Are you finding it difficult to afford a new home? Discover the Shared Ownership Scheme – a UK government scheme allowing prospective buyers to purchase a share of a property, and pay rent on the remaining amount.
We will delve into the intricacies of shared ownership, breaking down the fundamentals of what it is, whilst exploring how it has become a viable solution for those looking to make the transition from renting to owning.
What is the Shared Ownership Scheme?
The UK’s Shared Ownership Scheme was introduced by the government to make it easier for people to get on the property ladder. The scheme allows people to purchase a part of, or a share, of a property from a Housing Association. As you’re only purchasing a portion of the property, less deposit and a lower mortgage is required, which in turn means your mortgage repayments will be lower.
However, you will also be required to pay rent to the HA on the portion of the property you don’t own, as well as ground rent, and monthly service charges.
How does the Shared Ownership Scheme work?
The UK’s Shared Ownership Scheme, also known as Shared Equity or Help to Buy: Shared Ownership, is a government-backed initiative designed to make homeownership more accessible to people who might otherwise struggle to buy a property on the open market.
Here’s how the Shared Ownership Scheme works:
1. Property selection:
You can purchase a share of a new or existing property, typically between 25% and 75% of the home’s value, although some Housing Associations will let you go as low as 10%. You may need a smaller deposit since you are only buying a portion of the property, but the deposit must be at least 5% of the share you’re purchasing.
2. Mortgage and rent:
You’ll need to secure a mortgage to cover your share of the property’s purchase price. You’ll pay rent on the remaining share, typically at a reduced rate below the market rent. This rent goes to a housing association or housing provider. You will need to make sure you have budgeted to make the rent payments alongside the mortgage and the normal costs of running your home.
You should also factor in that the rent will usually be reviewed each year. It will typically have a cap, meaning that it can only rise so far but it cannot reduce. As a result, when you consider if Shared Ownership is right for you, you should take into account that the initial rent quoted by the HA is likely to rise in the years ahead.
3. Staircasing:
Over time, you have the option to buy more shares in your property, increasing your ownership percentage until you own 75% of the property. Some housing associations will let go to 100%, but you will need to check with them first.
This process is known as “staircasing.” The price of additional shares will usually depend on the current market value of the property, but different schemes calculate the value in different ways. It’s important to note that there are legal fees involved every time you do it, so you’re better to save up and buy larger shares, than doing it little-and-often! Some Housing Associations will put a limit on how many times you can staircase, so you may need to check with them first.
The more of your property you own, the lower your rent payments will be.
4. Selling the property:
If you decide to sell your shared ownership property, you can typically do so at any time. If you have got to a position where you own 100% of your home, you’ll usually be able to sell it as you would any other home, on the open market.
However if you don’t own all of your home, you will need to first notify the housing association, who will have the option of repurchasing your shares back, so that they once again own the entirety of the property.
5. Repurchasing by the Housing Association:
If selling your shared ownership house, the housing association will have the option to buy back your share. When this happens, there are specific rules and procedures in place, including the possibility of the housing association or housing provider repurchasing your share.
When you decide to sell your shared ownership property, the housing association or housing provider usually has the right of first refusal. This means they have the opportunity to buy back your share before you can sell it on the open market. This step ensures that the property remains within the shared ownership scheme, providing ongoing affordable homeownership opportunities.
The price at which the housing association or provider buys back your share will typically be based on the property’s current market value. This value is determined by a professional valuation conducted by a qualified surveyor. It’s important to note that the market value may have increased or decreased since you initially purchased your share.
If the housing association decides not to exercise its right of first refusal or if they are unable to do so within a specified timeframe (this is called a ‘nomination period’, and allows the HA 4, 8, or 12 weeks, depending on the lease, to find a prospective buyer for your share) you can then proceed to sell your share on the open market. You’ll need to follow the standard procedures for selling a shared ownership property, including working with a solicitor and notifying the housing association of your intent to sell.
However, if the housing association chooses to buy your shares back, you may be able to profit from those shares, depending on the property valuation. If the market value of your share has increased since your initial purchase, you may be entitled to a share of the profit upon selling. Conversely, if the market value has decreased, you may experience a loss. It’s essential to understand that any profit or loss will be subject to the terms and conditions of your shared ownership agreement, and should be understood fully before signing.
6. Costs and fees:
Besides your mortgage and rent payments, you will be responsible for other costs such as maintenance, service charges, and ground rent (if applicable).
7. Understanding restrictions around leasehold properties:
Shared ownership properties are typically leasehold, meaning you’ll have a lease for a specified number of years. Understanding the specifics around a leasehold property is important for shared ownership buyers:
Length of lease: Most shared ownership flats and apartments are leasehold, which means you have a lease for a specified number of years, often 99 or 125 years. This lease defines the terms and conditions of your ownership, including your rights and responsibilities.
Lease extension: As the lease term decreases over time, it’s essential to be aware of the option to extend the lease if you wish to remain in the property beyond the original lease period. Extending the lease may incur additional costs, so it’s advisable to plan for this well in advance.
Ground rent: Leasehold properties may also require you to pay ground rent to the freeholder. Ground rent is typically a nominal annual fee, but it’s essential to be aware of this cost when budgeting for your shared ownership property.
Possible service charges: In leasehold properties, you may also be responsible for paying service charges for the maintenance of communal areas and shared facilities within the development, as mentioned in the previous section.
Lease restrictions: Leasehold properties may have certain restrictions outlined in the lease agreement, such as restrictions on subletting the property or making structural alterations. It’s crucial to understand and abide by these restrictions to maintain compliance with your lease.
The leasehold ownership of a property typically relates to everything inside the property; floorboards and plaster to walls and ceilings. It does not, however, typically include external or structural walls.
The structure of the house (or common parts of a building if in a flat) as well as the land it sits on, is usually owned by the landlord, sometimes referred to as the freehold. They are responsible for the maintenance of the building, with the costs covered by the service charges which are billed to the leaseholders.
How to apply for Shared Ownership Scheme
Step 1: Check your eligibility
Before you apply for shared ownership, it’s important to ensure you meet the eligibility criteria. To be eligible for the Shared Ownership Scheme, you typically need to have a combined household income of less than £80,000 per year, or £90,000 per year if you are in London. Priority is often given to certain groups, such as first-time buyers, existing shared ownership homeowners looking to move, and armed forces personnel.
Who is eligible for the Shared Ownership Scheme?
Generally, you should:
- Be at least 18 years old.
- Have a combined household income within a certain range.
- Not currently own a home or have a mortgage on one.
- Be a first-time buyer or someone who used to own a home but can’t afford one now.
- Have a good credit history.
- Have a sufficient deposit (usually around 5-10% of the share you want to purchase).
Step 2: Register interest:
You should then register your interest with the Help to Buy agent in your area. You can do this on the official website or by contacting your local Help to Buy agent. This registration will help you receive information about available properties and the application process.
Step 3: Financial assessment:
You’ll need to undergo a financial assessment to determine your eligibility and affordability. This assessment will help determine the share of the property you can afford and whether you’re financially stable enough to meet the costs.
Step 4: Search for a property:
After completing the financial assessment, you’ll receive information about shared ownership properties available in your desired location. You can search for properties on various online portals or with the help of a housing association.
Step 5: View properties and choose your favourite:
Once you’ve identified properties you like, it’s time to arrange viewings and inspect the homes!
Step 6: Make an offer:
When you’ve found a property you like, you can make an offer through the housing association or developer. Your offer will typically be based on the share you can afford.
Step 7: Mortgage approval:
After your offer is accepted, you’ll need to secure a mortgage for the share you’re buying. Be sure to use a mortgage broker with experience in shared ownership, as some lenders specialise in this type of mortgage.
Step 8: Complete the purchase:
Once all the paperwork is in order, you can exchange contracts and complete the purchase. You’ll pay a deposit and any additional fees. You’ll also start paying rent on the remaining share and the service charge if applicable.
You should bear in mind that the application process and eligibility criteria may vary depending on the region and the specific housing association or developer. You can reach out to the experts here at Key Solutions Mortgages for expert guidance and advice.
The benefits of buying a Shared Ownership home
The Shared Ownership Scheme offers several benefits for individuals and families looking to get on the property ladder, particularly in the United Kingdom. Some of the biggest advantages of shared ownership are:
Affordable homeownership: Shared Ownership makes homeownership more accessible by allowing buyers to purchase a share of a property (typically between 25% and 75%), reducing the initial financial burden of buying a home. This can be particularly helpful for first-time buyers and those who cannot afford to buy a home on the open market.
Smaller deposit: With Shared Ownership, you’ll need a deposit based on the share you’re buying, which is typically a percentage of the share’s value, rather than the full property value. This means you may need a smaller deposit, making it easier for many people to save for their first home.
Monthly costs: In addition to your mortgage payments, you’ll pay rent on the remaining share owned by the housing association. While this increases your monthly housing costs, it’s often more affordable than renting on the open market and helps you build equity.
Staircasing: One of the notable benefits of Shared Ownership is the ability to “staircase,” allowing you to gradually increase your ownership percentage, potentially reducing your monthly rent payments.
Security: Shared Ownership provides greater stability and security compared to renting. As a shared owner, you have the same legal rights and responsibilities as a full owner, giving you more control over your home.
Government support: The UK government supports the Shared Ownership Scheme as part of its efforts to help people become homeowners. Various incentives and programs are available to make homeownership more attainable, such as Help to Buy and the Right to Buy scheme.
Equity growth: As you pay down your mortgage and potentially buy more shares in your property, you can benefit from any increase in the property’s value. This can be a way to build wealth over time.
While Shared Ownership offers many advantages, it’s important to be aware of the potential drawbacks, such as limitations on customising your home, service charges, and the process of selling your share. Let’s explore these in more detail…
The cons of buying a Shared Ownership home
While Shared Ownership offers several benefits, it also comes with certain disadvantages and limitations. It’s essential to be aware of these potential drawbacks before entering into a Shared Ownership arrangement. Here are some of the disadvantages:
Limited ownership: In Shared Ownership, you’ll only own a percentage of the property, meaning you won’t have full control over your home, and you’ll need to consult with the housing association or landlord on certain decisions and alterations.
Monthly costs: In addition to your mortgage payments, you’ll pay rent on the share owned by the housing association. Depending on the location and property value, these monthly costs can add up, making it more expensive than buying a home outright.
Rent increases: The rent you pay on the share owned by the housing association is typically subject to annual increases, which can affect your monthly housing expenses.
Potential for service charges: Shared Ownership properties may come with service charges to cover maintenance, communal areas, and other shared expenses. These charges can vary and impact your overall costs.
Difficulty selling: Selling your share of a Shared Ownership property can be more complex than selling a standard property. You may need to find a buyer who meets the eligibility criteria for Shared Ownership, which can take time.
Limited availability: Shared Ownership properties are not as prevalent as standard properties on the market. Finding a property that suits your needs and preferences can be challenging, especially in high-demand areas.
Leasehold arrangement: Shared Ownership properties are often leasehold, which means you don’t own the land the property is built on. Leasehold arrangements can lead to additional costs and restrictions.
Potential for negative equity: If the property’s value decreases, you might find yourself in a situation of negative equity, where your mortgage is higher than the property’s current value.
Find Shared Ownership properties for sale
The Shared Ownership Scheme can be an excellent option for those looking to take their first step onto the property ladder. With its affordability, government support, and the opportunity to gradually increase your ownership stake, it offers a pathway to homeownership for many. However, it’s crucial to be mindful of the potential drawbacks, such as limited customisation and ongoing costs.
If you’re ready to begin your journey, our team of expert advisors can help guide you through the process, from finding the best mortgage deal to securing your home. Contact us today to discover more about shared ownership!