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Should I staircase or overpay on my mortgage?

When you own a Shared Ownership property, you can staircase and gradually buy more of the house, or you could pay off your mortgage so that you only pay rent on the part of the house you do not own. But which option is the best?

Should I staircase or overpay on my mortgage?

Written by property expert Kate Faulkner

Although this question is to some extent about property, it’s really a financial one and it’s best to chat this through with a broker or independent financial advisor that can help you weigh up the different options. The organisation you part own through may also be able to run the numbers through with you.

Before you speak to them though, here are some things you need to think through.

What is staircasing?

The first thing to understand is how staircasing works as this will influence your decision.

The idea behind shared ownership is to help those that would otherwise struggle to get on the property ladder, rather than stay in rented accommodation or live in overcrowded accommodation. 

To date, typically with shared ownership, you are offered to ‘buy in’ from a minimum 10% of the property’s market value. You can also buy in at any larger amount up to 75%; the most common buy in amount is currently 25%.

Once you own a shared ownership property you have the option to staircase (buy more of the property), even up to 100% of the property’s value. Be aware though that some organisations may cap ownership at 80% or less to retain affordable homes in a particular area.

Once you have bought in to the property, you can staircase in increments of a minimum of 1%. But, remember each time you staircase, you will incur legal costs to reflect the increased ownership each time.

What are the benefits of staircasing?

To understand the benefits of staircasing, it’s worth a reminder of the different financing elements of shared ownership.

There are three parts to the financials of owning a ‘part buy, part rent’ property:-

  1. Your deposit
  2. The mortgage element of your shared ownership
  3. The rent you pay on the balance of the property you don’t own

Once you’ve bought your shared ownership property, you will have put a deposit down, for example, 5-10% or more of the ‘part you buy’.

For example, if you bought 25% of a £200,000 property and put down a 10% deposit you would have bought £50,000/£200,000 property with a £5,000 deposit and a £45,000 mortgage. You would then be paying rent on the £150,000 of the property you don’t currently own.

Property - £200,000

Own 25% Rent 75%
Mortgage £50,000 Rent £150,000
10% Deposit -£5,000  
Mortage £45,000  

If you have a financial lump sum, the benefit of staircasing is that you can increase the amount of the property you own, say from 25% (£50,000) to 50% (£100,000). You can do this by either increasing the mortgage from £45,000 to £95,000 if you are earning more income or if you have a lump sum of £50,000. 

Property - £200,000

Own 25% Rent 75%
Mortgage £50,000 Rent £150,000
10% Deposit -£5,000  
Mortage £45,000  
Staircase 25%  
Add Mortgage £50,000  
Own 50% Rent 50%
New Mortgage £95,000 New Rent £100,000
 

There are two key benefits of doing this:-

  1. The amount of rent you pay will reduce from paying rent on £150,000 to paying rent on £100,000.
  2. If the property increases in value, you secure 50% of its growth rather than 25%.

An additional benefit might be that if you extend the mortgage, the monthly payments you make may be less than the rent you pay. This could allow you to then overpay on your mortgage or just have some more money to spend each month.

The sums involved will be very individual to your own circumstances and the property you have part bought and part rent, which is why it’s worth speaking to a mortgage broker, or chat this through with the organisation you own your property with.

What are the benefits of paying off the mortgage?

Once you have a lump sum, you could instead of staircasing decide to pay off some (or even all) of your mortgage. Check first with a broker how much of your mortgage you can pay off, and by when. Some may restrict the amount you can pay off in any one year. And, if you were tied into a ‘mortgage deal’, you may need to wait until this has finished or you may have to pay an early repayment charge, limiting the amount you can pay off.

However, if paying off the mortgage helps to reduce your monthly costs, that could mean some extra income for you to spend or save towards something else.

As with staircasing, as the property increases in value, when/if you sell, you will also have more equity to put towards your next home.

How do you decide?

At the start, it’s really about carrying out some sums:-

  1. How much do you need to either pay off the mortgage or staircase? (e.g. £45,000 to pay off the mortgage and £150,000 to staircase to 100%)
  2. Will this allow you to staircase?
  3. Which costs you more each month? The mortgage or the rent paid for the part you don’t own?
  4. What costs will you incur if you staircase versus pay off the mortgage?
  5. Which option will help you benefit more from any increases in the property’s value?

Once you have worked out the sums, you need to think about what you plan to do in the future.

For example, if you could buy the property outright this may make it easier to sell on the open market or it may mean you could let the property out if your circumstances have changed and you can now afford another property.

Other considerations include what’s happening to your personal circumstances:

  • Do you need to reduce your monthly outgoings? Out of staircasing or paying off the mortgage, which would help you reduce outgoings more?
  • How long do you have to pay the mortgage back? Is it a 25 year term that is coming to an end?

There is of course a third option. That is if you have come into some money, do you still need the shared ownership property or could you sell up and put the lump sum towards a new one that better suits your needs now and in the future?

What to do next?

Knowing the best next step if you have a lump sum and own a shared ownership property isn’t straightforward. Once you have thought through what your own needs and wants are both now and in the future, armed with this information and the amount of money you have saved, speak to an expert that can help you run the numbers and work out what’s best to do for your individual circumstances. 

 

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