Research warns of risks in affordable home ownership schemes

People living in shared ownership properties could be hit hard by a double whammy of rising inflation and interest rates, according to new research. 

People who entered affordable home ownership schemes have assessed risks in a period of low interest rates, low inflation and stable employment. 

However, researchers say this context is changing with rising mortgage costs and a possible market downturn and recession looming.  

Experts 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. 
• 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. Research showed this is typically 0.7% more

The research, Affordable Homeownership and Risk, released by the University of York and supported by abrdn Financial Fairness Trust, looks at different models of home ownership including Right to Buy, Help to Buy and shared ownership, and makes recommendations for improving the products.

Research discovered that greater proportions of single people, women, people in routine occupations, people with disabilities and lone parents use shared ownership and the Right to Buy.

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, 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

Dr Alison Wallace, Senior Lecturer and Lead Researcher at the University of York’s Centre for Housing Policy, 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.’ 

Photo by Gonzalo Facello