Getting on the property ladder is becoming increasingly difficult for first-time buyers, with house prices rising much higher than wages. As a result, several schemes have cropped up to ease the burden, including shared ownership. But is shared ownership a viable alternative to buying a house traditionally? Here, we look at the differences between the two to give you an overview of shared ownership vs traditional home buying.
What is shared ownership?
Shared ownership allows you to buy a share of a house and involves paying a mortgage on the part you own while renting on the rest. That might sound more expensive than owning the home traditionally, but it actually works out cheaper as the deposit required is lower (usually around 5%), and the rent is less than the open market.
It can be an affordable option instead of being the sole owner of the property. You own a share, while a local housing association typically owns the rest. Over time, you have the option to buy more shares in the home until you’re the outright owner.
The scheme is usually aimed at first-time buyers, giving them a viable way to get on the property ladder. Shared ownership is also known as ‘part-buy, part rent’, and most homes that fall under the scheme are new builds.
How is it different from traditional home buying?
When you buy a house the conventional way, you either pay a deposit and borrow the rest through a mortgage or buy it outright as a cash buyer. Either way, you go down on the Land Registry as the property owner. If it’s mortgaged, you pay the lender back monthly until the house is paid off entirely or until you sell it.
On the other hand, shared ownership sees you paying a mortgage and rent to the housing association. Let’s say you bought 25% of the home. In that scenario, you would need to pay a 5% deposit and borrow a mortgage on the 25%. A housing association owns the remaining share, and you would pay rent of up to 3% of this amount.
There’s also the option to buy more shares in the property over time. This is known as staircasing and involves purchasing additional shares in increments of 10% until you own most of the home. When you buy shares, it’s based on the home’s value when purchasing them.
Do you need a minimum income for shared ownership?
To qualify for homeownership your joint household income needs to be less than £80,000 per year outside of London and less than £90,000 per year in the capital. One partner could earn £30,000 and the other £60,000 if you live in London, for example.
If, however, you exceed the amount, you won’t be eligible for shared ownership. Many offering the scheme also have shared ownership affordability calculators so you can see if you meet the requirements and qualify for the scheme.
What’s better out of the two?
Pros of home buying
- The process is more straightforward and involves only a mortgage agreement between yourself and the lender
- You’re the outright owner of the property
- You have more control over the home, especially when it comes to selling the property
- There are more choices of homes to buy compared to shared ownership
- The mortgage market is also larger for people buying a home traditionally.
Cons of home buying
- Buying a home traditionally is more expensive than shared ownership and usually requires a higher deposit
- Stamp duty is normally higher.
Pros of shared ownership
- You can buy a home for less, even if you only own a portion of it
- Many shared ownership schemes are in sought-after locations
- It’s more affordable initially, especially if you’re buying shared only just a 5% deposit
- You only pay stamp duty on the share you’re buying
- Rents charged by the housing association tend to be much lower than they are on the open market
- You can add shared and own more of the home
- You can sell your share at any time and benefit from the property increasing in value
- Security of tender – you have the legal right to say stay in your home as long as you keep paying the mortgage and rent.
Cons of shared ownership
- Fewer choices of homes compared to traditional home buying
- Only able to buy the leasehold, meaning you’ll need to pay ground rent and services charges
- You can expect the cost of shares to increase if the home rises in value
- You’re fully responsible for repairs and maintenance on your home
- Sale of shared ownership can have additional costs, such as valuations and legal costs
Summary: shared ownership vs traditional home buying
So, is it better to buy a home traditionally or through shared ownership? It depends on your financial situation and what you want from a home. Traditional home buying tends to be the first option for most buyers. But shared ownership offers a viable alternative where you can get the keys to your new home for less.
Last Updated: September 7th, 2022