Buying Your First Home: Unmortgage
‘No mortgage? No problem!’ according to Unmortgage, a new buying scheme introduced to the public in July 2019 by Wayhome. With this scheme, Wayhome allows prospective homeowners to buy a share of between 5% and 20% of a property with just a 5% deposit and NO mortgage.
At face value, what Wayhome offers with their Unmortgage scheme is an altered version of a shared ownership scheme. However, they claim that their scheme is ‘very different,’ explaining that they offer no or low service fees and charges and that it is easy to buy more of your chosen property, or sell the property and move on if you wish. Another major difference is that Wayhome offers the option of buying older properties with established value, whereas shared ownership schemes tend to only offer new builds. Additionally, Wayhome states that they take care of all of the ‘boring and stressful stuff’ such as dealing with solicitors and analysing property surveys and will even be your first port of call for things like boiler breakdowns. Sounds amazing, right?
How does it all work?
With the Unmortgage scheme, you will be matched with a funding partner who will buy the home with you, subject to you putting down a minimum 5% deposit of at least £12,500. This means that the minimum value of the property is £250,000. The scheme also requires you to have minimum household income of £30,000 before tax (or a maximum of £100,000) and the rent can only cost up to 36% of the household income. Other criteria that Wayhome need to know include:
How household income is split (if buying with a partner)
How many children you have (if any)
Your credit score
If you’ve been declared bankrupt
Landlord and employer references
The Unmortgage scheme will be unavailable to individuals with a poor credit score, individuals who have declared bankruptcy or have consistently failed to pay rent.
Unmortgage has set out criteria that properties must adhere to in order to qualify for the scheme so that they appeal to funding partners. The property must:
Be located in a quiet, urban area
Be complete and ready to be moved into
Be freehold, share-of-freehold or leasehold with a lease of at least 100 years
Not have foundation problems
Have between 2 and 5 decent sized bedrooms
Upon securing a property, you will pay rent to your funding partner who assisted in buying the property. The amount of rent paid is based on similar rental prices of houses in the surrounding area. You are then able to increase your percentage ownership at any time by increasing the amount of rent you pay each month. Homeowners then have the option to build up their share of the property overtime or to completely buy out the investor.
Some pros of the Unmortgage scheme include:
Getting on the property ladder without a mortgage
Not being restricted to just new build
The ability to increase your share at any time without being charged
Ability to list on the open market when selling making it easier to sell than a shared ownership property
So at first glance this scheme seems like a great idea for prospective homeowners who may struggle to get onto the property ladder.
So What’s the Catch?
The Unmortgage scheme isn't as straightforward as it may seem, with a few hidden costs along the way, but we will get into that a bit later on. Firstly, the Unmortgage scheme is not yet available nationwide. If the scheme is available in your area, the specific housing criteria must be considered, as not all properties are in line with the Unmortgage scheme. Wayhome will not consider new-builds, properties situated on main roads, near motorways or railway lines, properties with ‘unfairly sized bedrooms’, basement flats, flats above commercial property or ex-social housing. Additionally, inflation is another factor to take into account. Rent payments will increase annually dependent on the retail price index. However, if inflation falls, your rent payments will remain static. Another disadvantage to take into account is that with an Unmortgage scheme, when it comes to insurance Wayhome chooses both the home cover provider and the buildings provider. This may seem like another hassle free pro rather than a con, however, this may leave you with an uncompetitive rate, resulting in some hidden costs further down the line.
Usually, first time buyers are exempt from Stamp Duty (see Tip 2 in our Top 5 Tips blog post for a more in depth explanation) however, with Unmortgage the exemption is not applicable. In fact, you will end up paying Stamp duty in excess of what a typical buyer would. This is because you are buying with a funding partner, therefore a 3% surcharge will be added to the overall Stamp Duty. Initially, you will only be required to pay a Stamp Duty on your share of the property that you own, however as you buy more shares you will also have to pay your funding partner back proportionately for the amount of stamp duty they paid initially.
That is not all in terms of stamp duty, if you decide to buy out your funding partner to obtain full ownership of the property, HMRC will treat this as a separate purchase. Essentially, this means that you will have to pay a Stamp Duty for the full value property, inclusive of the share you already own.
Other cons include:
Selection of homes being limited to those preselected by Unmortgage
The inability to make structural changes (e.g. extensions or renovations) within the property
The inability to buy out your funding partner if the property has not grown in value
What are the Alternatives?
The most obvious alternative would be looking into a shared ownership scheme which involves buying a share of between 25% and 75% of a property using both a deposit and a mortgage and then paying rent to a housing association for the remains share of the property. A shared ownership scheme is similar to the Unmortgage scheme in many ways, with its main advantage being that it is a fully established scheme and it has been tried and tested for many years.
Other alternatives include buying with a 95% mortgage, allowing you to own the property in your own name or Help to Buy equity loans where you pay a minimum 5% deposit, the government lends you 20% and you take out a mortgage on the remaining 75%.
So what’s our opinion on the Unmortgage Scheme?
At face value the Unmortgage seems like a great idea, however any scheme involving joint ownership of a property do not come without their complexities. As stated above, there are many (hidden) costs involved within the process that require very careful consideration. We recommendation seeking advice from a financial advisor before making a concrete decisions and also researching alternatives to get a full picture of the options available to you. As Unmortgage is a fairly new scheme and not government affiliated, there are many risks involved the most serious being the Unmortgage going bust. A spokesperson touched on this saying: ‘The [homeowner] has legal ownership of the property along with the investors, so if Unmortgage were to go under, [the owner] would still have the legal right to live in their home and Allianz Global Investors would administer the process with them.’
Our opinion therefore, as with any decision in the buying process, is to gather all of the available information and to tread with caution!