Traditional home ownership can appear out of reach for many first-time buyers, with the average house price just over £230,000.
The rental market can feel just as daunting. Rising rents and fierce competition for good properties don't always offer an attractive alternative.
So, is first time buyer shared ownership a good idea? Is it the answer to people’s woes? Let’s take a closer look.
What is shared ownership?
Shared ownership is a cross between buying and renting. You buy a share in the property then pay rent on the remaining share at a reduced rate.
You’ll need a mortgage (or savings) to pay for your share of the home’s purchase price. You then own between 25% and 75% of the property.
Shared ownership properties are always leasehold. Over time you can buy more of your property, which is known as staircasing.
Is shared ownership only for first time buyers?
It’s mainly aimed at first time buyers, as a form of government help to buy a home. But, if you used to own a home and can’t afford to buy now, you could get back on the property ladder through this scheme.
Who is eligible for the shared ownership scheme?
You must also have the right to live permanently in the UK, and your combined household income must be less than £80,000 (£90,000 in London). Criteria differs depending on where you live, however.
Often, certain areas will have priority groups, such as widowers.
What type of shared ownership homes are there?
Generally, you will find new-build properties being sold on a shared ownership basis in England and Wales. Some housing associations have resale programmes too for existing homes.
Is it only in England?
In Scotland, shared ownership is usually done through housing associations. But in Northern Ireland, you can buy any property as long as it's less than £165,000 (the level is reviewed every April). But you will have to buy between 50% and 90% of the property.
In the rest of the UK, you can buy as little as 25% of the property.
Purchasing a shared ownership property
You may pay stamp duty on the full price of the property when you buy your first share. But you can choose to pay it just on the percentage you purchase - great if funds are tight. Be aware though, if you buy more shares in the property later on and it has increased in value, you'll have to pay a higher level of stamp duty too.
Shared ownership is still relatively niche with around 50,000 properties being sold on a shared ownership basis since 2009. However, figures from the government suggest the sector is growing.
The pros and cons of shared ownership
Deciding whether the scheme is right for you? It always helps to weigh up the pros and cons:
This scheme has some undeniable pros:
- Many shared ownership schemes are in sought-after locations. This can make it easier to live close to work or remain close to family and friends
- It's more affordable at the start, as you can buy a share of a home with a 5% deposit. This helps get onto the property ladder quicker than buying outright
- You can pay stamp duty just on the share you're buying, helping keep initial costs low
- You can purchase (or staircase) more shares over time (up to 100%) as you save more or pay off your mortgage
- The rent charged by the housing association is generally cheaper than open market rents
- Overall, it can be less expensive than renting privately, even with the mortgage payments added
- You can sell a shared ownership property at any time, and benefit from any increase in value
- You have security of tenure (the legal right to stay in your home) as long as you keep paying the rent
Of course, alongside this is, there are some inevitable downsides:
- You can't choose where the shared ownership properties are. They may not be in your chosen location
- You only buy the leasehold, not the freehold. The housing association own that. These types of properties have their own issues - such as unfair ground rent charges which has caused the leasehold scandal
- If you look to staircase and the value of the property has risen, the shares may cost more. Your stamp duty bill may be higher too
- As with most leasehold properties, you'll usually need to pay a service charge for the upkeep of the common parts
- You are normally responsible for repairs to your home. The housing association just maintain the communal parts – the stairs, lifts, gardens and so on
- If you need a mortgage, the market for shared ownership lenders can be limited. There may not be many products to choose from
- You can sell your shared ownership property at any time, but the housing association has the right to find a suitable buyer first, in what's known as the nomination period
- There can be additional fees associated with the sale of shared ownership property, such as valuations and legal costs for the Housing Association
What are the alternatives?
The government offers Help to Buy equity loans. They give a low-interest loan of up to 20% (40% in London) towards your deposit. You do need a 5% deposit of your own though. You'll then need a mortgage for the rest, and you must buy from a registered Help to Buy builder.
There is also a Help to Buy ISA where the government boosts your savings by 25% to a maximum bonus of £3,000.
An increasing number of commercial lenders offer 95% mortgages. This means you can buy a home with just a 5% deposit. Lenders are likely to set fairly high criteria for this level of borrowing though.
Shared ownership mortgages
It always helps to get your head around how mortgages work.
Guarantor mortgages allow a family member to guarantee your payments. As it can reduce the lender's risk, this can help your mortgage application get accepted. You might be offered better rates too. Remember though, this is a legally binding agreement for all concerned.
Here, getting a quote from a professional mortgage adviser is essential.
Shared ownership may not be the answer for everyone
The main benefit of buying via shared ownership is the initial lower cost. This helps you own a share in a flat or house without the larger deposit you'd need to buy the property outright. The rent is usually less than you'd pay in the open market too. You also get the security of tenure (if you keep up your rent payments), something you can't guarantee in the private rented sector.
The main disadvantages are that you usually have to pay service charges on the whole value of the property. Staircasing (buying more of the property) can also be expensive if property prices rise. You will also be treated as a tenant in law until you own 100% of the property. This means you could lose your property if you don't keep paying the rent.
Shared ownership might be one answer for some looking to get on the property ladder. But it's still a small part of the overall housing market and won't help everyone. You'll not always find your preferred type or location of home or the mortgage to buy it with.
Getting the right advice is key
Shared ownership has its own specific lease restrictions and conditions, which may present different issues in conveyancing. Ensuring you have the right professional to take care of legal matters is essential.
Get a quote from a solicitor below.