In recent years, rising house prices and the need to find a substantial deposit have left many younger people struggling to get onto the property ladder. So, it’s no surprise that schemes such as ‘shared ownership’ have become more popular.
The Daily Telegraph reports that more than 320,000 people have used shared ownership. Under the scheme, a buyer purchases between 25% and 75% of a property with the remainder owned by a housing association or other third party, to which the owner pays a monthly rent.
To qualify for shared ownership, a buyer should:
- Be aged 18 or over
- Have a household income of less than £80,000 (£90,000 in London)
- Generally, be a first-time buyer (or in the process of selling an existing property)
- Not be able to buy a house for their needs on the open market
- Be able to prove they can afford the regular payments and costs involved in buying
There are both pros and cons to using shared ownership, so here are three reasons to consider going down the ‘part buy, part rent’ route, and two reasons to think twice.
3 reasons to consider buying a shared ownership property…
1. You can buy with a smaller deposit
One of the main advantages of using shared ownership is that you’re likely to need a smaller deposit when buying your home. This is because your deposit will be based on the share that you are buying, not the overall value of the property.
Typically, you will need a deposit of at least 5% to 10% of the share you are buying.
Here’s an example.
If you are buying a 40% share of a property with a value of £400,000, the value of your share will be £160,000. If a 5% deposit was needed you would have to put down £8,000. If your lender needed a 10% deposit, you’d have to put down £16,000.
Compare this to getting a mortgage for buying the property outright. Here you would need a deposit of between £20,000 and £40,000.
2. You can increase your ownership share in the future
When you use shared ownership, you will typically buy between 25% and 75% of the property. Over time, you can use a process called ‘staircasing’ to increase the share of the property that you own.
When your income and circumstances permit, you can buy an additional share in your home. As you increase your ownership, your rent will reduce. Most schemes will let you staircase up to 100% ownership.
3. There is a wide choice of mortgages
While the market for shared ownership mortgages may not be quite as big as it is for all first-time buyers, you still have plenty of choice.
Many high-street lenders and some smaller building societies offer shared ownership products, with some offering specialist products designed exclusively for shared ownership borrowers. These sometimes come from smaller, regional building societies, which are often willing to lend at high loan-to-values – useful if you have a smaller deposit.
As with other types of mortgage, you’ll need to provide proof of earnings, and bank statements to demonstrate that the mortgage – and your monthly rent – is affordable to you.
We have access to a wide range of shared ownership mortgages and can help you to find the right deal for you. Email enquire@london-money.co.uk or call (0207) 808 4120 to find out more.
…and two reasons you shouldn’t
While shared ownership has helped hundreds of thousands of buyers to afford their home, there are some factors to bear in mind.
1. High service charges
You might think that if you were only buying a 25% share in a property you would only have to pay 25% of the monthly service charge.
However, most shared ownership leases stipulate that the owner must pay 100% of any monthly service charge, even if you’ve only bought a small share.
The Association of Residential Managing Agents (ARMA) estimates the average service charge bill in London at around £1,800 to £2,000 a year (£150 to £167 per month) and so this monthly fee is certainly something to consider, especially as you will be paying it in addition to your mortgage and monthly rent.
If you’re buying a shared ownership property it’s important to establish what the service charge will be, and whether there are any protections in place for this rising significantly in the early years of ownership.
2. Increasing your share can be expensive
We have seen above that it is possible to increase your share of ownership in a property through the ‘staircasing’ process.
However, it’s worth bearing in mind that there are costs involved each time you come to purchase an additional share. These include:
Valuation fee – a surveyor will be instructed in order to confirm the current market value of the property
Solicitor fees – staircasing will involve changing your existing lease, and this will require a solicitor
Mortgage fees – if you want to change lenders and increase your borrowing to buy an additional share, there may be charges involved. There may also be fees to your existing lender if you want to increase the loan size
Stamp Duty – if you did not elect to pay your total Stamp Duty bill when you first bought the property (assuming you were not eligible for first-time buyer’s relief) then you may have to pay additional Stamp Duty as you buy a further share in your home
If you are thinking of increasing your share, it’s worth remembering that you’ll need to meet any additional costs out of the funds you have saved.
Get in touch
If you want to find out more about how we can help you with the mortgage to buy a shared ownership home, please get in touch. Email enquire@london-money.co.uk or call (0207) 808 4120 to find out more.
Please note
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.