Affordable home ownership schemes: risks need to be better explained

14 October 2022

New research finds people living in shared ownership properties could be hit hard by double whammy of rising inflation and interest rates. People who entered affordable home ownership schemes assessed risk in a period of low interest rates, low inflation and stable employment. This context is changing with rising mortgage costs and a possible market downturn and recession looming. Researchers suggest people in shared ownership schemes may be particularly vulnerable due to:

Lower resilience: shared owners showed greater indicators of being vulnerable to financial harm than other mortgagors and were already struggling financially to a greater extent during the pandemic lockdowns. Shared owners had more indicators of financial vulnerability (53 percent) than other mortgagors (37 percent).

Inflation; the implications of inflation-linked rental payments were not transparently explained to many who entered into shared ownership schemes.
Interest rates; people in shared ownership properties tend to be offered higher interest rates than regular mortgages (due to banks classifying the group as having higher administrative needs and riskier to lend to). Research showed this is typically 0.7% more.

In addition, although shared ownership does help people on lower incomes get on the housing ladder, the low initial costs of shared ownership do not necessarily last. Over-inflationary rents result in shared owners’ monthly costs approaching those of open market buyers’ costs after 15 years, while at the same time accruing much less equity. This raises questions about the products’ value for money. However, shared ownership limits the impact of negative equity in housing market downturns.

The research, Affordable Homeownership and Risk, released today [13 October] from the University of York, supported by abrdn Financial Fairness Trust, looked at different models of home ownership (Right to Buy, Help to Buy and shared ownership) and makes recommendations for improving the products.

Greater proportions of single people, women, people in routine occupations, people with disabilities and lone parents use shared ownership and the Right to Buy (rather than Help to Buy purchasers and those who bought unassisted on the open market). The report makes recommendations for government, housing providers, lenders and brokers to provide greater safeguards for these vulnerable buyers including:

Cap rent increases below that allowable in leases for new and existing shared owners and control future cost increases by using CPI rather than RPI measures of inflation, with no additional uplift.

Review affordability assessment calculators to avoid high housing costs to incomes and Include rent and service charge rises over time (for all schemes), not just rising mortgage interest rates.

Highlight the long-term costs in key information documents, including rent and service charges, relative to open market purchases.

Develop support for existing shared owners, by extending all lease terms to at least 250 years, provide proportionate repairs support over time, ensure appropriate advice mechanisms are available and provide greater opportunities for flexible tenure.

Strengthen homeownership safety nets for short term income loss.

Alison Wallace, senior lecturer and lead researcher, University of York, said:

“Shared owners can claim housing benefits to help with part of their housing costs and get support from a housing association which is important. But greater proportions of shared owners were already struggling with higher housing costs before this current crisis. They will be challenged even more by above inflation rent increases and rising interest rates. Providers, government and lenders could do more to ensure these purchasers are protected.”

Karen Barker, Head of Policy and Research at abrdn Financial Fairness Trust, said:

“Affordable home ownership schemes have helped a lot of people on lower incomes to access home ownership. It has been particularly valuable for those living in areas of London and the south east where house prices are high. However, people making decisions on shared ownership need better information about the risks involved if they are to make informed decisions.”

Download the report