Shared ownership hopes dashed for many people with damaged credit
August 4, 2009
Getting any sort of finance such as mortgage finance has always been difficult for those that have damaged credit, and in the past people with bad credit ratings that wanted to get a mortgage struggled for years, as lenders viewed them as high risk and therefore either refused them credit or charged them a very high rate of interest.
For many people with bad credit the high rate of interest charged by the lender meant that they could consider a full mortgage, as their monthly repayment would have been unmanageable. However, one option that was available to first time buyers with damaged credit was opting for shared ownership property, which offered a number of benefits to first time buyers with less than perfect credit.
Many first time buyers with credit problems have considered shared ownership properties over recent years. One of the major benefits of opting for shared ownership for this group was that a far lower level of mortgage was needed depending on the percentage of the property that was being purchased. With shared ownership properties consumers purchase a share of the property with a mortgage, such as a 25 percent or 50 percent share, and then pay rent on the remaining share, which is owned by a building society. Further shares can then be purchased over time, which is a process known as staircasing.
For first time buyers with bad credit shared ownership provided an effective solution over recent years, as it meant that they had to get a far smaller mortgage, and whilst they were paying a far higher rate of interest than a borrower with good credit they would have to pay this high rate of interest on a lesser amount of money than if they were buying a property outright. Another benefit was that as their situations improved and they became eligible for more affordable mortgage deals they could look at staircasing and buying further shares on the property until they owned 100 percent of their home.
However, since the onset of the global credit crunch a lot has changed in the mortgage market, and much of it for the worse. In the current climate first time buyers with damaged credit appear to stand no chance of being able to get a mortgage for a shared ownership property, which will dash the home ownership dreams of many first time buyers.
Moreover, the few sub-prime lenders that are still prepared to lend to those with bad credit are not considering loans for shared ownership mortgages, and in some cases have increased their interest rates even further despite the fact that the base interest rate has dropped through the floor.
One first time buyer who had damaged credit spoke about her efforts to secure a mortgage for a shared ownership property, and said that things were looking very bleak
She stated: “I fell into financial problems a few years ago after my husband and I separated, and I was left to deal with all the debt. As a result of this I was forced to enter into a debt management programme. I also had to rent a property as I had no money for a deposit and no way of getting a mortgage on my income alone, especially with damaged credit. However, I spoke to a housing association about the situation and they suggested that shared ownership might be an option, as I needed to borrow less money so the monthly repayment would be far lower.”
She added: “I called the debt management company to see whether it would be possible to get a mortgage for a 50 percent share in a property, which came to around £50,000. They did some calling around and said that there were several lenders who would be prepared to do this shared ownership mortgage, and a couple were able to do it with no deposit, which was ideal for me. This was in around March of 2008.”
She then stated: “I called the debt management company again a couple of months ago, as I felt ready to move and look at moving into a shared ownership property, especially with property prices far lower than they had been a year ago. However, this time it was quite a different story. The debt management firm told me that there were now only a couple of lenders that were prepared to play ball, and they would not entertain the idea of shared ownership so I would have to get a mortgage to buy a property in the normal way on the open market. They would also want a deposit of at least 20 percent, and were charging up to 9.5 percent interest, whereas last year they were only charging 6.5 percent despite the fact that the base rate was far higher at that time.”
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