I have a shared ownership property with an estimated value of £250,000. I own a 40 per cent stake and pay rent on the rest.
The mortgage on the share I own is £37,000 and costs me £235 per month. The rent I pay is £595.
My mortgage deal ends in June. I have £100,000 in savings. Would it be wise to use some of that to pay off the mortgage, or should I use my savings to increase my stake in the property – known as staircasing – instead?
My lease on the property is now under 80 years. Extending this will cost around £8,000, plus other costs involved with staircasing.
Staircasing would lower the rent, but not by a huge amount as I can’t get to the full 100 per cent. I would also like to keep a decent amount of my savings free. S.R.
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David Hollingworth replies: You are in the positive position of being able to consider various options as you approach the end of your current mortgage deal.
As well as allowing buyers to purchase an initial share of the property, shared ownership enables the purchase of additional shares as their situation changes.
Known as staircasing, this would allow you to potentially own the whole property in time.
It sounds like you may have already discussed this with the housing association which makes a lot of sense, helping you to get a better understanding of the options and the figures associated.
Paying off the mortgage would cut your monthly costs and protect you from being hurt by higher interest rates.
Those higher mortgage rates could certainly be a reason why you’re more focused on reducing the debt, rather than potentially borrowing more to push toward full ownership.
Whilst it’s relatively easy to understand the potential interest saving that will come from paying off the mortgage, it’s hard to directly compare that saving with the potential benefit if you elect to buy another share.
Comparing mortgage and rent costs is hard
Increasing your share of the ownership of the property will reduce the rental payment, so it will give you a reduction in your monthly costs.
It sounds as though you may have been a little underwhelmed by how much an extra share could reduce the rental cost.
However, that isn’t a like-for-like comparison with overpaying or redeeming the mortgage.
What we don’t know is how house prices may behave in future and therefore how that could add to or detract from the benefit of staircasing.
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If prices were to rise and you own a greater share, you will clearly benefit more from that increase in prices, compared to retaining the current minority share of the increase.
Of course, there is no guarantee that prices will climb so there is still no right or wrong answer to this, but I would advise you to feed it into your thinking for the longer term, rather than only looking at the reduction in rent.
There will be costs to buying another share as well, so do factor those into your decision.
Extending the lease is another cost that could be worth exploring further. As the lease runs down the cost will increase and the other knock on will be in the range of available mortgage lenders, which will have minimum expectation on lease remaining.
Emergency fund
You’re right to want to maintain a level of savings. This is important and will very much depend on your goals in the future.
Having an emergency fund is crucial, so it would not be a good idea to put all your resources into the property and you should keep some cash savings in reserve.
How much you retain will largely depend on your financial and lifestyle aims but it’s nice to have the choice.
Rather than think in terms of all or nothing you might like to consider a balanced approach, potentially buying a smaller additional share, enabling you to maintain some savings but retaining your mortgage for now.
Shop around now for mortgage options to switch to at the end of the current deal.
That will help you better understand how manageable it will be to maintain or even increase the mortgage, now or in the future, if you decide to buy outright.
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