Staircase or overpay my mortgage – which is best?

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If you are lucky enough to have some spare cash you may be considering how best to invest this in your home. Unfortunately there are no easy answers, partly because everyone’s situation is different. Financial planning involves making some assumptions around future rent increases (unpredictable), future mortgage rates (likewise unpredictable) and future property market movements (yep, unpredictable).

You will benefit from discussing your options with a mortgage broker or financial advisor. Want to speak to one with Shared Ownership experience? Try Tembo In this feature, we talk through some key aspects to consider before talking to an expert. 

Future plans

Do you love your home and the area you live in? Is your current home your ‘forever’ home? Or are you intending to sell on in the foreseeable future? Maybe take a quick break at this point and scribble down a few notes on your future plans and hopes before you carry on reading.

Pros and cons of staircasing

  • Staircasing gives you a greater stake in equity. Consequently you will have a larger share of any increase in value if you sell your home.
  • As a shared owner you pay rent on the landlord’s share. Annual rent reviews are based on RPI (a measure of inflation) so if annual inflation rises faster than your household income, your rent could become increasingly less affordable over time. The advantage of increasing your share via staircasing is that there will be less rent to pay on the landlord’s share. 
  • If you staircase to 100% then you’ll stop paying rent on the landlord’s share.
  • Your monthly costs (rent plus mortgage) could be lower after staircasing. If so, you could use the difference to overpay your mortgage, or perhaps just to ease any money pressures or have a higher standard of living.
  • Staircasing to 100% could make it easier to sell your home, as you will have access to a wider pool of buyers on the open market.
  • Staircasing to 100% gives you access to the statutory route to lease extension. This is beneficial if you have a short 99-year or 125-year lease and need to extend it, now or in the future.
  • Staircasing to 100% may give you a right to sublet your home. This could be useful, say, if you need to relocate temporarily or if you move in with a partner but are not ready to sell your own home.
  • Staircasing uses ‘current market value’ to calculate the cost of additional shares. Property prices tend to rise over time, so you may get priced out if you wait too long.
  • You will need to pay valuation, legal, and administrative fees each and every time you staircase. This could add up substantially if you can’t afford to staircase to 100% in one go.
  • Larger shares, below 100%, may be harder to sell. Though this is likely to depend on a range of factors including the desirability of the local area and the availability of Shared Ownership homes.
  • If you have a short lease and can’t afford to extend it, then staircasing to 100% could mean you are investing in what is known as a ‘wasting asset’ (an asset which goes down in value). Read more on Should I staircase or extend my lease?.
  • You may be able to staircase more cheaply if property prices go down in the future. However, you would need to factor in the rent you’d pay in the meantime.
  • If your monthly costs (rent plus mortgage) are higher after staircasing you could encounter problems if you experience an unexpected drop in income. It’s a good idea to have the equivalent of at least three months pay (after tax) in savings. And it might be worth taking out insurance to cover against critical illness or redundancy. 

Pros and cons of mortgage overpayments

  • Mortgages are made up of two components: capital and interest. Capital is the amount you borrowed to purchase your initial share. Your lender will charge interest on your mortgage loan, the same as for any other loan. If you can reduce your outstanding capital you will pay less interest in total. 
  • Many mortgages allow overpayments of up to 10% of the balance each year, either in one-off chunks or monthly payments, with no additional fees.
  • If you make regular overpayments you will reduce your mortgage term and be mortgage-free sooner. Or, if you make a one-off overpayment, you may have the option to reduce your monthly payments rather than reduce your mortgage term.
  • The more of your capital you can pay off, the more likely you are to be able to access better deals when your current mortgage deal comes to an end.
  • It could be more financially beneficial to staircase than to make a mortgage overpayment.
  • You could end up paying fees or early repayment charges.
  • If you put all your spare cash into your mortgage you may not have sufficient savings for unexpected contingencies – illness, redundancy, or unexpected bills. 
  • You could be better off paying off other debts with higher interest rates: for example, credit card debt or unsecured loans and overdrafts, or putting excess cash into a pension scheme (particularly if your employer makes matching pension contributions).

Which option is best?

The best option will depend on a range of factors including your intentions for your home, whether you’ve got a lump sum to invest or whether you want to make the most of an increase in your monthly income, the affordability of your current and future monthly housing costs, whether your rent is good value for money, current and likely future mortgage rates, how much equity you currently have in your home, and likely future property price movements.

In short, you will need to talk to a mortgage broker or independent financial advisor to decide which option makes most sense given your own circumstances and aspirations for the future.

Don’t take our word for it!

We’ve focused on staircasing v overpaying your mortgage. But your spare cash could put other options on the table. Have you considered investing your spare cash? Or even selling up if you can now afford to buy a property on the open market? Make sure you cover all the bases when you talk to a financial expert.

This feature discussed ‘standard’ Shared Ownership. The rules on rent are different for some other schemes such as Older People’s Shared Ownership (OPSO). The rules on staircasing are different under the ‘new’ model, which allows staircasing in 1% increments. 

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