If you’re struggling to find a home you can afford to buy, one solution may be shared ownership.
This is a halfway house between renting and buying, and helps to reduce the biggest obstacle facing first-time buyers: the need to raise a large enough deposit.
For many people, shared ownership can provide a stepping-stone out of renting and onto the property ladder, and it can set you on the road to full home ownership.
There are some potential pitfalls too, so consider both the pros and cons when deciding whether this is for you.
What is shared ownership?
Shared ownership schemes are run by housing associations, and are usually open only to first-time buyers.
They enable you to take out a mortgage on a portion of your home (ranging from 25 per cent to 75 per cent) and pay rent on the remainder.
This means you don’t need as big a mortgage as you would if buying the home outright.
What are the advantages of shared ownership?
The main advantage of shared ownership is that it can be easier to achieve than full ownership.
Since you only need a smaller mortgage, the necessary deposit will also be smaller.
Even though your mortgage repayments plus rent may be as much as (or more than) the repayments on a full mortgage, the smaller deposit required makes it easier to achieve.
Shared ownership is also preferable to renting, as the portion of the home that you own will grow in value if the price of the property goes up.
If this happens, you’ll have some equity that will help you take your next step on the property ladder.
Can I buy the rest of the property?
You can increase your owned share of the property up to 100 per cent in a process called ‘staircasing’.
This may become possible for you if your circumstances improve – e.g. you are earning more so can afford a bigger mortgage, or have saved or otherwise acquired a lump sum to enable you to buy more equity.
You can usually do this at any time during your tenancy, up to a maximum of three times.
For example, if you start by buying 25 per cent, you could staircase first to 50 per cent, then 75 per cent, and finally buy the whole property.
Each time you staircase, your housing association will carry out a property valuation of your home – meaning you will be buying each share at the current market price (not the price at the time you bought your first share).
Bear this in mind when timing your decision to staircase. You’ll also need to remortgage, for which a mortgage broker is very useful.
How does stamp duty work with shared ownership?
Although most first-time buyers do not pay stamp duty, this exemption doesn’t always apply with shared ownership purchases.
You have two options when it comes to paying stamp duty: pay it on the full value of the home up front, or just on the portion you are buying.
If you choose to pay it on just a portion, you won’t qualify for the exemption (and you’ll also have to pay it every time you buy a bigger share in the property).
If you opt to pay the full amount up front, you will qualify for the exemption – but this only covers properties up to £300,000 (or £500,000 in London).
Talk to your mortgage broker about which option will be most cost-effective for you.
How do I sell a shared ownership home?
Selling a shared ownership home is essentially the same as selling a home in general.
The only real difference is that you must give the housing association the option of finding a buyer first before you put it on the open market.
You will receive a share of the sale price in proportion to your owned share of the property. So if the home sells for £300,000 and you have a 25 per cent share, you will receive £75,000.
Are there any downsides to shared ownership?
As the name suggests, shared ownership doesn’t grant you all the benefits of complete ownership.
As such, as well as pros there are some cons too:
1. You are still a tenant
As you are still paying rent on a portion of the property, you remain a tenant of your landlord.
This means you can be evicted on a number of grounds, such as failure to pay the rent, nuisance behaviour or sub-letting (see below).
Worse still, there is a real risk that if you are evicted you could lose the portion of the home that you have already ‘bought’, since you don’t own it in a fully legal sense until you have staircased up to 100 per cent.
The housing association is not legally obliged to reimburse you for this if you are evicted – you are only legally entitled to be paid for your share upon the sale of the property.
This is why it’s vital to be sure that you can afford both your mortgage payments and your rent before embarking on shared ownership.
2. Stamp duty
As described above, you may not qualify for the first-time buyer exemption.
3. Service charge
You’ll have to pay a service charge to cover the maintenance of communal parts of the building.
4. The lease
Shared ownership properties are leasehold, and homes with a short lease (under 80 years) become increasingly hard to sell.
Check that you would be able to obtain a lease extension if it becomes necessary.
5. Sub-letting
You are not allowed to sub-let a shared ownership property (unless you have staircased to 100 per cent ownership).
You are allowed to let out one or more rooms to lodgers/flatmates, but you must be living in the property permanently yourself.
An alternative to shared ownership is the government's Help-to-Buy scheme, where instead of renting part of the property, you receive an equity loan to cover a portion of the cost.
Find out more about Help-to-Buy.
Can I apply for shared ownership?
In England, you may qualify for shared ownership if your combined household income is less than £80,000 (or £90,000 in London).
Usually you will also have to be a first-time buyer – if you do own a home, you must already be in the process of selling it.
You will also need a good credit, rent and/or mortgage history, and enough savings to cover both the mortgage deposit and the moving costs.
To apply, contact your local council’s Housing team to asking about housing associations in your area, or look on websites such as Share to Buy, the government’s Help to Buy website, or Homes for Londoners if you live in the capital.
Not all mortgage providers will offer mortgages for shared ownership, so contact a mortgage broker who can find you the best deals.
If you found this article useful, you might also find our articles on how to get a single person mortgage and shared equity informative, too!
