Buying a property is a challenge. From unaffordable mortgages to potential chain breaks, obstacles get in the way and make what was an achievable dream suddenly seem unattainable. That is why many chose shared ownership to get themselves onto the property ladder.
Shared ownership is a great idea for those who are unable to afford a mortgage on the full value of the property, yet it comes with some aspects that make it less favourable. For example, whilst you pay a smaller deposit and find it easier to get a mortgage, you’ll also be paying rent, ground rent and service charges on top of your mortgage payments, making it potentially more expensive overall.
In this blog, we look at shared ownership so you can decide whether it’s an option worth considering or best avoided.
What is shared ownership?
Shared ownership is a scheme set up by the government to help people – mainly first-time buyers – get their foot on the property ladder and escape the rising rents and lack of opportunity to buy a home. By allowing buyers to own a share of the house rather than owning it all, ownership becomes more affordable.
How does shared ownership work?
Shared ownership allows the buyer to purchase a portion of the property rather than buy all of it. This means lower mortgage payments, smaller deposits and a much easier step up onto the property ladder. In many cases, buyers can purchase 25% to 75% of the home, but some associations allow stakes as low as 10%.
The remaining share is then covered with monthly rent. Over time, the buyer can “staircase.” This is where their stake in the property is increased. Staircasing can be done in increments of 1%, and over time, the buyer could take 100% ownership of the property.
Now this could all sound too good to be true. An easier-to-obtain mortgage, a smaller deposit. It’s a buyer’s dream! However, not all buyers are eligible.
Can anybody buy a shared ownership property?
No, the scheme is only available for specific house hunters. It aims to help people get onto the property ladder, and therefore, it has specific rules regarding who can apply.
Firstly, you must be over 18 years old. In addition, you’ll need to:
- Be a first-time buyer or have previously owned your home but can no longer afford it.
- Have a household income of less than £80,000 per year.
Even if you match these criteria, you may find that you are ineligible for shared ownership. Affordability checks are conducted to ensure you can afford the mortgage, the rent and bills.
How much rent do I pay on a shared ownership property?
The amount of rent you’ll need to pay on a shared ownership property depends on how much of the property you own. For example, if you have a 75% stake in the property, rent will be due on the remaining 25%. The good news is that, despite you paying both a mortgage and rent, the rental share will be substantially cheaper than it would be if renting privately. In many cases, the rent is 2.75% per annum of the value of the share owned by the landlord, with a cap of 3% on new-build properties.
It’s essential to know that rents can be increased, and if a lease was signed after 12th Oct 2023, it could be increased by the RPI (Retail Prices Index) plus up to 0.5% or by the CPI (Consumer Prices Index) plus 1%. Your lease will explain which type of increase you can expect.
How much does it cost to buy a shared ownership home?
Just like when you buy any other property, there are a host of costs to factor in. How much these equate to will depend on how much of a percentage you are buying, but you’ll need to factor in the following costs to your budget:
- Reservation fee (up to £500)
- Deposit (normally 5% to 10% of the value you are buying)
- Solicitor fees
- Monthly mortgage payments (for the share you are buying)
- Monthly rent payments (for the remaining share)
- Service charges
- Stamp duty
- Estate charge (due for communal areas not covered by service charges)
- Management fees (not always applicable, but cover administration costs for landlord/housing association)
- Sinking fund (not always applicable, but helps cover costs for substantial works such as a new roof)
How to apply for shared ownership housing
If what you have read so far has made shared ownership sound like a viable option, we’ll explain the application process before assessing the pros and cons.
To apply for shared ownership, firstly, check that you meet the eligibility criteria we mentioned earlier. Then follow these steps:
- Find the shared ownership organisations in your area. A quick online search will provide a host of housing associations you could use.
- Contact the chosen organisation and register your interest. They will then send you information on any homes, organise viewings, check affordability, etc.
- Get a mortgage in principle. Use a lender who specialises in shared ownership property and remember to have proof of your deposit funds.
- Reserve the home. If you find a home you like, you can pay a reservation fee. This holds the home for a specific time, with the fee deducted from the amount you pay on completion day. Note that this fee is non-refundable if you change your mind.
- Apply for the mortgage and instruct a solicitor to conduct all the legal work.
- Exchange contracts and pay your deposit.
- Complete on the agreed date.
Shared ownership pros and cons
As with anything, there are pros and cons. Shared ownership is no different. There are benefits to taking this step onto the property ladder, but there are also some potential pitfalls.
Advantages of shared ownership
- Smaller deposit
- Easier to obtain a mortgage
- Low-cost rent
- Easier way to make the first step on the property ladder
- Opportunity to buy more of the home over time
- New-build homes – you’ll be the first, or among the first, to live there
- You are a leaseholder, not a tenant, so you won’t be kicked out, unless you default on mortgage and rent payments
- Potential low maintenance costs (certain repairs are covered for the first 10 years under the Initial Repair Period)
Disadvantages of shared ownership
- You are still paying rent, and it can go up every year
- Service charges and ground rent. Non-negotiable extra costs you cannot avoid
- Less control. As a leaseholder, not a freeholder, you’ll be restricted in what you can do when it comes to development, subletting and selling.
- Staircasing isn’t cheap. Buying more shares is attractive, but you’ll need to pay valuation fees, solicitor fees, mortgage fees and potentially stamp duty.
- Selling isn’t quick. In many cases, the housing association will have the right to find a buyer first. As the buyer must meet the criteria too, this can take time.
- Total costs may be the same as full ownership
- Restricted to only eligible properties
- 100% of repairs and maintenance costs are your responsibility, even though you only own a share of the home.
- Limited mortgage options. Not all lenders offer mortgages on shared ownership property.
Is shared ownership worth it?
Now comes the big question: after reading the pros and cons, seeing the application process and understanding the criteria, is shared ownership worth it? It depends on your current circumstances. If you are a first-time buyer, looking to get on the property ladder, it can be a quick and affordable way to start that journey. However, if there is no rush to become a homeowner, saving for a little longer and buying a house not on the scheme may be a better option. With no ground rents or service charges, more freedom to do as you wish with the property and the option to pick any home you can afford from the property listings, you are free from some of the limitations shared ownership has.
That being said, that can take considerable time, and with the current difficulty buyers have in raising significant funds, shared ownership is at least a starting point.
If you are currently considering property to buy in Epsom, or even have a property to sell in Epsom or the surrounding areas, contact the team at Cairds. With years of experience and an extensive knowledge of the local area, we help people get the sale they desire and purchase the home of their dreams.