It can be hard for a first-time buyer to get on the property ladder in the U.K. As well as saving up a huge deposit, potentially paying out vast amounts in rent at the same time, you also need to pass all of the credit and affordability checks to get approved for a mortgage, wade through all of the different mortgage types available, and find the home of your dreams. Despite what some people say, giving up your daily takeaway coffee and dropping your Uber habit will not make that money appear magically. To try and help first-time buyers, the government launched a range of schemes, one of which is the shared ownership scheme. In this article, we will delve a little further into what it is, who would benefit from it, and some of its advantages and disadvantages.
What is shared ownership?
The government supports the shared ownership program, which allows first-time buyers to purchase a home from a housing association.
As the name suggests, you only own a share of the property. This means that you need a smaller deposit and a smaller mortgage to purchase it. For those who are finding it a little tricky to pull together a big deposit or be accepted for a larger mortgage, this can be a great way to take those tentative first steps on the property ladder.
However – and there are always caveats – it is important to know that there are other costs involved in shared ownership. You will still need to pay rent on the share of the property you don’t own yet, any monthly service charges, and ground rent.
Homes in the shared ownership scheme can be either new builds or existing properties and can be houses or flats. They will also be leaseholds rather than freeholds, which is not typical in houses.
Who is eligible for shared ownership?
To qualify for the shared ownership scheme, there are a few criteria you need to meet. Obviously, you need to be over the age of 18. You also need to be a first-time buyer, an existing shared ownership homeowner, or someone who used to own a home but now can’t afford to buy new.
The best thing about shared ownership is that it is targeted at those with a lower income – £80,000 or less, or £90,000 if you live in London. This is to give everyone a fair shot at owning a property.
How does shared ownership work?
Once you have found a shared ownership property, you need to decide what stake in the property you can afford to buy from the housing association. The minimum for this is 10%, and the maximum is usually 75%.
You will then need to put down a deposit of at least 5% of the share you are buying and take out a mortgage to cover the rest. You will also need to pay rent on the bit of the property that you do not own – it’s not just a case of paying the mortgage, unfortunately!
Through a process known as “staircasing,” you can buy more of the property over time. This is usually up to 75%, although a few housing providers may allow 100%. It is always best to check this first. There are also fees associated with staircasing, so while the minimum is 5% each time, it is often a better idea financially to wait and buy bigger chunks when you can afford it.
Pros and cons of shared ownership
As with everything, there are advantages and disadvantages to shared ownership, and it is really important to weigh these up before diving in.The biggest advantage is that it means that people with a lower income and are restricted by their mortgage affordability, or who can only save a small deposit can get onto the property ladder sooner than they would otherwise. You can also gradually increase the share of the property you own so that eventually, you may own most or all of it.
However, shared ownership properties are always leasehold rather than freehold. This means that the land the property sits on won’t belong to you, so there will be some restrictions as to what you can and can’t do. You also still need to pay any service charges and ground rent, no matter how much of the property you own. If and when you do come to sell the house, you might not be able to do so on the open market and will have to go back through the shared ownership scheme. This means it is going to be available to a much smaller group of potential buyers.
And – on top of all this – the more of your property you buy, the more it is going to cost you. While it might be the only way to get on that first rung, it could work out more expensive in the long run, so do your research!
While the shared ownership scheme seems perfect for those with lower incomes, in an ideal world it is for those who can afford a bigger mortgage but might be finding it hard to pull together a big enough deposit, perhaps because they are renting while they are trying to save. What you don’t want is to be able to afford the deposit and the mortgage, but get caught out by the rent and other fees and get into a financial mess.
As with any type of home ownership, it is important to get professional advice and speak to a specialist mortgage advisor. They know their stuff and will be able to advise you on whether it is the right scheme for you.
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