our mortgage and then we pay £107 a month service charges it is the biggest mistake i ever made if i was to do it again i would save for a bigger deposit and buy outright.

This might not be the rules for all HA so i would look into it fully before making your decision.

annetheman

p4nd said:

Hello all,
I'm hoping someone could impart some advice on a Shared Ownership flat I am about to complete on. 
Hello, fellow S/O person almost completing!


Currently looking at owning 60% of said flat. Housing Association (HA) informs me that at 85% I would no longer pay any rent. At 100% I have the ability to sub-let. My solicitor wants me to confirm if I want to pay SDLT on the 60% share (which is currently nothing thanks to the holiday) or several thousand on the 100%.

I see the HA have clarified you pay rent until the full 100% is owned by you. It would be financially unviable for them to offer S/O otherwise. 
I'd pay full SDLT on the full amount now, take advantage of the 'holiday'. I would also not go above 60% unless you are 100% sure you will staircase to 100%. 
Reason being that above this %age, the amount you're paying for S/O is very close or comparable to buying outright 100% leasehold or even freehold, which is always preferable (no rent, less/no onerous restrictions etc etc).


Is there any real incentive to actually achieve 100% ownership? On reading about SO, it seems there is no simple answer: if you own 100% you in effect by-pass the HA's "First Refusal" (which I still don't understand why it seems to strike fear into potential SO sellers).

Yes - see the reply above mine. The longer you remain below 100%, the higher your rent goes up on the unowned portion. How much by depends on the individual lease e.g. mine is annually based in RPI, which I consider to be fair, far fairer than many I've heard of (some double, some RPI + 5%, etc). I have had the idea of staircasing to 99% (you will be able to increase by 1%s from 2021) to avoid paying ground rent and staying there until I decide to sell. Interested in opinions on this!
I think first refusal can be a let-down for S/O sellers where they know that if they sell on the open market, they could ask for more. HAs have a duty to ensure the asking price remains in the 'affordable' bracket relative to the area. Also you won't have to pay their fees at 100% when you sell.


Is it not better to pay stamp duty to the value of 85% and never own beyond this? To staircase, assuming that you have no further cash reserves, the only way you raise the cash is through remortgaging the property asking for a bigger mortgage to in effect buy another tranche. But the bigger the mortgage the bigger your repayments so surely the more you want to staircase you're going to be like a dog chasing its tail? That is unless you get a new, better-paid job, or that wealthy relative you never knew existed departs the earth and leaves you a nice cash drop.

Yep, wouldn't go above 60% unless you are sure you'll get to 100% for reasons listed above. I would say it depends on your industry and the career projectory within it, and a healthy dose of reality is important here. Life cirumstances could mean you don't actually follow that projectory as you thought. You might find other circumstances change that mean you can besides earning more e.g. you may get married in 5 years and have double the income to get a bigger mortgage if you want to own it together. I think key for preparing for a remortgage is overpaying regularly and continuing to build your savings. The longer you leave staircasing, the more expensive the additional shares are likely to become - that said, the more of your mortgage you will have paid off and the higher equity will be in your owned shares. You may also have more years worth of savings, but I'd say make a decision about whether you realistically can and want to get to 100% before you go above 60%. 

I've read that 100% staircasing only happens in about 5% of S/O cases, good because it means there is no real net change in S/O stock so someone else can have a chance to lease S/O too, but also indicative of how difficult it is for most.

Hope that gives some perspective that may help!

SDLT_Geek

annetheman said: 

I have had the idea of staircasing to 99% (you will be able to increase by 1%s from 2021) to avoid paying ground rent and staying there until I decide to sell. Interested in opinions on this!

It is likely that the shared ownership lease will require the last increase to be at least 10%.  Here is a clause from the model form of lease which can be found on line here: https://www.gov.uk/guidance/capital-funding-guide/1-help-to-buy-shared-ownership
“Portioned Percentage” means at any relevant time (including for the avoidance of doubt on the Final Staircasing) the percentage interest in the Premises which the Leaseholder proposes to acquire (or has already acquired) under the provisions of ‎Schedule 6 (Staircasing Provisions ), being a portion of the then Market Value of the Premises up to a maximum of 100%, each Portioned Percentage being at least 10%, and so that the Portioned Percentage which accomplishes Final Staircasing shall be at least 10%.