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Shared ownership sometimes dearer than buying 100%

Halifax has released a survey today which highlights the fact that a high proportion of potential homeowners have little or no knowledge of shared ownership and in particular only 24% of Brits would consider buying a home through a shared equity or shared ownership scheme.

It is unquestionably helpful that Halifax is highlighting this as an option for potential home owners and it will certainly be the best option for some.

But using the example that Halifax gives there is an alternative option which most potential purchasers would prefer which would often have lower monthly costs, allow the purchaser to own 100% of their property and not restrict their choice of property to those available on a shared equity/ownership basis.

It is called an interest only mortgage, a useful option for some homeowners, but which most lenders no longer offer at LTVs above 75% and which the FSA seems to think is almost as dangerous as weapons of mass destruction, despite its own research proving otherwise.

The example Halifax uses is a shared ownership property that costs £160,000, with a 75% share being purchased with a deposit of 15%. Thus the numbers are:

Purchase price of 75% share: £120,000.

Deposit: 15% (£18,000).

Mortgage: £102,000.

Halifax has used its three-year fixed rate of 5.79% to illustrate the monthly costs and assumed a 25 year repayment mortgage.

The result is a monthly mortgage payment of £652 plus rent for the 25% of the property being rented of £92, giving a total monthly cost of £744.

If instead of buying 75% of this property the same purchaser bought 100% with the best 90% three year fixed rate mortgage on an interest only basis the deposit required would be £2,000 less and the monthly payments £61 less.

The 5.79% three-year fixed rate Halifax has used in its example is a direct only product and to make a like for like comparison I have used the cheapest 90% three-year fixed rate available on an interest only basis, including direct only deals. This is 5.69% from the Post Office, which has similar set up costs to the Halifax mortgage.

Here are the calculations:

Purchase price: £160,000.

Deposit: 10% (£16,000).

Mortgage: £144,000.

Monthly interest only cost at 5.69%: £683.

Clearly it would be illogical for any lender who considered £744 per month as affordable to not also consider £683 as also affordable.

Although the risk and capital adequacy requirement are obviously higher on a 90% mortgage than an 85% shared equity mortgage on which the lender has a first charge on 100% of the property.

Despite this the Post Office, with a mortgage also funded by a lender relying on state support, Bank of Ireland, offers a three-year fixed rate to 90% LTV which is 0.10% lower than the Halifax rate to 85%.

Furthermore, a purchaser preferring to buy 100% of the property with an interest only mortgage could alternatively have a five-year fixed rate from the Post Office only 0.1% dearer than the three-year fixed rate, such as a rate of 5.79%.

This would increase the monthly payments to £695, which in my view is a small price to pay for an extra two-years worth of interest rate security. Furthermore it would still be £49 per month cheaper than the shared ownership option.

Purchasers who can only afford, say, a 50% equity share are less likely to find purchasing 100% is an option, primarily because of the subsidised rent on whatever portion is not purchased, but these figures clearly demonstrate just one example of where an interest only mortgage may be best advice for a purchaser.


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