Mortgage free homeownership scheme – too good to be true?

 

You may have noticed some news articles and adverts on home-moving websites for a new company called Unmortgage, offering first time buyers the chance to buy a share in a property without a mortgage. You initially pay rent, and can build up your ownership gradually, for free.

It may sound like a dream come true, but often with schemes like this there’s a catch – not least due to the hefty stamp duty bill that buyers face, regardless of whether they’ve owned before.

We’ve taken a look at the pros and cons of buying a home with Unmortgage and compared it with other options including the Help to Buy Scheme and 95% mortgages.

How does Unmortgage work?

Officially launched to the public in July, Unmortgage gives people the chance to buy a share of between 5% to 20% in a property, which they will live in. The rent is then set at local market rates and is paid on the remaining share, which is owned by an investor.

In order to qualify for the scheme, your household income must be between £30,000 and £100,000, and the rent can only cost up to 36% of your income.

The idea behind Unmortgage is that buyers can become partial homeowners, without going through the usual mortgage process. The website states: ‘Unmortgage is for you if you can’t afford to buy the home that you can afford to rent.’

At first glance it may seem like an ideal way to get onto the property ladder… but, there’s some catches that may result in you paying more money than if you’d just saved for a deposit.

The drawbacks of Unmortgage

Usually, first time buyers in the UK are completely exempt from Stamp duty (which is known in Scotland as Land and Buildings Transaction Tax) when buying a property costing up to £300,000, and a discount applies on purchases between £301,000 and £500,000.

With Unmortgage, not only does the usual exemption not apply, but you’ll actually need to pay more stamp duty than a normal buyer would. Because you’re buying with an investor, a 3% surcharge will apply.

You only need to pay stamp duty up front on your share, but this can still add a lot to your costs. As you buy more shares, you’ll also need to pay the investor back on any stamp duty they originally paid.

This isn’t the only bill you may need to fork out for… If, at some point you do decide to buy the remainder of the property so you fully own it, it will be classed as a separate property purchase by HMRC. Which means you’d need to pay ANOTHER stamp duty bill on the full value of the property, including the part you already own.

Another hidden expense worth noting is that you are unable to shop around for a competitive buildings and contents insurance rate. Unmortgage pick these for you, which could leave you paying more than you usually would.

 What kinds of homes are available on the scheme?

 You’ll need a good credit score to be considered for the scheme, and your chosen property will need to meet all the requirements.

Un-mortgage selects the properties that are listed on its website, but these homes also remain for sale on the open market until a buyer is found.

The company has a criteria of over 100 conditions to choose properties, including that homes need to have an asking price of between £250,000 and £500,000, are in quiet urban areas, and do not need any renovations.

Unmortgage also does not list new-builds, basement flats, ex social housing or any properties located on main roads, motorways or backing onto railway lines. Properties with ‘unfairly sized’ bedrooms are also a big no for Unmortgage.

What are the alternatives to Unmortgage?

The most obvious option for someone considering the scheme would be to buy with a 95% mortgage. This would mean that you will own the property in your own name and would not be tied to an investor.

If you are considering Unmortgage, it may be a good idea to look into shared ownership, where you buy a share of between 25% and 75% of a property using a combination of a deposit and a mortgage, and pay rent to a housing association on the remaining balance.

Another popular option is to buy a property using the Help to Buy Scheme. This would mean putting a minimum deposit of 5% down and the government lends you between 15-20% and you take out a mortgage on the remaining 75-80%.

Both shared ownership and the Help to Buy Scheme is only available on new build properties.

Things to consider

If you are interested in part-buying a property using the scheme, it can be complex so it’s a good idea to do your research and be confident that you’re fully aware of any risks involved and you know exactly how it works.

It also may be worth considering taking advice from an independent mortgage adviser who can help you explore all of your options, so you are comfortable that you’re making the most suitable choice for you.

 

Your home may be repossessed if you do not keep up repayments on your mortgage.