Sharing the burden proves popular
14th Jul 2009
Shared equity purchase is proving to be a popular way for first time buyers, in particular, to enter the housing market.
Shared purchase schemes are where the buyer pays 75 per cent of the purchase price with the developed taking a second charge on the remaining quarter.
The 25 per cent becomes an interest free loan which is required to be repaid on the re-sale of the property or after an agreed term, usually ten years. Lenders will not agree to a term of less than five years.
Although the buyer pays only 75 per cent of the price to purchase the property, they own 100 per cent and are responsible for 100 per cent of all land burdens, buildings insurance and so on.
At re-sale, the amount of repayment is based on 25 per cent of the property’s open market value, arrived at via an independent valuer.
If the resale price falls below the purchase price the share is based on 25 per cent of the sale price.
The cost of any improvements made by since the original purchase is deducted from the valuation figure.
For example, at an original purchase price of £120,000, a loan of £90,000 is required plus a £30,000 interest free loan.
If the onward selling price is £140,000, the loan of £90,000 is repaid plus £35,000.
If the selling price falls below the original purchase price, say £110,000, the pay back is £90,000 plus £27,500.
In order to qualify for the scheme, purchases must use one of the Panel Approved Mortgage Brokers.
Most lenders that operate the scheme will allow purchasers to borrow 100 per cent of the 75 per cent value, so it may not be necessary to offer any deposit, making the scheme particularly attractive to first time buyers.
Once the purchaser has bought their property they can pay back part of the 25 per cent as long as the repayment installation is equal to or more than a quarter of the outstanding 25 per cent interest free loan. This will be based on an overall independent valuation at that time.
If a buyer decides they do want to purchase a property under the scheme, they must first sign a reservation form with the developer.
The contract pertaining to the purchase, along with a separate Deed relating to the shared purchase scheme, will be forwarded from the developer’s solicitors to the purchaser’s nominated solicitor.
Denise Miller is a conveyancing executive at BHP Law and a specialist in shared equity purchase. She can be contacted on (01325) 466794.
Author: Denise Miller, Conveyancing Executive (DeniseM@bhplaw.co.uk)
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