Is Shared Ownership a Good Idea?
Shared ownership is a useful option for buying a home without overstretching finances. You can buy a percentage of a property and pay rent on the remaining portion, allowing you to enjoy the benefits of homeownership while managing costs.
However, weighing the pros against the cons is important. While shared ownership offers lower upfront costs and the opportunity to increase your share over time gradually, it also involves ongoing rent payments, restrictions on selling, and potential limitations on amenities.
Go for shared ownership if:
- You cannot afford a property outright but want to get on the property ladder.
- You have a small deposit and even if you borrow at 90-95% LTV (loan-to-value), you can't afford the property you need.
- You have a large deposit but can't secure a mortgage big enough to cover the rest of the property value, based on low income or poor credit rating.
- You want to build equity by paying off your mortgage and increasing your shared through staircasing.
- You are comfortable with the responsibilities of homeownership - shared ownership comes with the same commitments as owning a property outright such as maintenance and repairs
Don't go for shared ownership if:
- You plan to move frequently or you're unsure about your long-term living arrangements.
- You have a large deposit, as you might be able to purchase a property outright.
- You are uncomfortable with the responsibilities of homeownership - shared ownership comes with the same commitments as owning a property outright such as maintenance and repairs
What is shared ownership?
Shared ownership allows you to buy a share of a property and pay rent on the rest, providing a flexible way to become a homeowner without overstretching your finances.
It's attractive for first-time buyers and those with limited savings; with lower upfront costs and potentially lower monthly payments compared to outright ownership, shared ownership can help you achieve your homeownership goals sooner.
To qualify for shared ownership, you typically need to meet certain criteria, such as:
- Being a first-time buyer (or having previously owned a property that you no longer own).
- Having a household income below a specified threshold.
- Being able to afford the mortgage payments on your share.
What percentage can I buy?
You can typically buy between 25% and 75% of a property under the shared ownership scheme. The exact percentage depends on your financial circumstances and the availability of suitable properties in your area.
The percentage you can staircase by typically ranges from 5% to 25% of the property's full market value. This means you can purchase additional shares in increments of 5%, 10%, 15%, 20%, or 25%.
For example, if you initially bought 25% of a property and the full market value is £200,000, you could staircase by 10% to increase your ownership to 35%. You would need to pay the equivalent of 10% of £200,000, which is £20,000.
Do I need to buy with a mortgage?
Yes, you usually need a mortgage to purchase your share of the property. The mortgage lender will assess your affordability and provide you with a loan to cover the portion of the property you're buying. It's important to note that the interest rate on your shared ownership mortgage might be slightly higher than a traditional mortgage. However, the initial deposit is often lower, making it easier to get on the property ladder.
How it works - the process in a nutshell
- Find a property: Search for shared ownership homes in your desired area.
- Apply for a mortgage: Obtain a mortgage for the portion of the property you're buying.
- Purchase your share: Complete the purchase of your initial share.
- Pay rent: Continue to pay rent on the portion of the property owned by the housing association.
- Increase your share: Over time, you may have the opportunity to increase your share of the property, gradually reducing your rent payments.
Pros and cons of shared ownership
Lower upfront costs
- Smaller deposit: Compared to traditional homeownership, shared ownership typically requires a significantly smaller deposit, making it more accessible to those with limited savings.
- Reduced mortgage payments: Because you're buying a smaller share of the property, your mortgage payments will be lower, reducing your monthly financial burden.
- Affordable: Shared ownership provides a more affordable way to get on the property ladder, especially in areas with high housing prices.
Potential for full ownership
- Increase in share: Over time, you may have the opportunity to purchase additional shares in the property, gradually increasing your ownership stake.
- Home ownership: By steadily increasing your share, you can eventually own the entire property, achieving full homeownership. If you staircase to 100% ownership, you might have the opportunity to purchase the freehold title.
- Financial benefits: Owning your own home can offer significant long-term financial benefits, such as building equity and reducing rent payments to zero.
- Easier to secure: Due to the smaller mortgage required, shared ownership can be easier to secure compared to buying a property outright, especially for first-time buyers with limited savings.
Flexibility
- Sell your share: If you need to move or sell your property, you can sell your share of the property, subject to the terms of your lease.
- Potential for rental income: In some cases, you may be able to rent out a portion of the property, generating additional income.
Government support
- Government backing: Shared ownership schemes often receive government support, which can include affordable mortgages, grants, or other financial incentives.
Building equity
- Equity growth: As you make mortgage payments and potentially increase your share of the property, you'll be building equity in your home.
- You benefit from the appreciation in value on the share you own - for example, if you start with a 25% share and the value grows by 10%, 2.5% of that new property value is your capital gain. If you staircase to 100% ownership, that 10% growth in value is all yours.
- Financial security: Equity is the percentage share of the property that you own, not the share you rent from the housing association or the share you owe the mortgage lender. This is cash you could release for emergencies, home renovations, or retirement..
Restrictions on selling
- Limitations: Selling a shared ownership property can be more restrictive than selling a traditional home. You may need to offer your share to the housing association first before selling it on the open market.
- Potential delays: The selling process can be slower and more complex due to the involvement of the housing association.
Rent payments
- Ongoing costs: Even after purchasing a share, you'll still need to pay rent on the portion of the property owned by the housing association.
- Financial burden: Rent payments can add to your overall monthly expenses, potentially limiting your ability to save or spend on other priorities.
Disagreements
- Conflicts: There's a possibility of disagreements or conflicts with the housing association, particularly regarding maintenance, repairs, or changes to the property.
- Stress and inconvenience: Disagreements can be stressful and time-consuming, potentially impacting your overall satisfaction with shared ownership.
Limited property choice
- Fewer options: Shared ownership properties are typically new-build homes, limiting your options compared to the wider property market.
- Compromises: You may need to compromise on your preferences in terms of location, style, or features.
Leasehold restrictions
- Limited ownership rights: Shared ownership properties are typically leasehold, meaning you have a limited right to occupy the property for a specified period.
- Ground rent and service charges: As a leasehold owner, you'll be subject to ground rent and service charges, which can add to your monthly expenses.
- Restrictions on improvements: Leasehold restrictions may limit your ability to make significant improvements or alterations to the property. You'll also need to cover the cost of maintaining your own share of the property, including repairs and upgrades.
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Shared ownership costs
Shared ownership mortgage payments
Interest rates: The interest rate on your mortgage will determine the amount you'll pay each month but can also change depending on your credit score and the lender you choose. For example, if you borrow £100,000 at an interest rate of 5% over a 25-year term, your monthly mortgage payments would be approximately £585.
Loan-to-value ratio: Your loan-to-value ratio, which is the amount you're borrowing compared to the property's value, will also affect your mortgage payments.
How much rent do you pay on shared ownership?
Rent percentage: The amount of rent you pay will be based on the percentage of the property that the housing association owns. For example, if you own 75% of the property, you'll pay rent based on the remaining 25%. The rent limit on a shared ownership new build is 3% of the value of the share the landlord owns. Most landlords charge 2.75%. So, you'd pay monthly rent at 2.75% of the 25%, which is approximately 0.7% of the full property value.
Rent reviews: Rent payments may be subject to regular reviews and may increase over time.
Stamp duty for shared ownership
Stamp duty land tax: You'll likely need to pay stamp duty on the purchase of your share, similar to buying a traditional home. For example, if you purchase a 25% share of a property valued at £250,000, you might pay a stamp duty of around £1,250. If you're eligible for first-time buyer relief, you may find you would have no SDLT to pay on the full amount. If so, you should opt to pay stamp duty on the full amount, so that there's none to pay on staircasing.
Tax rates: The amount of stamp duty you'll pay will depend on the value of your share and the current stamp duty rates. Check out our stamp duty calculator for more information.
Deposit and legal fees
Smaller deposit: Shared ownership typically requires a smaller deposit of as low as 5%, making it more accessible to those with limited savings. You can also get 5% deposit options on a full ownership property, but 5% of a 25% share will be a lot lower than 5% of a 100% share.
Conveyancing costs: You'll need to pay legal fees to cover the costs of the conveyancing process. As a rough estimate, you might expect to pay between £500 and £1,500 in legal fees.
Valuation and survey fees
Property valuation: A property valuation may be required, which will incur additional costs. The cost of a valuation can vary depending on the size and location of the property, but you might expect to pay around £300-£500.
Home survey: You should get a survey on any purchase excluding brand-new properties which will need a snagging survey. This will be in addition to your lender's valuation. Our survey costs start from £375 EXC VAT for a Level 2 Home Survey.
When staircasing, you will only need a current market valuation. This is because you will need to know the condition of the property before you buy additional shares. We offer this from !svar{CURRENT-MARKET-VALUATION-PRICE-EX-VAT}!svar.
Repairs
Maintenance: As a shared ownership homeowner, you'll be responsible for maintaining your share of the property, including repairs and upgrades. For example, repairing a leaky roof could cost anywhere from a few hundred pounds to several thousand pounds.
Budgeting: It's important to factor in potential repair costs when calculating your monthly expenses.
Insurance: Consider purchasing home insurance to protect yourself against unexpected repair costs. A home survey will also ensure you can budget and anticipate costs for repair.
Ground rent and service charges
Leasehold costs: As a leasehold owner, you'll be subject to ground rent and service charges, which can add to your monthly expenses. The amount can vary depending on the location, age, and size of the property. For example, you might expect to pay around £50-£100 per year in ground rent.
Second-hand shared ownership
Potential discounts: You may be able to negotiate a discount on the purchase price of a second-hand shared ownership property.
Existing features: Second-hand properties may already have desirable features or improvements in place.
Quotes
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Finding shared ownership homes
- Online resources: Utilise online property portals like Rightmove, Zoopla, and Shared Ownership Network to search for available shared ownership properties in your desired area. These platforms often have dedicated sections for shared ownership listings.
- Housing associations: Contact local housing associations directly to inquire about their current availability and application processes. Many housing associations have their own websites where you can find information and submit applications.
- Local councils: Check with your local council's housing department for information on shared ownership schemes in your area and any available properties. They may also be able to provide you with contact details for relevant housing associations.
What is different about selling a shared ownership home
Your housing association typically has right of first refusal
In many shared ownership schemes, the housing association has the right of first refusal, meaning they have the opportunity to purchase your share before you can sell it on the open market.
This is to ensure that the property remains affordable for future shared ownership buyers.
The sale conveyancing is otherwise the same
If the housing association doesn't exercise their right of first refusal, you can sell your share through a traditional estate agent.
The selling process will involve marketing the property, negotiating with potential buyers, and completing the legal formalities.
Shared ownership solicitors that you can trust
SAM can help you sell your shared ownership property. We have specialist shared ownership solicitors who will guide you through every step, ensuring all aspects are covered.
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