How do shared ownership schemes work, and what are the benefits? Here, we cover the pros, cons, and risks of using these schemes to help you decide if it’s right for you.
Buying a home can feel out of reach for many, but shared ownership schemes offer an alternative to help you get onto the property ladder. These government-backed schemes allow you to purchase a share of the property, typically between 10%-75% of the market value, making it more affordable with a lower deposit.
How shared ownership works
With a shared ownership arrangement, you buy a percentage of the property and pay rent to the ‘landlord’ on the portion you don’t own.
Typically, you’ll need to put down at least a 5% deposit on the share you’re looking to buy, then your mortgage will cover the remainder.
As mentioned, you then pay rent on the part of the property you don’t own. Most schemes, although not all, allow you to increase your share over time, with the option to own the property outright eventually.
The benefits of shared ownership
Lower upfront cash outlay
One of the main benefits of using a shared ownership scheme is the lower upfront deposit. For first-time buyers, shared ownership options make buying a home much more affordable. As your deposit and mortgage are based on the share, not the full market value, it’s easier to get onto the property ladder with limited savings.
For example:
Let’s say you want to buy a property valued at £200,000. If you were looking to buy a 25% share of the property, you would need a deposit on £50,000, not the full market value.
A 5% deposit of the £50,000 would cost you £2,500, compared to a 5% deposit on the full £200,000, which would cost you £10,000.
Flexibility
Furthermore, another big advantage is the ability to ‘staircase’ or increase your share over time. You can buy additional shares once you’re in a position financially to do so, until you eventually own the property outright. This gives you control over your finances without committing to a large mortgage from day one.
Access to bigger or ‘better’ properties
In many cases, shared ownership allows you to access better properties, such as new builds in desirable locations, that would otherwise be out of reach. You can secure a property in a good area by purchasing a smaller share without compromising size.
The drawbacks of shared ownership
Limited control
As you don’t fully own the property, there are certain restrictions on what you can do. For example, major renovations or refurbishments will often require approval from the landlord or the housing association. Sometimes, even smaller improvements can need consent.
Ongoing rent
Alongside your mortgage payments, you’ll pay rent on the portion you don’t own. Consequently, your monthly outgoings can be higher than expected, especially if you have service charges or maintenance fees to pay. It’s important to factor in these costs when budgeting. Our team can provide you with a good idea of what you can expect to pay in rent and mortgage costs.
Cost to increase share
It’s important to note that by purchasing more property shares, you may have to pay valuation and legal fees each time. The costs can add up quickly, so increasing your shares may take you longer than expected.
Selling the property
When selling a shared ownership property, things become more complicated. Many schemes require you to offer it back to the housing association first, and there may be restrictions on who can buy it, for example, it must be first-time buyers. This can slow down the selling process significantly compared to selling a fully owned home.
The hidden risks of shared ownership
A key factor to consider is house price fluctuations. If property prices rise, buying additional shares becomes more expensive. Whilst this can increase the value that you own, it delays your goal of full homeownership. On the other hand, if property prices fall, your share may lose value. This means you could lose equity when you come to sell the property.
Another factor to consider is that most shared ownership homes are leasehold. If the property has a short lease, this can impact its value and the available mortgage options. Extending a lease can be expensive, so you’ll need to consider this before purchasing the property with a shared ownership scheme.
How do mortgage lenders view shared ownership schemes?
Whilst you’re not ‘limited’ with your mortgage lender options if you’re going down the shared ownership route, it’s worth bearing in mind that not all lenders accept this type of scheme. Furthermore, some lenders will have a minimum purchase amount, for example, a 25% share, to consider your application.
Typically speaking, you can access the same rates as if you were purchasing the property outright, although some lenders do offer rates specific to shared ownership scheme buyers. Our team of experts can help you find the right lender to suit your needs.
Is a shared ownership scheme right for you?
Shared ownership can be a great way to get more first-time buyers on the property ladder, with low upfront costs and more flexibility, but it’s not for everyone.
Our homebuyer brokers can help you weigh up the pros and cons while keeping your long-term plans in mind. We’ll explore all the rate options available and advise you on whether purchasing through a shared ownership scheme is right for you.
Next Steps
To discuss your options or to ask us a question, get in touch on 0345 345 6788 or submit an enquiry here.
