Opinion: Do high service charges undermine the intentions of the shared ownership scheme?

By Sue Phillips, Founder, Shared Ownership Resources

The Shared Ownership Council (SOC) has just published the results of a consumer survey of 1,707 past, current and prospective shared owners, finding that nearly half their respondents (46%) are unlikely to recommend shared ownership (SO).[1] Their survey suggests that service charges could be a significant factor.

It’s a highly topical issue, with the London Assembly Housing Committee currently undertaking an investigation into leasehold charges, including whether SO in London becomes unaffordable due to such charges.[2]

This piece explores service charges from a shared owner perspective.

Shared Ownership Council

The SOC survey found that people in SO flats were more likely to be dissatisfied than those in houses, and that dissatisfaction increases over time. Service charges were a common theme, with respondents explaining concerns about rising costs, value-for-money and poor understanding of the costs charged on.

Some stated that they would never have entered SO if they knew the extent to which service charges would rise. As the SOC says: “The financial pressures created by rising service charges has knock-on effects for consumers, as often it means they can no longer afford to staircase whilst also making the property less attractive to prospective buyers, such that the consumer cannot sell the property.”

The Levelling Up, Housing and Communities (LUHC) Committee: Inquiry into shared ownership

A 2023-24 LUHC Committee inquiry into SO also concluded that, for too many, housing costs become increasingly unaffordable, stating: “The main issue faced by most shared owners is uncapped service charges levied by the provider or landlord…for many this was exacerbated by the sudden or unexpected nature of the increases in costs.”[3]

The Housing Ombudsman: Complaints about service charges

In August 2024 the Housing Ombudsman published an Insight report on SO[4], revealing that service charges comprise the third most common source of complaints from shared owners.

Of course, the Housing Ombudsman’s jurisdiction doesn’t extend to affordability – whether the level of service charge or the amount of any increase. In an earlier Spotlight report[5], the Housing Ombudsman revealed that, in 2018-20, around one-third of complaints about service charges fell outside the scope of the service.

The Regulator of Social Housing: Tenant Satisfaction Measures

The Regulator of Social Housing (RSH) undertook a major analysis of the 2023-24 TSMs, finding that only 49.5% of shared owners are satisfied with the overall service from their landlord. Where shared owners are dissatisfied, 38% mentioned rent or service charges. [6]

However, shared owners are excluded from responding to RSH questions on satisfaction with repairs (TP02, TP03 and TP04). Additionally, there are no questions on satisfaction with ongoing affordability or transition to full homeownership.

Are high service charges a London problem?

Given that most new-builds in the capital are flats, it is likely that Londoners are particularly exposed to high service charges. Regardless, it’s sensible not to make assumptions about the experiences of shared owners outside London, including when it comes to service charges and estate management charges.

The SOC’s survey found that, when it comes to the experience of people in SO flats outside London, satisfaction rates are higher but still low.

The London Assembly Housing Committee: How high is too high?

In their Service Charges Charter (2021)[7], the GLA states: “For affordable housing tenures such as SO, service charges can be the difference between housing costs being affordable or not.” The charter specifies that “annual housing costs – defined as inclusive of service charges – are considered genuinely affordable at under 40% of net household income”.

As part of their ongoing investigation into leasehold charges, the London Assembly Housing Committee is currently investigating whether increases in service charges can lead shared owners in the city to face an overburden of housing costs, above the 40% threshold determined, at the outset, as the maximum affordable.[8]

Do shared owners understand what they’re getting into?

Is transparency adequate when it comes to SO service charges? Researchers at the University of York[9] found that the costs of repairs and insurance were frequently omitted from homebuyer comparisons of monthly homeownership costs with their previous private rents.

And a failure to flag up service charges appears to be an ongoing trope of SO marketing campaigns.

Myth: shared ownership is more expensive as I have to pay rent and mortgage every month

Truth: in many cases, the monthly payments for a shared ownership property is less than renting privately, just with the added benefit of owning a stake in your home![10]

The SOC makes a case for improved transparency. Their report also discusses problems with sales incentives taking the form of discounted service charges for a limited period, finding that these can make it harder for shared owners to understand the long-term affordability of their new home.

Do high service charges undermine the intentions of the SO scheme?

Some claim that high service charges are a leaseholder problem rather than a shared owner problem. However, this view fails to take account of contextual factors: SO is delivered under an affordable homes programme and is described by government as a pathway to full homeownership.

Affordability

The future is inevitably uncertain and, consequently, there are risks associated with any form of house purchase. However, SO is targeted at households who are, by definition, financially vulnerable compared to those who can afford to purchase on the open market. Defining affordability purely in relation to access to a mortgage deposit and short-term comparisons with other tenures does shared owners a disservice.

“What’s the point of affordability testing? I had to pass an affordability test with the housing association initially to see if I could afford to pay for the share of the flat and its associated costs. But now, nobody cares whether I still can afford it.”[11]

The University of York research referred to above[12] found that SO service charges typically increased much faster than inflation, with one shared owner commenting:

“I didn’t understand about the service charges that well. I didn’t understand they’ll be extortionate like they are now”.

A pathway to full homeownership?

The LUHC Committee concluded that large increases in service charges could act as a barrier to staircasing, thereby undermining the premise of SO as a pathway to full homeownership.

Shared owners are liable for 100% of the costs of repairs and maintenance (other than during a ten-year initial repair period under the new model lease), on the basis that they are ‘homeowners’, regardless of the legal actuality (a landlord/tenant relationship) and regardless of the size of their share (perhaps as low as 10%). But how fair is 100% liability for costs, if this very same liability can push staircasing to 100% out of reach?

Some shared owners purchase their home as a ‘starter home’, anticipating transition to full homeownership via a gain on sale. But high service charges can also pose problems when it comes to resales. If total housing costs for a SO home have risen since purchase, all things being equal, there will be a smaller pool of potential buyers for the share who can afford the charges yet still meet eligibility criteria. Lenders will assess service charges and, if they consider that they are too high, could turn down a mortgage application or require a higher deposit.

Summary and recommendations

All the evidence discussed above points to high service charges undermining the intentions of the SO scheme. So, what can government and providers do? Here are a few ideas for starters:

Improve the transparency of future costs with a longer-term affordability focus and indicative scenarios
Include service charges when making comparisons between SO and other tenures
Don’t offer time-limited discounts on service charges as a sales incentive
Design out high costs
Fund viable exit routes (as opposed to, say, offering payment plans) where total housing costs have risen above the 40% threshold determined as the maximum affordable at the outset.

[1] https://www.sharedownershipcouncil.org.uk/shared-ownership-code

[2] https://www.london.gov.uk/who-we-are/what-london-assembly-does/london-assembly-work/london-assembly-current-investigations/leasehold-charges

[3] https://committees.parliament.uk/committee/17/levelling-up-housing-and-communities-committee/news/200679/shared-ownership-is-failing-to-deliver-an-affordable-route-to-homeownership-say-mps/

[4] https://www.housing-ombudsman.org.uk/2024/09/26/shared-ownership-complaints-in-latest-insight-report/

[5] https://www.housing-ombudsman.org.uk/reports/spotlight-reports/leasehold-shared-ownership-and-new-builds/

[6] https://www.insidehousing.co.uk/news/news/less-than-half-of-shared-owners-satisfied-with-overall-service-first-year-tsm-results-show-89537

[7] https://www.london.gov.uk/sites/default/files/service_charges_charter_pdf.pdf

[8] https://www.london.gov.uk/who-we-are/what-london-assembly-does/london-assembly-work/london-assembly-current-investigations/leasehold-charges

[9] https://www.york.ac.uk/media/business-society/news/2022/55103_Final%20Report%20Oct%2022.pdf

[10] https://www.sharetobuy.com/shared-ownership/shared-ownership-myth-busting/#:~:text=Myth%3A%20Shared%20Ownership%20is%20more,a%20stake%20in%20your%20home!

[11] https://www.sharedownershipresources.org/my_so_home/no-15-shared-ownership-downsides/

[12] https://www.york.ac.uk/media/business-society/news/2022/55103_Final%20Report%20Oct%2022.pdf

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Rue

1 year ago

The answer is yes, it does undermine, but this is not limited to s o. Service charges are set up, often by a managing company, that has no interest in the shared ownership model and are there to make money. The land is bought by a housing association, and the selling agent wants to continue making money for it in the form of a estate charges, also the add-ons like gyms, concierge et al, which create an image of service rather than actually providing one. Ground rent has almost died out so this needs to be replaced by another form of non-service tax
Shared ownership was set up by housing associations to help people who couldn’t afford the full whack of 100% ownership, now I think you’ll find that housing association shared ownership properties are actually more expensive than the privately sold. If you were to wander across the shared ownership properties on rightmove you’ll find that many outgoings will prove far higher than the private sector.
The old models 99 year /125leases are becoming increasingly difficult to sell – often burdened
by onerous rising ground rent over periods of 10 years. it doesn’t look good for share ownership, not sure how much the one percent above CPI even with 950 year leases will help long term.

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