WHEN first-time buyer Sian Melonie brought her three-bed flat seven years ago with a friend through the shared ownership scheme she initially bought 40 per cent.
It allowed the Londoner, who lives in Hackney, to get on the housing ladder – but as her income increased she knew it would be financially savvy to own the property outright.
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New rules for first-time buyers introduced in the 2018 budget mean those who buy through shared ownership don’t have to pay stamp duty if the property is below £500,000, and as long as they don’t own over 80 per cent of the property.
But unfortunately Sian, 35, who writes money blog Little Miss Frugal, was hit with the tax three times.
That’s because when she initially bought the property first-time buyers still had pay.
Then she decided to buy a bigger share of equity known as “staircasing” – initially taking the friends’ share from 40 per cent to 90 per cent in 2017 and then to 100 per cent last year.
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This is where homeowners can increase the portion of the flat they own.
But each time, they were faced with bills worth thousands of pounds for more stamp duty, and in legal and mortgage fees.
Plus, the value of the house had gone up since the day they bought it, making the stamp duty even more expensive than if they’d paid for the full whack upfront.
It meant she paid around £5,200 stamp duty in total, compared to £3,370 if she’d paid it at the start.
This is the “hidden” cost for first-time buyers who may be thinking about buying a shared ownership home.
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“There are legal fees applicable when you staircase, such as solicitors’ charges” explains Emily Smith, mortgage expert at Habito.
“The big thing to watch out for is that it can be much pricier than you bargained for.
“Your property’s value is likely to go up over time, making every percentage share cost more too.”
We caught up with Sian for My First Home to take us through how shared ownership has worked for her.
What’s your home like and when did you buy it?
I live in a three-bed flat in Hackney. Technically it’s a new build but the building used to be a business block.
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I bought the home with a friend in 2015, through the shared ownership scheme.
It’s got three double bedrooms, two bathrooms, a good size living room but no outside space.
Why did you buy with a friend and not do it solo?
At the time, I was nearing 30 and thought that for some reason I needed to get on the housing ladder before my birthday.
I’ve always been really frugal and been saving ever since I was able to start earning money, so I had around £40,000 in savings that I knew I could invest into my first home.
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But I also knew that I wanted to stay living in central London. I loved having a short commute into work but I also knew I couldn’t do it on my own, even when I looked at the shared ownership route.
There was no boyfriend on the scene at the time, so I talked to my friend who I’ve known for more than 15 years.
We’d already been renting together for five years – six months of which we were in the same room to save cash – so we knew that we could live together.
It was a no brainer really. Combining our salaries meant we could also get a bigger place.
What is stamp duty and who has to pay it?
STAMP duty is a land tax paid by buyers on property that costs more than £125,000.
There are different rates of tax depending on the portion of the property’s value.
These are the current rates set by the government:
- 0 per cent – Up to £125,000
- 2 per cent – Over £125,000 and under £250,000
- 5 per cent – Over £250,000 and under £925,000
- 10 per cent – Over £925,000 and under £1,500,000
- 12 per cent – Over £1,500,000
Since November 2017, first-time buyers don’t have to pay stamp duty on the first £300,000 of their home.
You will then have to pay the normal rate of tax on anything above this threshold.
How does stamp duty work for shared ownership?
First-time buyers who bought through the shared ownership scheme don’t have to pay the tax on property worth under £500,000.
If you’re buying a property worth more than £500,000 then you will have to pay the normal rates.
You also don’t have to pay the duty on any shared ownership transactions that are worth less than 80 per cent of the property.
But if you staircase to an amount that takes you over 80 per cent, then you’ll have to pay the tax on the entire portion you pay to take you over the threshold.
For example, if you have a £400,000 home and want to buy a 25 per cent share, you won’t have to pay any stamp duty.
If you increase the share to 75 per cent by paying another £200,000, you still won’t have to pay any stamp duty.
But if you want to increase to 90 per cent, you’ll have to pay the full amount of tax on the portion of cash that took you from 25 per cent to 90 per cent.
If you want to avoid paying stamp duty completely then you should stay below the 80 per cent threshold, but it will mean that you will have to continue paying rent on 20 per cent of the property that’s still owned by the housing association.
My friend didn’t have much in savings so I ended up fronting the bill and she paid me back her half within six months, so we own everything 50/50.
We’d had an honest chat about what we do if one of us wanted to sell and what would happen if the other one died.
My family encouraged us to get a “tenants in common” agreement which would mean that our half of the flat would go to our families if one of us died.
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But we decided to be “joint tenants” instead, meaning that the one that was still alive and kicking would get the other’s share.
We thought it would be crap enough having lost your best friend without having to then lose the flat too.
We also have a joint bank account to help us manage bills and maintenance costs.
Let’s talk money. How much did you pay for it?
When we first bought the flat back in 2012 it was valued at £550,000 and we bought a 40 per cent share in the property, worth £220,000.
We put down a 15 per cent deposit on the portion of the flat we were buying, worth £33,000. We then took out a mortgage for the remaining £187,000.
We fixed into a two-year deal over 30 years, making our monthly mortgage payments £970 between us and our rent about £725 a month.
When you buy a property through shared ownership you get a choice of either paying stamp duty for the whole property upfront at market value, or pay it in stages as you buy more shares.
How much does it cost to staircase on your shared ownership property?
STAIRCASING is a legal process so you’ll have to fork out for more than just the value of the share you’re buying.
You’ll need to pay for a surveyor to give an up to date valuation of the property, as well as any solicitor fees.
You may have to think about stamp duty if you buy more than 80 per cent of the property. The amount depends on the value of the property.
You may also have to pay fees on a new mortgage.
These can cost up to £999 depending on the deal and your circumstances.
Doing it in stages means you risk paying more if your home increases in value but it was going to cost us around £3,750 upfront so we decided that we’d deal with it if and when we came to staircase.
Because we bought before the stamp duty relief for first-time buyers, we had to pay the tax on a portion we bought, which came to £1,900, plus another few thousand pounds in solicitors fees.
After clearing it with the housing association, we were allowed to rent out the third room to a friend.
We didn’t really make money for this as we charged mates rates but it was enough for us to split the cost three ways making payments easier.
Was it easy getting a mortgage?
No, it really wasn’t. When we bought our home, shared ownership was fairly new and not many lenders offered a shared ownership mortgage.
We also used the adviser the developers recommended which turned out to be a total nightmare.
They put us forward for a mortgage but we were rejected because the property came with a new build certificate that wasn’t endorsed by the providers.
When we were finally accepted by a lender the surveyors they sent round to view the property weren’t sure about the building as it used to be commercial property.
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In the end we spoke to the mortgage provider directly and explained the situation and why we’d been rejected.
They were actually completely fine with it and we got the mortgage that we needed, without the help of the adviser.
After complaining to the mortgage adviser, we ended up getting our £2,500 fees back from them.
It’s shared ownership – so how come you now own 100 per cent?
Throughout the four years that we’ve been living here, we’ve “staircased” – increased our shares – twice to 100 per cent.
But what we didn’t realise was that we had to pay legal fees and tax every time we bought more of the property, which ended up costing us more than £16,000 in extra payments.
That included paying stamp duty three times in total. It’s complicated but since we first bought the flat, stamp duty rates have gone up and the value of our home has increased too.
What help is out there for first-time buyers?
GETTING on the property ladder can feel like a daunting task but there are schemes out there to help first-time buyers have their own home.
Help to Buy Isa – It’s a tax-free savings account where for every £200 you save, the Government will add an extra £50. But there’s a maximum limit of £3,000 which is paid to your solicitor when you move.
Help to Buy equity loan – The Government will lend you up to 20 per cent of the home’s value – or 40 per cent in London – after you’ve put down a five per cent deposit. The loan is on top of a normal mortgage but it can only be used to buy a new build property.
Lifetime Isa – This is another Government scheme that gives anyone aged 18 to 39 the chance to save tax-free and get a bonus of up to £32,000 towards their first home. You can save up to £4,000 a year and the Government will add 25 per cent on top.
Shared ownership – Co-owning with a housing association means you can buy a part of the property and pay rent on the remaining amount. You can buy anything from 25 to 75 per cent of the property but you’re restricted to specific ones.
“First dibs” in London – London Mayor Sadiq Khan is working on a scheme that will restrict sales of all new-build homes in the capital up to £350,000 to UK buyers for three months before any overseas marketing can take place.
Starter Home Initiative – A Government scheme that will see 200,000 new-build homes in England sold to first-time buyers with a 20 per cent discount by 2020. To receive updates on the progress of these homes you can register your interest on the Starter Homes website.
The first time we staircased was when our first fixed-mortgage term came to an end.
We’d both been promoted at work and our salaries had increased so we could take out a bigger mortgage.
That, combined with the equity we now had in the flat, meant we could afford to borrow enough money to cover 90 per cent of the share.
There’s a stamp duty relief for first-time buyers when it comes to shared ownership so you only have to pay stamp duty when you buy more than 80 per cent of the shares.
But you have to pay the tax on the total amount you paid to take you over the threshold.
That meant another £1,900 in stamp duty for us, as well as another £4,730 in legal fees and charges.
We added the extra money needed to our next mortgage term, which again we fixed into for another two years.
When we were ready to remortgage at the end of that term, we were in a position to increase to 100 per cent of the property, which again we could put on our new mortgage term.
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We paid a mortgage adviser £300 to help us with the process as we found doing it ourselves really complicated before and it involved so much paperwork.
This time around, it cost us another £5,193 in stamp duty which I could add to the new mortgage.
But we actually ended up paying an extra £10,580 in total for that transaction as the mortgage didn’t quite cover the total cost of the property.
In hindsight, I wish that we’d held out or got help from an adviser earlier as that would have helped us get from 40 per cent ownership to 100 per cent, instead of bothering with 90 per cent, just to save money on all of the fees.
But now we own the property outright and our mortgage repayments are more manageable, despite being slightly more than when we were paying rent and a mortgage.
We still have to pay a £750 annual ground rent charge and a £75 service charge every month.
How did you save enough for a deposit?
I never really set out to save for a mortgage deposit but I’ve always been frugal.
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I’ve been saving since I was old enough to get my first job at 11 – I earned £6.60 a weekend doing a paper round.
At 14 I was working Saturdays and Sundays in a sandwich shop and all through uni I worked 40 hours a week working at a nightclub.
Even when I went backpacking after uni, I ended up getting a job working full time at a government ombudsman for two years, in Brisbane and Perth in Australia. I actually came back to the UK with savings.
I worked bar jobs, did baby sitting and worked at loads of festivals and just kept tucking away what I earned.
Now that you own 100 per cent of the mortgage, are you planning on staying there?
Sadly no, due to a change in circumstances. My friend is in a position to buy somewhere to live with her boyfriend and me and my boyfriend are looking to go travelling.
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We’ve decided to keep the flat and rent it out so we’re in the process of turning our mortgage into a buy-to-let at the moment.
Hopefully, we’ll make a bit of money on it every month but it’s more about keeping the investment.
It’s reassuring to know that for whatever reason, we’ve got a place to go to and it’s sort of a safety net really.
When we come back from travelling, we’ll probably look to rent for a bit before we buy somewhere.
I’d like a place with a garden, and I need to save more because the charges to buy a second property will be more than they were for the flat.
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