New scheme allows first-time buyers to buy a shared property without a mortgage - but Which? says it has “serious catches”
For first-time buyers getting onto the property ladder, the prospect of securing a mortgage can be intimidating.
This is everything you need to know about the new Unmortgage scheme - that allows you to purchase a home without a mortgage.
The scheme is available through a company called Unmortgage, which launched in July.
Their website says, “Unmortgage is for you if you can’t afford to buy the home you can afford to rent.”
The idea is that people looking to get on the property ladder can become partial homeowners, and they have the option of building up their share of the property over time. They could even eventually buy out the investor.
“We arrange a partnership between you and our funding-partners to buy the home together, in cash. Just you and them. If you pay for five per cent, they pay for 95 per cent,” the Unmortgage website explains.
You would then also be required to pay rent to your partnered investor in order to live in their share of the property.
How does it work?
Potential homeowners looking to be first time buyers are required to put up at least a five per cent deposit - which comes to a minimum of £12,500 - in order to use Unmortgage. This means that you would need to be looking at properties that cost at least £250,000. The maximum deposit that can be put down through the company is capped at 20 per cent.
You must also earn a certain amount to use the service.
The Unmortgage website states, “You - or you and your partner - need at least £30,000 household income, before tax.”
The rent for the remaining part of the property is figured out by looking at similar properties in the same area. The FAQ section of the website says that “an independent third party” is used to check the rent is fair.
You are only required to pay the rent on the amount of the home you don’t yet own, so if you already own five per cent of the property, you pay 95 per cent of the rent.
Unmortgage says, “We make sure that your rent payments on day one are no higher than 36 per cent of your joint household income because we don’t want you to overburden yourself with high rent.”
Is it too good to be true?
Which? described the scheme as having “some serious catches”.
Firstly, those using Unmortgage would end up paying more stamp duty than a normal buyer would.
Which? explains, “Normally, first-time buyers in England are completely exempt from stamp duty when buying a property costing up to £300,000, and a discount applies on purchases between £301,000 and £500,000.”
This exemption does not apply with Unmortgage and due to the fact that you’re buying with an investor, a three per cent surcharge would apply.
Up front, you only pay the stamp duty on your share - if you only own five per cent of the house, you only pay five per cent of the stamp duty.
Which? says, “As you buy more shares within the first five years, you’ll also pay the investor back proportionately for the stamp duty they originally paid.”
Even higher costs
Which? goes on to explain that, if in the future you decide to buy out the property for full ownership, the HMRC would treat it as a separate purchase.
“This means you’d have to pay a new stamp duty bill (this time without the 3 per cent surcharge, but also without the first-time buyer exemption) on the full value of the property, including the share you already own,” Which? reports.
Which? also urged anyone thinking about buying through Unmortgage to undertake legal and financial advice to make sure you fully understand the terms before entering into an arrangement wherein the investor owns the property.