Buying a home using shared ownership: the pros and cons

Shared ownership is a halfway house between renting and buying, and it helps to reduce one of the biggest obstacles facing first-time buyers: getting a mortgage.

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.

However, there are some potential pitfalls, so it’s important to do your research first.

What is shared ownership?

Shared ownership schemes are run by housing associations, and are often (but not exclusively) open to first-time buyers.

They enable you to take out a mortgage on a portion of your home, ranging from 25% to 75%, and pay rent on the remainder.

This means you don’t need as big a mortgage as you would if you were buying the home outright or need to raise such a big deposit.

Who is eligible for shared ownership?

In order to qualify for shared ownership, however, you will need to meet certain criteria.

Firstly you will need to:

• Have a combined household income of less than £80,000 ( £90,000 in London).

• Be unable to save for a deposit and afford monthly mortgage payments for a home that meets your needs.

In addition, you must also meet one of the criteria below:

• Be a first-time buyer.

• You used to own a home but cannot afford to buy a new one.

• You’re forming a new household.

• You’re already using the shared ownership scheme and want to move.

• You already own a home and want to move, but you can’t afford a new home, which will meet your needs.

Some housing associations may also need you to prove that you live, work in or have a connection to the area where you want to buy a home.

How much rent do you pay on shared ownership?

How much rent you pay on a shared ownership home varies, depending on your property’s value, the share you own and the rent charged.

Typically, a housing association will charge you 2.75% rent on their share of the property.

So, if you buy a 50% share in a property worth £150,000 and were charged 2.75% on the housing association's stake, you would pay £2,062.50 annually or £171.87 rent each month.

This will be on top of your monthly mortgage payments as well as any service charges or ground rent that may be due.

Can you rent out a shared ownership property?

You usually won’t be able to sub-let a shared ownership property unless you fully own it, but you may be able to have a lodger.

It’s worth asking the housing association before you apply.

What are the advantages of shared ownership?

The main advantage of shared ownership is that it can be easier to achieve than full ownership.

As you only need a smaller mortgage, the deposit will also be smaller.

Even though your mortgage repayments plus rent may be as much as, or more than, repayments on a full mortgage, a smaller deposit makes it easier to get onto the property ladder.

Shared ownership is also preferable to renting, as the portion of the home you own will grow in value if the price of your property rises.

If this happens, you’ll have some equity that will help you take your next step on the property ladder.

Is buying the rest of a shared ownership property possible?

‘Staircasing’ lets you gradually increase the portion of your home that you own, by purchasing more equity, as and when your finances allow.

Typically, you can buy shares of 10% or more at any time, though some older leases may only allow 25% or more, while newer leases might permit shares as small as 5%.

If you purchased your home on or after 1 April 2021, you might also be able to buy 1% shares each year, for the first 15 years.

If you start by buying a property with a 25% share, you could staircase to 50%, then 75%, and finally buy the whole property.

Just note that each time you staircase, your housing association will carry out a property valuation of your home, so you’ll buy each share at the current market price, not the price at the time you bought your first share.

You should bear this in mind when timing your decision to staircase.

You’ll also need to remortgage - a mortgage broker can be helpful in finding the best deal for your circumstances.

Unbiased can quickly connect you to a qualified mortgage adviser.

How does stamp duty work with shared ownership?

Stamp duty is a bit more complicated when you’re buying a shared ownership property and, if you’re a first time buyer, you might not necessarily get the relief that you would if you were buying your home outright.

You have two options when it comes to paying stamp duty:

Option 1: Pay stamp duty on the full market value upfront

If you choose to pay stamp duty on the full value of the home upfront (a "market value election"), you can still qualify for first-time buyer relief.

This exemption applies if the market value of the property is £500,000 or less.

For homes valued up to £300,000, you won’t pay any stamp duty. You’ll pay 5% on the remainder of the purchase price up to £500,000.

When you buy a share of a property and pay stamp duty on it at the residential rate, you don’t have to pay any more stamp duty after this, even if you buy a bigger share in the property later on.

Option 2: Pay stamp duty on the portion you are buying

Alternatively, you can pay stamp duty on just the portion of the property you’re buying.This can be helpful for buyers that want to keep upfront costs as low as possible.

However, if you choose this option, you won’t qualify for the first-time buyer exemption.

Additionally, if your share in the property exceeds 80% later on, you’ll have to pay stamp duty again on the increased portion.

You should talk to a mortgage broker about which option will be most cost-effective for you.

Learn more: how does stamp duty for first-time buyers work?

What is the process of selling a shared ownership home?

Selling a shared ownership home is essentially the same as selling any other home.

The only real difference is that you must give the housing association the option of finding a buyer 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% share, you will receive £75,000.

Are there any downsides to shared ownership?

As the name suggests, shared ownership doesn’t give you all the benefits of complete ownership.

So, there are a few pros and cons to consider:

1. You're still a tenant

As you're still paying rent on a portion of the property, you remain a tenant of your landlord.

So, you can be evicted on many grounds, such as failure to pay rent, nuisance behaviour or sub-letting.

Worse still, there is a 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%.

The housing association is not legally obliged to reimburse you if you are evicted – you're only legally entitled to be paid for your share on the sale of the property.

This is why it’s vital to ensure you can afford your mortgage payments and rent before applying for shared ownership.

2. Service charge

You’ll have to pay a service charge to cover the maintenance of communal parts of the building to the full value of the property, even if you only own 25%.

3. The lease 

Shared ownership properties are leasehold, and homes with a short lease (of under 80 years) become increasingly hard to sell.

You should check that you can obtain a lease extension if necessary.

4. Sub-letting

You are not allowed to sub-let a shared ownership property unless you have staircased to 100% ownership.

While you are allowed to let out one or more rooms to lodgers or flatmates, you must be living in the property permanently yourself.

Find out more about Help-to-Buy.

Can I apply for shared ownership?

You may qualify for shared ownership if your combined household income is less than £80,000 (or £90,000 in London).

Usually you will have to be a first-time buyer although you may be eligible if you meet other criteria. If you own a home, you must already be in the process of selling it.

You will also need a good credit record, rent or mortgage history, and enough savings to cover the mortgage deposit and 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 or Homes for Londoners if you live in the capital.

Not all mortgage brokers will offer mortgages for shared ownership, but it’s worth getting in touch with one as they may be able to find you the best deals.

Considering shared ownership?

It’s a good idea to talk to a qualified mortgage broker who can help you find the most competitive mortgage for your unique circumstances.

Get expert financial advice

Shared ownership can be a valuable option if you’re looking to step onto the property ladder but can’t afford to buy in the conventional way.

But it’s important to weigh the benefits against the potential downsides, such as ongoing rent payments.

By thoroughly understanding the terms and conditions and considering your long-term financial plans, you can make an informed decision about whether shared ownership is the right path for you.

Unbiased will match you with a qualified mortgage broker who can provide expert advice on shared ownership and help you navigate the complexities of securing the best financing option for your needs.

If you found this article useful, you might also find our articles on how to get a single person mortgage and shared equity informative.