Shared Ownership can offer a fantastic option for those looking to gain entry into the property market where there are limitations on borrowing or budget. Unfortunately, numerous potential pitfalls come with taking this path.
Here we address the common complaints Shared Ownership receives as well as the opportunities it can provide.
What is Shared Ownership?
Shared ownership programmes enable purchasers who meet certain eligibility criteria to qualify for a mortgage to purchase a stake in a property (generally between 10% and 75%) while paying rent for the remaining share at a reduced rate (around 2.75% of the property value annually) to the housing association or developer who owns the building.
By allowing you to start by purchasing as little as a 10% share in a property, putting down just 5% of the price of that share rather than the whole purchase price, the programme lowers the cost of home ownership.
Also, until you own 80% of the property, stamp duty will typically be deferred.
When you purchase a shared-ownership property, keep in mind that the home is typically leasehold. You must pay an ongoing service charge and a portion of major maintenance costs; however, housing associations and landlords must still make contributions to the costs of essential repairs and maintenance for at least the first 10 years. You can also seek to reduce rent expenses, if you are able, by purchasing additional shares through ‘staircasing’ or increasing your share in 1% increments over time.
Housing associations or housing developers operate shared ownership programmes. However, the specifics, costs, and limits involved differ per provider, so when considering utilising such a scheme it’s best to assess each provider on its own merits, and the terms within the lease.
Who is eligible for Shared Ownership?
First-time buyers, or those actively selling their current property, can take advantage of Shared Ownership, as long as they are aged over 18, and are a British or EU/EEA citizen or have indefinite leave to remain.
To qualify, your annual household income should be below £80,000 (or up to £90K in London), plus you will need a deposit typically amounting to 5-10% equity share of your future home. An additional £4K to cover associated costs such as legal fees will also be required, and providers will expect to see proof you can afford to maintain the costs of owning your own home.
If you’re self-employed, you will need to provide evidence of at least three years of your accounts to show that you’re suitable for Shared Ownership, though If your salary fluctuates significantly, it’s advisable to obtain some financial advice before borrowing money or committing to property ownership.
What are the benefits of Shared Ownership?
- Smaller deposits
Purchasers of a shared ownership property won’t need to break the bank for their deposit, thanks to its percentage-based calculation. This can be invaluable assistance in overcoming one of the homebuyers’ biggest obstacles – particularly those with low incomes who would otherwise struggle to afford it.
- Low-income earners can access mortgages
Low-income earners are more likely to qualify for a Shared Ownership mortgage than those seeking traditional financing. This is because they borrow significantly less from the bank, making them attractive candidates in today’s market.
- Gradually increasing shares
With ‘staircasing’, you can make gradual progress towards fully owning your property. Acquire ownership of as little as 1% at a time and eventually – with dedication – reach the goal to own 100%.
- Security
In contrast to traditional renting, you have a lot more security because your landlord can’t raise the rent or sell your house, as long as you make your rent and mortgage payments on time and in full. You could even stay in your property for the duration of the leasehold if you so desired typically between 90 to 100 years, but this might vary.
What are the main challenges with Shared Ownership?
- Maintenance charges
Service charges for maintenance and repair are payable on top of the mortgage and rental. Whilst this still makes Shared Ownership affordable for some, the fluctuation of such charges can be off-putting.
For example, any monthly service charge will only generally cover general caretaking and upkeep of communal areas, however, if major roofing repairs or electrical work is required, you may be asked for an additional sum.
Previously, those on Shared Ownership schemes would have been liable for all maintenance costs, but the rules have changed on this matter in relation to Shared Ownership homes built under the government’s Affordable Homes Programme (AHP) from 2021 – 2026.
Now, scheme providers are required to pay a maximum of £500 per year towards the costs of “qualifying” essential repairs and maintenance for the first 10 years.
It should be noted, however, that this is only relevant for homes acquired during the 2021 to 2026 window. If you purchase an existing home through a shared ownership resale scheme, it will still have the previous conditions attached, meaning 100% of the maintenance remains your responsibility.
- Buying up increased shares in your property can be expensive
When looking to increase your stake in your home by ‘staircasing’ it will not just be the cost of the share you need to be covered, as there will be other matters for consideration;
- Valuation fee – the scheme provider will likely want to know the current market value of the property so will instruct a valuation is undertaken
- Legal expenses – increasing your shares will result in changes to your existing lease, so the support of a solicitor will be required
- Stamp duty – There are two methods to pay if you are not qualified for first-time buyer relief. In the first, a lump sum payment is made in advance based on the property’s market worth, and in the second, payments are made over time.
- Mortgage fees – Changing lenders to purchase additional shares or access better interest rates requires you to cover the lender’s valuation and mortgage arrangement fees, plus any termination penalties your current lender may impose.
Do your research and ensure that you understand the implications when buying a bigger share of your property. Talk to your housing provider about whether they have any restrictions on ‘staircasing’, i.e., how much can you buy at one time? How often are increases allowed? What is the maximum level of ownership available; could it be as high as 100% outright ownership?
With house prices continually increasing faster than wages, ‘staircasing’ can remain out of reach as 1% increments may prove to be too unaffordable. To exemplify this troubling reality – if a homebuyer were to purchase 10% upfront and then add an additional 1% increment every year for 15 years – they would still only own 25%. Unfortunately, such a limited stake in the property will not give much benefit in terms of either rent payable equity or even prospects of ever achieving full ownership.
- The risk of negative equity
When considering a new-build property, it’s wise to evaluate the likelihood of staying put for several years. This is because initial purchase premiums will depreciate with time, meaning that if house prices fall during your ownership you may find yourself in negative equity and lose money when selling up. To ensure financial security while still meeting lifestyle criteria, be sure to consider precisely what makes this home perfect – from storage solutions and family planning considerations, through to its ability to fit existing furniture.
- Rent burn
Shared ownership offers a great option for those who are not cash-rich, allowing potential buyers to purchase property with as little as 10% of the total cost. However, rising rental costs could lead shared owners to face “rent burn” on their remaining shares, which can be particularly challenging for those who acquired a smaller stake.
According to Homes England’s model lease agreement in place, developers must abide by an annual rent increase that is indexed against inflation plus 0.5%, meaning UK residents will see higher rates due to current high levels of inflation – and unfortunately have limited power when it comes negotiating more favourable terms.
- Issues around selling your share when moving home
Selling a shared ownership property presents unique challenges that can hold up your journey to the next step on the proverbial ladder. When you’re ready, it’s important to be aware of ‘first refusal’ – an agreement between homeowners and their associated housing association or local authority which gives them priority over buyers in finding eligible candidates for sale.
After a certain point, if your provider has not been able to secure a new purchaser, you may be granted permission to find your own buyer if need be. However, they must meet the housing provider’s criteria in order for the arrangement to work out; on top of that some banks don’t provide mortgages tailored towards shared ownership which can further limit potential buyers. With all these considerations it is important to bear them in mind when assessing your options.
Shared ownership resales can present a unique set of challenges for potential homebuyers. Unpredictable, above-inflation rent increases create an unsustainable level of expenditure that is often more expensive than nearby market values. To avoid prohibitive rental costs, owners may need to invest in a simultaneous sale and ‘staircasing’ transaction – which could become costly if not handled correctly.
- Restrictions
Your lease may contain certain restrictions that must be adhered to when living in a rented property. These could include needing written permission from the housing provider before making structural or aesthetic changes, as well as not being allowed to rent out your residence without explicit authorisation. Sub-letting is prohibited within most properties and needs to be kept in mind when deciding on how you want to use the space allocated.
- Repossession
Despite the government backing, it’s important to remember that you may not have extra protection when renting part of your home. Your housing provider has the power to take legal action to repossess if rent is unpaid – meaning any investments made into the property will be lost too.
What should you do if you are interested in applying for Shared Ownership?
- Research potential housing providers online before applying, to check for client feedback.
- Verify the housing provider’s eligibility requirements for the property you desire.
- Read your lease carefully, taking note of any restrictions it contains.
- Calculate your monthly payments and the cost of the various expenses.
- Consider your long-term goals and the earliest possible time that you could start ‘staircasing’.
As with any decision to purchase a property, embarking on a Shared Ownership scheme should only ever be done upon thorough assessment of the pros and cons, and with expert advice where necessary. It is important not to make such a financial commitment without first thoroughly understanding the demands it will place upon you, and the impact it could have on your future.
