With house prices continuing to rise, and their upward trajectory set to continue, many potential homeowners are still looking for an affordable way to get themselves onto the property ladder. For some, shared ownership could be the answer.
In today’s post, we’ll go through all things shared ownership, covering everything from stamp duty to staircasing. So, if you’re considering going down the part buy/part rent route, this guide is a must-read.
Before we get into the weeds, though, let’s kick things off with the most basic question...
What is shared ownership?
As you’ll no doubt have already gathered, shared ownership is a scheme aimed at those looking for a more affordable way to own their own home. Otherwise known as part buy/part rent, shared ownership gives those who are eligible to apply an opportunity to buy a percentage of a property, rather than the whole home all at once.
Shared ownership schemes are run by housing associations up and down the country, and it is they who will own the remaining portion of your home.
How does shared ownership work?
We’ve already discovered that shared ownership is divided up between the homeowner and the housing association offering the property, but how does it work? Basically, by purchasing a smaller percentage, applicants can apply for a smaller mortgage than they ordinarily would if they were buying the full 100%.
The percentage bought can vary (more on this next) and the majority of properties will be newly built. That being said, as the shared ownership scheme matures, more and more homes are hitting the market as resales.
Whatever percentage is bought, rent must be paid on the remaining amount owned by the housing association (we’ll explore how this is calculated later on in this post). In addition to the rent, you’ll obviously have to pay off your mortgage as well.
Despite sounding like you’d be no better off, it can actually work out to be a very affordable way to enter the property market. Although you may end up paying the same month to month as you would have done had you bought 100% of the property, the fact that you’re only buying a percentage means that the deposit you need to find is far less.
What percentage will I own?
In most instances, the percentage will be your choice when you buy, but it must fall between 10% and 75% of the overall property value. This flexibility allows purchasers a little wiggle room in terms of affordability and prevents people being priced out of homes that could be perfect for their needs.
Moving forwards, those on the shared ownership scheme will be able to purchase a greater percentage of the property, should they wish to do so. There’s no pressure to buy more, but the option is there if the homeowner can afford the extra mortgage payments.
It’s important to remember that the rent will be adjusted accordingly, so you’ll pay more for the mortgage, but less in rent to the housing association. The process of buying a greater percentage is commonly referred to as ‘staircasing’ and we’ll go over it in greater detail later.
What deposit do I need for part buy/part rent?
This really is the beauty of shared ownership. As we touched upon in the last section, shared ownership brings the deposit required down significantly, and that is often the obstacle that trips up potential homeowners. With this stumbling block removed (or lowered, to be more precise), buying a property can be far easier.
Naturally, we cannot give you an actual figure as there are so many variables at play here. The key thing to remember is that you will be able to get a foot on the property ladder for less deposit if you opt for shared ownership.
Do I need a special mortgage for shared ownership?
Although shared ownership is gaining popularity and some lenders are now offering specific loans to accommodate the demand, for most people a normal mortgage will be perfectly acceptable. You will, obviously, be subjected to all the usual affordability checks, so make sure you run your numbers properly before you apply.
To find out more about what lenders have to offer, check out our post on the different types of UK mortgages available to homebuyers.
How much rent will I pay to my housing association?
As with the deposit, an exact figure is impossible to give. We do, however, have a formula you can use in order to get an idea of what your rent might be:
Property value x percentage owned by the housing association / 100 x 3 / 12
Here’s how it works:
Say the property in question is worth £300,000 and you own 60% with the remaining 40% owned by the HA, your rent will be calculated as follows:
300,000 x 40% = 120,000
120,000 / 100 x 3 = 3,600
3,600 / 12 = 300
TOTAL RENT PAYABLE: £300 per month
The majority of housing associations currently calculate rent in this way, so you can fairly accurately work out what you’ll need to pay using this formula. That being said, it’s always worth double checking with them to be 100% sure you’re on the right track.
Will I need to pay stamp duty on a shared ownership property?
In the majority of cases, first-time buyers do not usually have to pay stamp duty, thanks to the relief offered by the government. Shared ownership, however, can be different, so you may not be exempt.
This is because the property is split between two parties: you and the housing association. In order to receive the exemption, you must agree to pay the full stamp duty amount up front, not the percentage of the property you own.
Remember, the exemption only applies to homes up to the value of £300,000 (or £500,000 if you’re buying in London), so you should think about what this means for you in terms of what you’ll be liable to pay. Consult either a financial advisor or talk to your mortgage broker to find out which avenue makes more sense for you and your personal circumstances.
Who is eligible to apply?
There are two main criteria one needs to meet in order to be deemed eligible to apply for shared ownership. These are:
- Your household, as a whole, earns £80,000 a year or less or £90,000 a year or less in London
- You are a first-time buyer, you used to own a home but can’t afford to buy one now or are an existing shared owner looking to move (source)
If you’re unsure about your first-time buyer status, check out this post: What Is A First-Time Buyer? Who Qualifies And Who Doesn't?
Are shared ownership properties leasehold or freehold?
All shared ownership properties offered in England are leasehold. Check out our post on the difference between leasehold and freehold for more information on the two.
What is shared ownership staircasing?
Staircasing is the term given to buying additional portions of a shared ownership home.
Previously, anyone wishing to buy a greater percentage had to do so in increments of 10%, but this has recently been revised downwards to a mere 1%, allowing almost everyone to buy more of their own home from their housing association. Associated fees have also been reduced significantly with the new gradual staircasing model.
So, I can potentially own the property outright?
Yes, although your housing association may have rules attached to doing so.
Some will require you to live in the property for a certain length of time, usually 12 months, before you can up the percentage you own, but this isn’t always the case. You may find that your HA will allow you to staircase immediately. It varies.
Similarly, some housing associations may have a ceiling on the amount of times you can staircase, with many stating that you can only go through the process a maximum of three times.
This means you’ll have to carefully consider how much more you buy in any given staircasing period, as you could end up with too great a percentage left to buy on your last staircase.
What happens if I want to sell my shared ownership property?
For the most part, selling a shared ownership property is no different to selling a home you own outright. The key difference will be what is stipulated in your lease in terms of the housing association rules over first refusal.
In the vast majority of cases, shared owners will need to inform their HA about their desire to move on, rather than simply calling an estate agent and offering the property to the open market. This allows the HA to offer the property to others looking for an affordable way to buy who may be on their waiting list.
There is, however, usually a nominated period in which the HA must find a buyer for the home (often eight weeks, but do check). If no one is found during this timeframe, the property can then be offered to the open market for sale.
Things to think about before you buy into shared ownership
While shared ownership can be great for some, it’s still worth thinking about the following before you sign up for the scheme:
You’ll still have a landlord
While you only own a portion of the property, you will, effectively, still be a tenant. This means eviction is still a very real possibility and it can become a reality for a number of reasons.
Naturally, losing the roof above your head is never ideal, but those on the shared ownership scheme potentially have a lot more to lose, namely the part of the property they ‘own’. Until you own the full 100%, you don’t really own any of it from a legal standpoint, which means the housing association can evict you without paying back the amount you’ve bought.
Housing associations only have a legal responsibility to reimburse you when a shared ownership property is sold, not after an eviction, so you could be left seriously out of pocket.
When you consider the fact that evictions could be made due to things as varied as failing to pay rent through to anti-social behaviour issues, it’s something you should definitely keep in mind.
You will likely have restrictions to adhere to
As a leaseholder, you will have to stick to the terms laid out within the lease itself. This can range from small things such as not being able to lay hard flooring in apartments with neighbours below them through to greater restrictions on structural changes to the property. Always read the small print.
Your costs can increase
Costs can, and most likely will, increase across the duration of your ownership/tenancy. This is especially true of service charges, but will also apply to the rent payable to the housing association as well.
Don’t forget that you will be liable to pay full price for maintenance and repair work, too, as this is not calculated pro rata. So, even if you own the minimum 10% of your property, you will be expected to pay 100% of repair and maintenance costs incurred.
You cannot rent the property out
Bit of a no-brainer this one, but it’s worth pointing out. Shared ownership properties cannot be rented out under any circumstances. Even subletting is a no-no, so don’t think that you’ll be able to get a flatmate in to help with the bills, as doing so could land you in hot water.
Negative equity is a possibility
Thanks to the fact that most shared ownership properties will be new builds, negative equity becomes a very real possibility. As with anything new, a premium comes along with it, and that goes away as soon as it becomes ‘pre-owned’.
It is, therefore, worth thinking of shared ownership as a medium-term purchase as opposed to short. Staying put for as long as possible will help negate any depreciation you may incur, but don’t forget that house prices can go down as well as up.
Falling house prices coupled with depreciation is a recipe for negative equity, unfortunately.
Staircasing can prove to be expensive
While staircasing seems like a great idea at face value, it’s vital to bear in mind that each time you go through the process there will be fees to pay. Legal costs, valuation fees, mortgage arrangements, stamp duty...it all mounts up.
Would you want to pay the above three or four times over? Probably not.
Selling can be less straightforward than a home owned outright
This can vary greatly depending on location. Desirable areas will sell, no problem at all, but other shared ownership properties may struggle.
Think about this before you buy. List all the positives and look at open market demand to get a handle on just how marketable the property will be when you want to move on.
Alternatives to shared ownership
There are a number of alternative options to shared ownership available, and some may suit you better. We recently published an article on why 2021 is a great time to be a first-time buyer and in it we discuss all of the alternative schemes currently out there. Go check it out.
That’s it, our guide to shared ownership is complete. We hope you found it useful and informative. If you’d like more of the same in your inbox every Monday, please feel free to subscribe to our newsletter for more good stuff each and every week.