People who rent in London could save more than £40,000 in two years by buying a property through shared ownership, according to research carried out by Leeds Building Society.
The study examined how much it would cost to buy a 25% share of a one- bedroom flat in Islington for £600,000, putting down a deposit of £7,500. The research found that someone renting a similar property on the open market in the same neighbourhood, costing £3,900 per month, would spend £41,004 more over two years.
Furthermore, the calculation does not factor in any increase in property values. If house prices in the area were to rise, owners would see the value of their 25% share appreciate accordingly.
How does shared ownership work?
Shared ownership enables people on lower incomes to step onto the property ladder. The buyer purchases a proportion of a property and rents the rest, which means the deposit and repayments are lower than normal. Not only that, but the buyer has the opportunity in the long run to increase the share they own, a process known as staircasing.
A housing association would typically be in charge of the scheme and own the remaining share of the property. Purchasers can buy a share of between 25% and 75% of the property. Leeds has said that a buyer could invest the money saved by not renting outright in buying a larger share of the property.
Shared ownership celebrates its 40th anniversary this year and the building society says the scheme remains the ‘cornerstone’ of affordable housing in the UK. There were 181,057 shared ownership purchasers in the UK at the end of the 2018 tax year, according to a report by Social Housing, and more than 10,000 of these were first-time buyers who entered the market.
Government plans mean that this figure could rise by 70% over the next five years.
Shared ownership is available to anyone considering buying a property to live in, on condition that they will not own another property, or a share in any other property, on completion of the new purchase. Although the scheme has largely focused on first-time buyers, it is also available to home movers, as long as the existing property is sold before completion.
Lower deposit required
Matt Bartle, Director of Products at Leeds Building Society, says that the scheme has enabled thousands of people to step onto the property ladder and is still a feasible proposition, especially for first time buyers. He added that the challenge of saving for a deposit is often cited as the greatest barrier to those wanting to buy their first home.
Nonetheless, by taking out a shared ownership mortgage with Leeds, the would-be buyer need only put down a deposit of 5% for the share being purchased. As there is no need to pay a deposit relating to the total value of the property, the amount of deposit required is substantially reduced.
Additionally, recent alterations to the scheme have made it more accessible and currently the only restriction is that borrowers must have an income of less than £90,000 in London and £80,000 elsewhere in the UK. And a consultation to examine potential changes to shared ownership, including ways of facilitating staircasing, has been finalised.
Bartle made the point that shared ownership makes real financial sense for many people as it reduces the amount of deposit required, enables buyers to own a share of their home from the outset and to increase equity as and when affordable. What’s more, the monthly cost can be less than the rent for a similar privately rented home.