Getting on the property ladder can feel like an enormous feat for a first-time buyer. Often, the biggest obstacle facing first-time buyers is raising a large enough deposit to purchase a property.
Luckily, there is support out there for those that are struggling to overcome this – such as the shared ownership scheme. If you aren’t sure how the shared ownership scheme works or if it is a good idea for first-time buyers, we’re here to explain.
How does the shared ownership scheme work?
The shared ownership scheme is a cross between renting and buying. Instead of purchasing a property, you purchase a share of a property. The remaining proportion is retained by a Housing Association. They then charge you a monthly rent for occupying its share of the property.
You do still need to put down a deposit (typically between 5-10%). However, the actual amount is based on the share that you are purchasing. For example, if you want to purchase a 25% share of a £300,000 home, the value of your share will be £75,000 (25% of £300,000). If a 5% deposit was required, you’d need to put down a £3,750 deposit. You would then raise a mortgage for the remaining value of your share (£71,250) and pay rent on the rest.
Over time, you will normally have the option to buy further shares and own more of the property. This is known as ‘staircasing’. The more of the property you own, the less the Housing Association owns and therefore the rent you pay decreases. In many cases, you can eventually staircase up to 100% ownership. This means you would own all of the property and no longer have to pay any rent.
Am I eligible for the shared ownership scheme?
The shared ownership scheme is designed to be accessible and so is open to a wide range of people. That being said, there are a few eligibility criteria that you must meet. Firstly, you must be at least 18 years old and able to take out a mortgage. You must also not already own a home.
You must also have a household income of less than £80,000 (or £90,000 in London). This maximum income threshold is in place to ensure that the scheme is restricted to those who actually need it, rather than those who could otherwise afford to buy a house on the open market in the usual way.
Find out more – ‘Who is eligible for shared ownership?’
Shared ownership advantages
The shared ownership scheme comes with a number of advantages for certain buyers. Let’s run through the main advantages that make the shared ownership scheme attractive to first-time buyers in particular:
- You are more likely to be approved for a shared ownership mortgage than a traditional mortgage because the amount you need to borrow is generally lower.
- It can sometimes work out cheaper than renting. The rent that you do pay is generally at a lower rate than would normally be charged on the open market.
- You may be able to purchase a bigger house or live in a more desirable area than you would have been able to afford if you were buying outright.
- Shared ownership properties are often built in private developments, helping to put affordable housing in the heart of sought-after areas.
Shared ownership disadvantages
Of course, the shared ownership scheme also comes with its potential downsides. Let’s run through the main ones that you should be aware of:
- Staircasing and buying additional shares in your property can be expensive. There are costs involved each time you do it. These include the cost of a property valuation, legal fees and potentially some remortgaging costs.
- You may encounter a few restrictions on what you can do with your property. You are technically a joint owner with, and a tenant of, the Housing Association. For instance, you may be unable to add an extension to your home or even make some alterations to your property without the prior approval of the Housing Association.
- You could potentially be evicted from the property if you fail to pay the rent or if you display nuisance behaviour. If this does happen, then you could lose some, or all, of the portion of the home that you have already ‘bought’.
Find out more – ‘Shared ownership pros and cons’
Alternatives to the shared ownership scheme
If you are a first-time buyer struggling to raise a deposit, you should also explore the option of the Help to Buy Equity Loan Scheme. In 2021, the scheme became exclusive to first-time buyers only and altered its criteria to include regional price limits. This means that buyers can only use the scheme to purchase a home costing no more than the specified property price cap in their region, to ensure that the scheme reaches the people who need it most.
So, how does the Help to Buy Equity Loan Scheme work? Essentially, the government lends you up to 20% of the cost of your new build home (up to 40% in London). For this reason, you only need a 5% cash deposit and a 75% mortgage to make up the rest (up to 55% in London).
You could also explore the option of the government’s 95% mortgage scheme. It has been introduced to help first-time buyers and people looking to move into a new home up to the value of £600,000 with a minimum 5% deposit. The government is offering lenders the guarantee that they need to provide mortgages that cover the other 95%, subject to their usual affordability checks.
When asking yourself the question of whether shared ownership is a good idea for first-time buyers, it will depend on your personal circumstances. Ultimately, however, there is a reason why this scheme has been popular since the 1980s. It is a very attractive option for many first-time buyers struggling to raise a deposit.
Do you have further questions about the shared ownership scheme? At Mortgage Light, we have shared ownership experts ready to help you. Contact us today.