Pathways through Shared Ownership
Different people have different aspirations. For you, achieving full home ownership may mean staircasing to 100% in a ‘forever home’. Or perhaps you intend to move on after a few years, using your Shared Ownership property as a ‘starter home’ - hopefully generating a gain to help you buy a bigger or better property on the open market. On the other hand, you might have no interest in achieving full home ownership. Shared Ownership may simply offer a more secure form of renting.
Consequently, there is no ‘one-size-fits-all’ answer to the question of whether you should extend your lease and/or staircase.
Should I extend my Shared Ownership lease?
The Government recently introduced a 990-year lease term for new Shared Ownership homes. If that’s you, you shouldn’t need to undertake a lease extension. However, this reform doesn’t benefit you if you already bought a home with a 99 or 125-year lease.
Can I extend my Shared Ownership lease?
As a shared owner, you have no legal right to lease extension until you staircase to 100%. At this point you can undertake a statutory lease extension (also known as the ‘formal’ route). Most landlords offer an ‘informal’ option. However, this offers fewer legal rights and protections than the formal route.
Why 80 is a critical number
Once you have fewer than 80 years remaining on your lease the cost of lease extension (the ‘premium’) increases dramatically due to an additional charge called ‘marriage value’. Consequently, your home will decline in value over time. Worse, as the value goes down, mortgage lenders are increasingly reluctant to lend.
Pros and pitfalls of lease extension
- Re-mortgaging - Some lenders may be reluctant to lend several years before you hit the critical 80-year threshold. Extending your lease can avoid problems in re-mortgaging.
- Selling - Extending your lease may make it easier to sell your home. In fact, if the number of years remaining drops too low, a sale to a cash buyer may be the only option on the table other than lease extension.
- Inheritance - Perhaps you have no intention of selling your home, and are leaving it to family, friends and/or a charity in a will. Extending your lease could ensure your well-intentioned gift doesn’t turn into an expensive headache for your beneficiaries.
- Cost – Generally speaking the longer you leave lease extension the more it will cost.
- Benefit v cost – It may be worth trying to assess the likely benefit in relation to the estimated cost. For example, if your landlord bases their premium calculation on the total value of the property - rather than on the value of your percentage share - could the costs of lease extension outweigh the benefit? How you view this may depend, for example, on whether you hope to sell your home in the near future.
- Landlord’s interest in the lease – If your landlord is not the freeholder and also has only a short interest in the lease, they may not be able to offer you the additional 90 years that would be available under the statutory route to lease extension.
- Building safety issues – A flaw in the Building Safety Act 2022 means that if you are eligible for protections and you extend your lease you could lose those protections. (This will depend whether your lease extension takes the form of a surrender and re-grant – effectively a new lease – or a variation of the existing lease. If the latter then you won’t be able, for example, to reduce any ground rent to a peppercorn, so it’s not exactly an ideal solution). The Government is aware of the BSA problem but it is not yet clear when and how it will be resolved.
Pros and pitfalls of staircasing
- Rent - Staircasing reduces the rent payable.
- Access to statutory lease extension - Staircasing to 100% allows the statutory route to lease extension, so long as you have owned your home for two years.
- Obtaining the freehold - If you have a Shared Ownership house, staircasing to 100% may obtain the freehold. (Check your lease to find out).
- Cost - Staircasing to 100% could cost more than you can afford, particularly if you have only a small share to start with.
- Mortgage rates - If you fund staircasing with a mortgage, your monthly costs could increase when your fixed term ends.
- SDLT - You may have to pay Stamp Duty Land Tax if you staircase over 80%.
- Wasting asset - If you have a flat or a leasehold house, staircasing to 100% won’t prevent your home decreasing in value once the number of years remaining falls below 80.
- Selling on - A larger share could be harder to sell.
Which should I do first, extend my lease or staircase?
The short answer to this is, it depends!
Flat and houses - If staircasing to 100% obtains the freehold of your house, it may be more cost-effective to skip lease extension and proceed straight to 100% staircasing. The situation is different for shared owners with flats. Flats are always leasehold.
Will lease extension make staircasing more expensive? – Lease extension increases the value of your home. Given that staircasing costs are based on current market value, lease extension could make staircasing more expensive. However, some Housing Associations allow you to register lease extension as a home improvement, meaning you won’t be penalised if you staircase at a later date.
Don’t take our word for it!
You might know the phrase ‘horses for courses’. It means that what is good for one situation or person might not be good for another. This is definitely true when it comes to the question of whether to staircase and/or extend your lease. You will almost certainly need expert advice to help decide on the best decision for your own situation.
Talk to your Housing Association about their staircasing and lease extension policies. Talk to a broker if you need more information about taking out a mortgage, or whether a buyer could secure a mortgage if you decided to sell your share.