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Recent news highlights a concerning trend: two-thirds of first-time buyers (FTBs) in the UK are unaware of what shared ownership means. Given the rising property prices and the challenges of entering the housing market, it’s crucial to understand the various schemes available to help make homeownership more attainable. Shared ownership is one such scheme that can provide a viable pathway to owning a home. This article will demystify shared ownership, explaining how it works, its benefits, and its potential drawbacks.
What is Shared Ownership?
Shared ownership is a government-backed scheme designed to help people who cannot afford to buy a home outright. Instead of purchasing the entire property, you buy a share, typically ranging from 10% to 75%, and pay rent on the remaining portion owned by a housing association. This makes the initial step onto the property ladder more manageable as it requires a smaller deposit and mortgage.
To be eligible for shared ownership, you need to:
1. Be a first-time buyer, an existing shared ownership homeowner, or a former homeowner who cannot currently afford to buy.
2. Be over 18 years old.
3. Have a household income of less than £80,000 per year (£90,000 in London).
Shared ownership properties can be new builds or resale properties and are available across England.
How Does Shared Ownership Work?
When you opt for shared ownership, you decide the share of the property you can afford to buy. You then take out a mortgage for that share and pay a subsidised rent on the remaining portion. For example, if you purchase 25% of a £200,000 property, you pay £50,000 via mortgage and rent on the remaining £150,000.
You also have the option to “staircase,” which means you can buy additional shares in your property over time, gradually increasing your ownership stake. The cost of each additional share is based on the property’s market value at the time of purchase. In some cases, you can eventually own 100% of the property, but this depends on the housing association’s rules.
Pros of Shared Ownership
1. Lower Initial Costs
One of the main advantages of shared ownership is the lower initial costs. Since you are only buying a portion of the property, the deposit and mortgage required are significantly less than for full ownership. This makes it easier for FTBs to save for a deposit and secure a mortgage.
2. Affordable Monthly Payments
The combined cost of the mortgage and rent under shared ownership is often cheaper than renting privately or repaying a mortgage on the entire property. This can make homeownership more affordable, especially in high-cost areas like London.
3. Flexibility to Increase Ownership
Shared ownership offers the flexibility to increase your stake in the property over time through staircasing. This allows you to buy more of your home as your financial situation improves, potentially leading to full ownership.
4. Access to New and Well-Maintained Homes
Many shared ownership properties are new builds or well-maintained resale homes. This means you can benefit from modern living standards and potentially lower maintenance costs compared to older properties.
Cons of Shared Ownership
1. Leasehold Ownership
Shared ownership properties are typically leasehold, meaning you do not own the land the property sits on. Leasehold ownership can come with additional costs and complexities, such as service charges and ground rent, which can add to your monthly expenses.
2. Limited Control and Higher Costs for Improvements
As a leaseholder, your ability to make significant changes or improvements to the property can be restricted. Additionally, staircasing can incur legal and valuation fees each time you purchase an additional share, which can add up over time.
3. Selling Restrictions
When you decide to sell a shared ownership property, you may need to do so through the shared ownership scheme rather than on the open market. This can limit your pool of potential buyers and might affect the property’s resale value.
4. Ongoing Service Charges
Regardless of the share you own, you will be responsible for paying service charges for the maintenance of communal areas and services. These charges can increase over time and should be factored into your budget.
Shared Ownership vs. Help to Buy
Another popular scheme for FTBs is Help to Buy, which offers an equity loan from the government to assist with purchasing a new-build home. Here’s a quick comparison:
Help to Buy: Equity Loan
– **Deposit**: At least 5% of the property value.
– **Loan**: Up to 20% of the property value (40% in London) from the government.
– **Ownership**: Full ownership of the property once the loan is repaid.
Shared Ownership
– **Deposit**: At least 5% of your share of the property.
– **Ownership**: Partial ownership, with the option to staircase up to 100%.
– **Monthly Costs**: Mortgage plus rent on the remaining share.
While Help to Buy allows for full ownership from the start, shared ownership offers a more gradual approach with potentially lower initial costs. The right choice depends on your financial situation and long-term goals.
Conclusion: Is Shared Ownership Right for You?
Shared ownership can be an excellent option for FTBs who find it challenging to save for a large deposit or secure a mortgage on the full property value. It provides a more affordable pathway to homeownership, with the flexibility to increase your stake over time. However, it’s essential to consider the ongoing costs and potential restrictions associated with leasehold properties.
Before making a decision, carefully evaluate your financial situation, future plans, and the specifics of the shared ownership scheme you are considering. Speaking with a financial advisor or mortgage broker can also provide valuable insights tailored to your circumstances.
By understanding shared ownership, FTBs can make informed decisions and take advantage of the opportunities available to them, turning the dream of homeownership into a reality.