Key Post How "shared ownership" works

[Brendan Burgess]

This thread is about the complex topic of shared ownership. Any posts on Affordable Housing will be deleted. It would be very helpful if someone wrote a sister thread on Affordable Housing.

This thread relates to houses purchased after 1 January 2003 only. Again, it would be very helpful if someone wrote a sister thread on how shared ownership worked for houses purchased before that date.

I have pieced this together from various guides but I have not yet received a copy of the actual contract issued on the purchase of the house. I would be very grateful if someone could email a copy of this to brendan askaboutmoney.com

The terms "shared ownership" and "rent" are misnomers
I have no idea why these contracts are described as "shared ownership". They have none of the features of ownership.
The "Council's share" is actually an ordinary mortgage. Sometimes this is referred to as "rental equity"
The "rent" is actually an ordinary mortgage payment.
Understanding these misnomers is the key to understanding how "shared ownership" works

Much of the public commentary on Shared Ownership is wrong as a result of these misnomers
I have looked at posts over the years on askboutmoney and other websites, and they almost all misunderstand how it works. I have looked at the guides from the county councils and they often contain errors. People report having been given misleading and inconsistent information from their council and I fully understand why this is. The most serious misunderstanding was the frequent recommendation to get an ordinary mortgage as they were cheaper. If the borrower was able to get a tracker, they would have been cheaper, but all other mortgages were more expensive, and now are far more expensive. ( Shared Ownership 2.75% vs up to 4.5% SVR from Ulster Bank)

Summary and example (transaction costs ignored for simplicity)
A purchaser buys a house for €200k
They get an ordinary annuity mortgage from the council for €110k for their portion.
The "council's share" is €90k on which they pay "rent" to the council.
The "council's share" is actually a mortgage just like any other mortgage.
Interest is charged on the outstanding "council's share" just like any other mortgage. I have been unable to confirm the rate of interest charged on the "council's share". I assume it is the same rate charged on ordinary mortgages - currently 2.75%
The "rent" is actually a mortgage repayment.
If the "rent" exceeds the interest charged, the cost of buying out the "council's share" goes down.
If the interest charged exceeds the "rent" , the cost of buying out the "council's share" increases.
The purchaser can buy out the "council's share" of the house at any time for the balance on the "council's share" account.

This is best illustrated by way of an example I received from Dublin City Council

year	opening principal	Interest rate	interest charged	“rental" rate	"rental" charged/paid	Capital outstanding at year end
2008	90,000	2.25%	2,025	4.3%	3,870	88,155
2009	88,155	2.25%	1,983	4.49%	3,961	86,177
2010	86,177	3.25%	2,800	4.7%	4,047	84,931
2011	84,931	3.25%	2,760	4.91%	4,168	83,524
2012	83,524	2.75%	2,297	5.13%	4,283	81,539

Note the terminology used in this statement:
"Opening principal" - just like any other mortgage
"interest charged" - just like any other mortgage
"capital outstanding at year end" just like any other mortgage

But for some odd reason they refer to the mortgage repayment as "rental paid"

Now let's look at the year 2009 in a bit more detail



As the "rental" paid exceeded the interest charged by €1,978, the capital outstanding was reduced by this amount

This example assumes that the purchaser pays the "rent" charged in full, so "rent paid" = "rent charged"

If the purchaser had been unable to pay any "rent", the balance outstanding would have risen by €1,983, the amount of the rent.

What rate of interest is charged on the "council's share"?
I can't find a schedule anywhere. As of July 2012, it is 2.75%.

How is the "rental" rate determined?
The initial "rental" rate is set at 4.3% of the opening principal.
The "rental" rate increases by 4.5% on 1 July each year.

So while the principal is falling, and the rental rate is increasing, the actual rent could be rising.

You must also pay Mortgage Protection insurance at 0.5615%

This is payable on the mortgage on the bit you own, assuming you have a council mortgage and also on the "council's share". This post explains why it appears so expensive.

 

[Brendan Burgess]

How much will it cost me to buy out the "council's share" ?
You will pay the balance outstanding at that time on the "council's share" account.

Who values the property when I am buying out their share?
No one, the value of the property is irrelevant. Just like an ordinary mortgage, you owe the same balance, whether the value of the property has risen or fallen.

This is best explained and illustrated by [broken link removed] - Point 12

WHEN AND HOW IS THE REST OF THE HOUSE PURCHASED?

A person occupying a dwelling under the Shared Ownership System will have the right to purchase the local authority's share of the ownership and acquire full ownership at any time. Alternatively, this may be done by purchasing from time to time additional shares of the authority's equity. The amount and frequency of such purchases is a matter for determination by the local authority.

Interest will be charged on the Council’s share in line with the prevailing interest rate (currently 5.598% - mortgage protection included). The interest due will be balanced by the amount of rent paid and this will result in the Council’s share increasing or decreasing in the following year by the difference.

 

[Brendan Burgess]

"It's a disgrace - the council is pushing up rents by 4.5% every year, although rents are falling everywhere else and the value of the property has fallen by 50%"
Because the "rent" is not actually rent, but is an ordinary mortgage repayment, it is not an extra cost to you, although it does affect your cashflow. The extra money you pay goes to paying off your "rental equity".


"Should I buy out the Council's share and save myself this extortionate rent?"
I don't think it makes any difference. As the "rent" is actually a mortgage repayment, the excess over the interest charged is actually slowly buying out the council's share anyway.

You will not be able to borrow any cheaper than the rate which the council is charging - 2.75%(?) as of July 2012

If you fall into arrears on your "rent", the council will not hassle you as much as the mortgage lenders.



"Should I transfer the rental bit to a council mortgage?"

Probably not.

The interest rate is the same on both the rental loan and the mortgage, assuming you have your mortgage with the Council. So I don't see that transferring it makes any difference?

You are liable for the full Local Property Tax in either case.

You may qualify for TRS on your share, but not on the council's share.

"Should I take out an ordinary mortgage to replace the council's mortgage on the bit that I own?"

Probably not.

You will not be able to borrow any cheaper than the rate which the council is charging - 2.75%(?) as of July 2012 (The cheapest SVR for new business is 3.5% from AIB and the dearest is 4.75% from Ulster Bank).

If you fall into arrears on your "rent", the council will not hassle you as much as the mortgage lenders.

 

[Brendan Burgess]

Why do I have to pay Mortgage Protection Insurance on the "council's share" of the house?
Because it's really a mortgage and if you die the mortgage will be paid off.

Why is the MPI so expensive compared to other policies available in the market?
If you have a mortgage (or a "shared ownership") from a local authority, you must sign up for their group mortgage protection plan, which has a rate of 0.5615% on the balance outstanding.

Cover provided:

• the mortgage is paid off in full on the death of the borrower or their spouse
• In the case of disability of the principal earner due to accident, illness or serious illness, the mortgage repayments are for the period of disability.

It is paid on the reducing balance of the mortgage, so while it is more expensive initially, it will be a lot cheaper when the balance on the mortgage is reduced. (With ordinary mortgage protection policies, the premium remains constant for the full term)

The Council Mortgage Protection Policy may be good value for

• married couples
• people whose illness would prevent them from getting cheap mortgage protection
• smokers
• People whose occupation would prevent them from getting cheap mortgage protection

This is terrible value for

• single people
• non-smokers

Borrowers are free to switch their mortgage to another provider, but the overall package of cheap interest rate and group cover is still very cheap.

This issue is debated in this thread

 

[Brendan Burgess]

So who actually owns the property?

I am not sure of the actual legal form, but in practice, the purchaser renter has all the benefits and liabilities of 100% home ownership.

• The purchaser benefits from any increase in market value of the "council's share"
• The purchaser suffers from any reduction in value of the "council's share"
• The purchaser is obliged to buy out the "council's share" eventually, so they can't just stop "renting" it as they could do with an ordinary rental property
• The purchaser is fully responsible for the maintenance, insurance and upkeep of the property.
• The purchaser pays any management fees or service charges in a MUD, but not the Household Charge.
• If they build an extension, they get the full value of that extension. The council does not "own" half of the extension

There are a few anomalies arising from this mythical "ownership" by the council

• Because the house is part-owned by the council, it is not liable to the Household Charge
• Because the "tenant" is paying "rent", they don't get TRS on it.

Dublin City Council has told one customer

DCC are telling me that the rental part was in effect a loan AND that iam in effect the owner absolute of both the outstanding mortgage

 

[Brendan Burgess]

Can I sell my house?

You can sell your house at any time as long as you are able to pay off the mortgage on your share of the house and the balance on the "council's share".

If you bought recently, it is likely that the house is in serious negative equity so you will have to find funds from outside to pay off the negative equity on both your own share and the "council's share".


Can I rent out my house?

(not sure about this)

In theory, you need the permission of the Council to rent out your house. In practice, they turn a blind eye to it as long as they are getting their payments on time. If you do rent it out, I am not sure that they can do much about it.

 

[Brendan Burgess]

Good points about Shared Ownership

• The lowest Standard Variable interst rate availabe - 2.75%
• Good value Mortgage Protection insurance for most clients
• Availability of Rental Subsidy to pay your mortgage interest if your income is below €28,000
• Probably easier treatment than from the banks if you are in arrears

Bad points

• Hard to understand
• No TRS on "rental payments" which are really capital repayments
• Officially, not allowed to rent out shared ownership home
• City Councils generally very bureaucratic and hard to get a response from ( similar to banks?)

 

[Brendan Burgess]

Can anyone confirm whether Mortgage Protection Insurance is paid on the "council's share"?

If it's not, what happens if a person dies while in a shared ownership scheme?

 

[Skier]

MPI covers council's share as well, i have the policy and in my case it covers in full (mortgage and rental part) from death and disability of principle and joint borrower,

i can privide a copy of MIP policy if requyired to your priv email.

skier

 

[Skier]

Brendan,

It looks like the shared ownership scheme is not a bad deal at all; i must say that I was wrong on many aspects of the scheme until seeing your Thread.
The scheme looks complex but if it works as you explained above then it is a good deal, the wording used by council causes a lot of confusion.


Thanks a lot for your excellent work on this.

Skier

 

[Brendan Burgess]

Hi Skier

Yes, on analysis, it's a good product and it's amazing the negative comments about it which are based on misunderstandings of it. Here is zen's post from yesterday

Not being allowed to transfer your loan to a private lender, if this has changed then they are being less than unhelpful with the process.
You are allowed to, but you would be mad to do so.


Not being allowed to lease out your own Private home. (my pet hate)
Not sure if this is correct or not. If the taxpayer subsidises people to buy their family homes through low interest rates, they don't really want them to become property investors.

Not being considered to be transferred if you have outgrown your place.
Transferred by whom? If I outgrow my home, I can't go to the mortgage provider and ask for a bigger home.


Not being allowed to take ownership of the SO portion to the current market value.
Why should you be? If the market value of the SO portion rises well above the mortgage, you get to keep the profit

Upward only rent on SO %
I agree that this is not appropriate. However, it's not "rent" and the increased payment goes towards reducing your mortgage


Not being allowed to change your MPP (Mortgage Payment Protection) policy which is exceptoinally high.
It's highish for young, single, non-smokers.
It's great value for older, married, smokers.

But the community rating scheme should be replaced by a risk adjusted scheme.

In fact no one has even got a copy of their policy,,,,CAN YOU BELIVE THAT.
Poster Skier has the policy. It should be online as it's common to everyone.

So people are paying a high premium but dont know their level of cover. This equate to a whopping 21,000€ over a 25 year mortage, think about that little 70eur every month....
I doubt that these numbers are correct, even for the young, single non-smokers. The premium is a percentage of the amount outstanding so will be very low in the later years of the policy.

Not being allowed to fix your interest rate from Variable in the case of annuity.
The Minister for state says that you can fix at 4.4% for a 5 year period. The cheapest available from a financial institution for a normal ltv is 5.29% from Bank of Ireland. So it's good value again.

The council, who are landlords to a % of the property should technically pay for that percentage of the management fees.
The odd thing is that they are not really landlords and all this is presumably set out in the purchase agreement.
But if the landlord has to pay for something directly, the rent is increased. So it makes no difference.

If I was SO I'd take legal action against this.
I have spent all this time answering these arguments, and you don't even have an SO !

 

[Skier]

Brendan,

... one comment on your statement below:


"Not sure if this is correct or not. If the taxpayer subsidises people to buy their family homes through low interest rates, they don't really want them to become property investors."

in my opinion this is not right in all cases, for instance: consider the house bought from the open market through the shared ownership:
1. the house is not subsidised
2. the interest rate (actually this is in all cases) is low but still runs always at 0.25% to 1% above the standard variable rate set by ECB, this extra cost is to cover the administration provided by council,

so, in case of the shared ownership with the house from the open market, nothing is given for free, council/government make the legislation work - but this is their job,

the situation is slightly different in case of the shared ownership used to buy the affordable house, the house is subsidised and the renting out is an issue as you said.

I agree with most of your other statements as it looks like the SO is similar to a regular mortgage, but council should explain this in a proper way...

 

[leprechaunx]

Thanks again

Yes, misunderstanding is very correct but not amazing, I wouldnt be blaming myself as its what I've been led to believe by being blinded with jargon etc,. Askaboutmoney.com is the only place where SOS'er's can assemble and theres few of us here, I came here with this misunderstand already, it appears so did everyone else, I still cannot get my head around believing what you have written about the rent!. No offence. =o) Im no solicitor or accountant, I take my shoes and socks off to count from 11-20 ;o) I'm just going on how the information was presented!

I have never forgotten that if it wasnt for the SOS that I would not have the house I own (negative equity or frustration at the 4.5% up up up rent issue aside) I am thankful in all my correspondence with the council, who in all fairness have never given me a runaround and have been understanding and on the ball when issues arose. Going by the low grade low paid clerical wage in the public service Id say there are also a few of them also on SOS or AH .......

Again Brendan, thanks for your work, it really is appreciated.

 

[postman pat]

yes i must agree a brilliant explanation by Brendan,it was just when in contact with the council with any questions they seemed unable to answer them,,i believe they just did not know the workings of this complicated scheme.
I will print off a copy of Brendan"s article to have it to hand when speaking with the council again.

regards Pat

 

[bd1]

Brendan,


Thank you for creating this thread and for providing much needed insight into the Shared Ownership scheme. It’s really helpful to have the facts laid out in such a way and to have some of the big issues clarified so we are not drawing our own (sometimes wrong) conclusions.



With a better understanding, those of us who believe Shared Ownership to be unsustainable over the long term might be able to negotiate and work with the council to reach solutions rather than feel we have no other option but to hand back the keys. Hopefully they are working on this and will soon advise us all of our options so that we might make informed decisions. If not, maybe this thread will.


It would also be great to determine exactly who is liable for negative equity on the council’s share.

 

[D10]

Hello all

Thanks for the thread.

What happens at the end of when I am finished paying my mortgage - I still have to rent DCC side?? Or else buy it out? Which I have been paying all along through the rental side?

Rental side going up is so annoying and can this be changed at all?

 

[Brendan Burgess]

Hi D10

In effect you have two mortgages, it's just that one of them is called "rental".

You are paying off your own mortgage and you are paying off the "rental" mortgage.

The "rent" is actually a mortgage repayment and so it is paying off the mortgage if it is in excess of the interest charged.

 

[Skier]

In summary, basically you have two parts in you shared ownership loan that are called:

Part 1: mortgage equity
Part 2: rental equity

Your monthy payments cover:

1. Repayment of the mortgage equity (in this case all payment goes to repay your initial mortgage equity and to cover interest)

2. Repayment of the rented equity (in this case some portion of payment goes to council as a rent – to cover administration work - and some portion goes to repay your initial rental equity and to cover interest).

Effectively, you have two loans that (eventually) will be paid off.
The loan on mortgage equity will be paid off after 25 year (or whatever is your loan term), while the loan on rented equity will be paid off slower...


skier

 

[Fredb]

Thanks Brendan for all the details, the one thing about SO is it's confusing. I recently received a breakdown of what I owe 13 years into my half of the mortgage, (they don't send it out yearly, you have to ask them I'm with Scc) I got into SO before 2003, 1999 to be precise and I found it a great solution at the time as there was no way I would have afforded a mortgage - what I still can't quite understand is the equity share on the property and how it accrues - I owe 15k on my half and 40k on the equity share - the house wasn't exceptionally priced to begin with @ 60k and I bought just before the celtic tiger madness - now though the house would still be worth less or about the same as the original value - so to me it means in 13.5 years I have actually paid 5k on the total amount, as it stands and that equity share will rise - it makes me wonder if I'll ever own the entire property, obviously if times get good again I will try to pay more than the required fee - but then I suppose this is the chance taken with any mortgage. Pro of SO for me were affordable opportunity to mortgage the Con is the feeling of not ever reaching the end of payments - I reckon I would feel a lot more of the cons had I bought in the boom time - my other niggle with SO is that the council don't seem very clued in on it either which makes it all a bit messy. Thanks again for your post I will come back to it often.

 

[Skier]

Hi,

- I started my shared ownership in January 2006:
- mortgage equity was 83,200
- rented equity was 136,800
- total 220,000

- in December 2011 I asked council for the redeption figure, and I got:

- mortgage equity € 69,722
- Rent equity €126,444
- total to pay 196,166

- as you see my mortgage equity and rent equity decrease, this indicates something different what they say to you (i am with cork council but it should be the same)
- I would suggest asking them for the redeption figure (thatshould be calculated by some accountant) and you should see the same as me.

- now if you find any online-calculator for mortgage and put there the initial loan of 220k for 25 years and at 7.5% interest, you will see that after 6 years of repayments (from 2006 to 2011) the principlal balance (outstanding balance) is roughly 196k - which is similar to what I got for my shared ownership redemption figure;


skier