Is finance available for a fractional ownership purchase?

In the UK, several smaller building societies were looking at fractional ownership as a new sector for them to lend to prior to the 2008 downturn. Several products were launched for a short period but were withdrawn during the credit crunch and have not to date been reintroduced in Europe.

 

Why aren’t fractional ownership mortgages widely available?

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• Most co-ownership structures are based on the property being owned by a corporate entity (such as a limited liability company) with the owners being shareholders or members of that entity. Unless all the owners have borrowed from the same lender (which is very unlikely), the key issue is setting up a structure which would allow a lender to enforce its security against a defaulting owner without also affecting the other owners

• Potential owners will not want to buy a share in a property which is mortgaged to secure a loan to just one owner. If they did, they would risk losing the property through no fault of their own where that owner has defaulted on their repayment obligations. There are some schemes where the promoter will act as guarantor for a defaulting owner but that still puts the other owners at some risk.

• The fractional ownership sector is still relatively small and is not currently` on the radar of most of the larger mainstream lenders.

 

What are the options?

 

Unsecured loans

In the UK, unsecured loans of up to £35,000 are available with a maximum loan term of between 5 and 8 years. As the loan is not secured on any property, the interest rate will be higher than a secured loan.

 

Use the equity in your current home

If you have sufficient equity in your home, you could borrow more and at a cheaper rate of interest than an unsecured loan:

• Second mortgage: you will keep your existing mortgage and grant a second mortgage to secure your new loan, either with your current mortgage lender or with a different lender.

• Remortgage: this will involve taking out a new mortgage where you will borrow a sufficient amount to repay your existing mortgage and have the additional funds you need for your second home purchase. As with a second mortgage, this can be with your current lender or a different lender. A key consideration with a remortgage is that with the increase in lending rates during 2022 and 2023, you are unlikely to be able to borrow at the same rate as your current mortgage

• Lifetime mortgage: this is a form of equity release available to over 55s. It can be an expensive way to borrow and you should take specialist financial advice if you are considering this option.

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Funding through the developer

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Some larger schemes may have a developer funding option. You will normally need to pay up to 50% of the total price for your fraction with the balance funded either direct with the developer or through a lender it has partnered with.

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Are individual mortgages to owners likely to be available in the future?

 

At Lighthouse, we are involved with several structures that will allow owners to borrow on a secured basis to help fund their purchase without affecting the other owners. We are discussing these with a number of smaller lenders who have shown interest in second home co-ownership as a new sector. Please contact us if you would like to discuss this.

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