If you would like to buy a property outright but you can’t raise a mortgage large enough to complete the purchase, then you might consider making use of the Shared Ownership scheme. The Shared Ownership scheme is designed to make buying a house more accessible for people on a lower income or who have low deposits- but is it a good idea?
How does Shared Ownership work?
Shared Ownership schemes are a cross between buying and renting aimed mainly at first-time buyers. You own a share of the property and pay rent for the part you don’t own at a reduced rate. Previously, you would need to purchase at least 25% of the property value, but new changes to the scheme allow you to purchase just 10%, making Shared Ownership all the more affordable. You will usually need to provide some level of cash deposit, and raise a mortgage for the rest of your share from one of the participating lenders (note: not all mortgage lenders will fund Shared Ownership properties).
The Housing Association will then own the remaining share of the property and charge you rent under a tenancy arrangement to live there. Over time, you can increase your stake up to 100%, own the property, and stop paying rent. This process is called ‘staircasing’.
All Shared Ownership properties are leasehold, meaning you will never own the freehold whilst you own a percentage of the property. Leasehold properties are fairly common, although your solicitor should check the terms of the underlying lease as this may include some restrictions, as well as an on-going annual ground rent and service charge which may increase regularly.
Leases also have an expiry date after which the property will no longer belong to you. Leaseholds for 125+ years are generally regarded as being almost as good as freeholds are and particularly common in multiple occupancy buildings such as flats or apartment blocks.
The Shared Ownership scheme is open to a wide range of people. There are a few criteria that you must meet:
- You’ll need to have a household income of less than £80,000 (or £90,000 in London)
- You can’t own a property already
- You need to fit the affordability calculator issued by the Housing Association
Is the scheme a good idea?
Of course, there are pros and cons to everything. If you cannot afford a mortgage on your current salary for the type of home you’d like to move into, Shared Ownership may allow you to fulfill this ambition. It’s important, however, to be aware of the good and the bad points of the scheme before you make any decisions.
Let’s take a look at the reasons why Shared Ownership might be right for you:
- Generally, once you have lived in your property for a certain period of time as a shared owner (depending on the terms of your lease), you can buy additional shares in your property until you own 100%. By reducing the percentage of the property that you rent from your Housing Association, you will cut your monthly rent bill (although your mortgage payments are likely to go up if you have increased your borrowing to buy the additional share).
- A smaller mortgage will be needed to purchase a share of the property. For example, if a property costs £300,000 and you purchase a 50% share, the contribution needed will be £150,000 made up of a cash deposit and a mortgage).
- Shared Ownership allows you to get on the property market with a smaller cash deposit. You only need to put down a deposit on the share of the property you are purchasing. In the above example, you are buying a 50% share of £150,000. In most cases, this will require a 5% cash deposit of £7500 and a mortgage of £142,500. If you were to buy the same property outright, you would need a £30,000 deposit (10%) and a £270,000 mortgage.
- Housing Associations can only charge rent on their share of the property normally up to 3%. Again, using the previous example, the Housing Association owns 50% (£150,000 worth) of the property, so can charge rent up to £4,500 per annum (3% of £150,000). That works out at £375 per month in rent, in addition to your mortgage repayments.
Here are some downsides to Shared Ownership that are important to consider:
- There are a limited number of Shared Ownership properties available, so you will be restricted on where you can buy. Only new build homes and properties on the resale registers from Housing Associations are available.
- The rent that you pay on the share of the property that you don’t own does not go towards reducing your mortgage or increasing your share of ownership. As well as being a homeowner, you are also a tenant which means you can be evicted if you fail to keep within your lease terms, such as failing to pay rent or displaying nuisance behaviour that affects your neighbours. If you are evicted you could lose a portion of your home that you have already purchased and the Housing Assocation is not legally bound to reimburse you.
- As a shared owner, you are responsible for 100% of the maintenance costs. This means that even though you don’t own 100% of the property, you will need to cover 100% of the costs of ownership such as service charges, ground rents, and property repairs.
- Staircasing comes at a cost and each time you staircase, you may have to pay for the valuation fee, legal fees, and mortgage lender fees if applicable.
- The cost of purchasing additional shares will depend upon the current market value of the property at the point of staircasing. The cost of the additional share will be more than your first share if the value of your property has gone up, or less than your first share if the value of your property has gone down.
- Not all mortgage providers provide loans against Shared Ownership properties, so the pool of mortgages you have to choose from will be smaller than if you were buying a fully owned property.
- When you want to sell your Shared Ownership property, your Housing Association has the right to buy it from you first. This is known as ‘first refusal’. The Housing Association has the right to find a buyer for your home and this is known as the ‘nomination period’. The nomination period usually lasts from 30 days to two months and if this period passes without finding a buyer, you can appoint an estate agent and handle it yourself.
- If you do not own 100% of the property, you can only sell your property to someone who meets the Shared Ownership eligibility criteria, thus reducing the pool of potential buyers you have to choose from.
- Although you are granted much of the freedoms you would have as a full homeowner, with Shared Ownership you will be faced with a few restrictions. You are unable to rent a Shared Ownership property out to someone else and you will need to seek permission before doing any major home improvements, such as changing the property’s structure or footprint. This may be denied, but if it is approved, any improvement value will eventually be allocated to you at the point of sale.
Should I just rent instead?
If homeownership is a dream of yours, there’s a lot to be said for considering Shared Ownership over renting. Whilst you will still be making rental payments whilst using the scheme, you do benefit from the security that often lacks in the rental market.
As previously mentioned, as long as you stay within the terms of your lease, the Housing Association cannot ask you to move. This can happen on the open rental market should a landlord decide to sell or re-purpose the property that you’re living in. You are also protected from rent increases, with that maximum 3% rent previously mentioned. You also will not need to ask permission when decorating or minorly modernising your Shared Ownership house. You can paint walls, hang shelves and photos, and style it to your taste, which you may be restricted by when renting.
The big benefit of Shared Ownership over renting is that you will be paying down your mortgage each month, building up equity and taking you closer to being a mortgage-free homeowner. Simply paying rent for any length of time will not bring you any close to owning your home.
Whether or not Shared Ownership is a good idea will completely depend on your circumstances. This scheme is designed to bring homeownership opportunities to first-time buyers, those on lower incomes, or low deposits, but it is always important to look at the bigger picture and read the small print.
If you aren’t sure whether Shared Ownership is right for you and would like some more information, get in touch with us at Mortgage Light. Our experts have a lot of experience in Shared Ownership, so you’ll be in the best of hands. Contact us today using our online enquiry form, dialing 01908 597655 or using the live chat in the bottom right-hand corner of your mobile or desktop screen.