For many homebuyers, particularly first-time buyers, buying a house with shared ownership sounds like an excellent prospect because they tend to be much cheaper, but how does the scheme work?
Put simply, shared ownership of a property enables someone to buy a share of the home and then pay rent on the share they do not own, and in some places, London for instance, then these homes may offer a cheaper solution to renting.
The aim is to help those with smaller deposits and lower incomes to get a foot onto the UK’s property ladder.
It’s also for this reason that some people refer to shared ownership as ‘part buy, part rent’.
It helps too that a potential buyer may only need a minimum requirement of a 5% deposit, but this will only be on the buyer’s share of the property and not on the total price.
Apply for a shared ownership mortgage
If you do have the deposit amount, then you can apply for a shared ownership mortgage to pay for your share of the house.
This means the scheme will enable someone to buy between 25% and 75% of a particular property and then pay rent on the rest that will usually be owned by a housing association which is a not-for-profit organisation.
There may be people worrying that the rent price may put this scheme out of their reach, but it’s quite easy to calculate how much the rent on a shared ownership property will be.
For example, if you are looking at a property worth £150,000 and your share will be 40% means it is worth £60,000.
The balance is £90,000 and the housing association will then charge rent of up to 3% – the usual rate is 2.75% – on the balance which would cost the homebuyer £206.25 every month or £2,475 per year.
Finance their share of a shared ownership property
Don’t forget that the homebuyer has to finance their share of a shared ownership property with a mortgage and there will be repayments to be made.
While shared ownership schemes have been very popular, they tend to be available for first-time buyers but they are also for those who may have owned on property previously but cannot afford to buy one currently.
The scheme also extends to those who already live in a shared ownership property, but want to move home.
And if you live outside London, then your total household income must be lower than £80,000 and for those who live in London, it needs to be less than £90,000.
Shared ownership scheme
If the prospect of a shared ownership scheme appeals to you, then it’s easy to apply.
The first step is to visit the government’s ‘Help to Buy’ website which has details of how you can apply for a shared ownership scheme.
There’s a need to answer various questions, including how much you earn and how much you have in savings as well as where you live and what your credit payment history is like. The scheme will also need to know whether you have been in debt previously and the application is processed quickly.
Once the application has been accepted, then you can begin the search for a shared ownership property.
Arrange a viewing
Once you find a property you like the look of, then you can arrange a viewing and the relevant housing association will arrange this.
If, after viewing the property you like what you see, you will need to put down a reservation fee, which is usually £200 but will vary between associations.
It’s at this point you need to appreciate that your application will need to come under a full financial assessment and this will be carried out by the housing association. You will need to provide:
- Three months of bank statements;
- Three months of your wage slips;
- Proof of identity;
- Information about other credit arrangements and also debts;
- Proof of how much you have in savings;
- Information about the benefits you may receive.
It’s also likely that you’ll need to go through a credit check and it’s after this assessment has been completed that you’ll know how much of a share you are able to afford and also how much rent you need to pay.
Access shared ownership mortgages
But that’s not all – you will still need to go through a financial scrutiny process with a mortgage lender to access shared ownership mortgages.
Essentially, you need to pass the lender’s usual mortgage application process which will include a detailed analysis of your expenses and income so the mortgage lender can calculate how much, or even whether, they will lend you.
The mortgage lender will appreciate that there are two important costs that should be appreciated by the applicant. They are:
- The rent you will need to pay the housing association on the share of the property you do not own;
- As a leasehold property, there will be service charges and ground rent to pay.
Indeed, if these costs and your mortgage repayment are more than 45% of your household’s overall income, then you may find that you will struggle to pass this affordability test.
Shared ownership financial product
For those interested in shared ownership mortgages, you will need to understand that while this market is not as large as it is for first-time buyer mortgages, there is still a wide range of choice. Most high-street lenders and many small building societies will offer a shared ownership financial product.
Indeed, some lenders will have a specific shared ownership mortgage to offer and these tend to be with smaller building societies and will have a higher loan-to-value (LTV) which is helpful for those applicants with a small deposit.
However, one of the downsides is that these lenders will have a longer checking procedure so you may need to supply a lot more paperwork and someone will thoroughly check your payslips and bank statements to ensure that you can afford the mortgage you have applied for.
Seek independent financial advice
Finally, it’s always advisable to seek independent financial advice, particularly from a mortgage broker as early as you can.
That’s because you will find their experience and advice invaluable and they will know which properties you should be looking to avoid particularly those with onerous lease clauses.
An independent mortgage broker will also be able to give you a fairly accurate idea of how much you will be able to borrow with a shared ownership mortgage.
All you need to know about shared ownership schemes
That essentially explains all you need to know about shared ownership schemes and these questions and answers on the subject may help.
Is it worth buying a shared ownership house?
While a shared ownership scheme is a great way for some people to get onto the property ladder, it may not be suitable for you.
Using a shared ownership scheme may be cheaper than it is to rent, but this may not always be the case.
You can sell a shared ownership property at any point and you will benefit from the equity, that’s the increase in the property’s value since you bought it.
What are the disadvantages of shared ownership?
In the previous answer, we highlighted what the advantages of a shared ownership scheme may be, but there are some disadvantages. They include:
- Location: You will be restricted to buying a shared ownership property where the housing association is building them, which may not be somewhere you want to live.
- Staircasing: Building up the shares in the property is called staircasing but this can become more difficult as the property becomes more expensive, so the shares will grow in price.
- Service charges: Do not be surprised to know that you will need to pay a service charge for a leasehold property – which most of these properties will be.
- Mortgage: Accessing a shared ownership mortgage can be a problem, but it’s not impossible.
Can you use help to buy on shared ownership?
While there may be some confusion over Help to Buy and Shared Ownership, it’s important to appreciate that they are very different schemes.
Shared ownership sees an applicant buying a property from a housing association that has been built using Government money.
Help to Buy sees an applicant buying a property from a developer using an equity loan.
So, no you can’t use Help to Buy to purchase a shared ownership property.
Is shared ownership only for first-time buyers?
No, shared ownership is not only for first-time buyers, but access to the scheme is restricted.
As mentioned earlier, along with first-time buyers, the scheme is also for those who already live in a shared ownership home and want to move and for those who have owned property and want to buy.
Buying shared ownership outright
While you cannot buy a shared ownership property outright, you can build up your shared ownership within it.
You’ll need to staircase to 100% of the property’s value so you become the outright owner and there’s no need to buy pay rent anymore.
Shared ownership valuation problems
When it comes to having a shared ownership property valued, then you may encounter problems.
That’s because the housing association will have the property valued by several surveyors.
If you are not happy with the property’s valuation, then you can challenge it but you will need to provide some evidence, such as proving how much similar properties nearby sold for recently.