Buying a property with shared ownership

When the possibility of buying a home outright is alluding you, shared ownership is worth considering. A compromise between renting and buying, it’s a way to get your foot on the property ladder without having to find a large deposit. When you’re able to, you can buy more of the property until you own it completely.

What is shared ownership?

With shared ownership, you buy a portion of the property – between 25% and 75% of its value – and pay rent at a discounted rate on the remaining portion. You need to buy your share using a mortgage or savings and a deposit, with the latter usually being 5% to 15% of your share’s value.

The lower mortgage and deposit amounts make this a more feasible option than if you were buying a property outright. For example, when buying a 50% share of a home in Bexleyheath that’s worth £300,000, you can expect to pay £22,500 as a 15% deposit of £150,000 as opposed to paying 15% of the full price if you were buying with a standard mortgage.

For the portion of your home that you don’t own, you pay a discounted rent to the housing association that owns the remaining share. This is usually 15–20% lower than the market rate.

The eligibility criteria

Shared ownership is primarily aimed at first-time buyers but is also available for those currently in a shared ownership home who want to move and for those who previously owned a home but now can’t afford to purchase one. To be eligible for the government’s Help to Buy: Shared Ownership scheme:

• Your combined household income must be less than £80,000 (or less than £90,000 if you live in London).
• You must unable to buy a property on the open market.
• You must have a good credit history.
• You need to show your ability to afford the deposit, stamp duty, legal fees and moving costs.

What types of homes are available for shared ownership?

With shared ownership, there are two types of property you can choose from. The most common type is a new-build home offered via a housing association. Some housing associations also offer resale programmes. These include existing shared ownership properties that have been put on the market by the current owners. You buy their share, or more if you can afford to, and pay a discounted rent for the remaining share to the housing association. Properties available through resale schemes differ in age, type and size.

The stamp duty requirements

Two options are available for paying stamp duty with shared ownership. You can either make one upfront payment or pay the stamp duty in stages.

If you decide to pay it upfront, you make a payment based on the property’s full value at the time of your purchase, regardless of the share you own. When paying the stamp duty upfront as a first-time buyer, you qualify for the exemption. This normally applies to prices of up to £300,000 but is currently increased to prices up to £500,000 due to the stamp duty holiday.

When choosing to pay the stamp duty in stages, you do so based on the portion of the property you own. Each time you increase your share of the property, you will have to pay stamp duty again. Be aware that if your property’s value has increased, you can become liable for a higher level of stamp duty. As a first-time buyer, the exemption won’t apply if you decide to pay the stamp duty in stages.

Increase your share of the property

When you’re ready to increase the share you own of the property, this is done via a process known as staircasing. Each share increment must be for a minimum of 10% of the property’s current market value. The housing association will carry out a property valuation, at your expense, to determine this.

You also need to allow for extra costs when staircasing. These include solicitor’s fees as changes will have to be made to your lease and stamp duty may be due on your additional share. Any arrears must be paid before you can increase your share of the property. If you decide to make any changes relating to your mortgage, such as switching to a better rate, you need to allow for an arrangement fee, a valuation fee and any penalty fee that may be due for finishing your existing mortgage early.

Selling a shared ownership home

When looking to sell your shared ownership home, the housing association has first refusal on this before you can offer it for sale on the open market. The amount you receive from the sale proceeds depends on your share of the property. For example, if you owned 50% of a new-build in Bexley and sold it for £340,000, you will receive £170,000.

The pros and cons of shared ownership

There are many advantages to buying a home with shared ownership:

• It’s an affordable way to buy a home.
• The rental amount you pay is discounted compared with the market rate.
• You can choose to pay stamp duty only on the share you own, making your initial costs lower.
• The share that you own will increase in value if your property’s price goes up, providing you with some equity.
• You can increase your share of ownership when you are ready to.

Some disadvantages to consider are:

• You are restricted to buying a property that is available under the shared ownership scheme.
• Even though you own a share of the property, you are still a tenant as you pay rent on the remaining share. This means you are at risk of being evicted if you fail to comply with the rental restrictions, such as non-payment of your rent or causing nuisance behaviour.
• A service charge will be payable for the maintenance of any communal areas.
• All shared ownership properties are leasehold. The housing association will own the freehold to your property.
• When staircasing, your shares may cost more if the property’s value has increased. This may, in turn, increase your stamp duty liability.
• You cannot sub-let the property unless you have increased your ownership to 100%.

Alternatives to consider

If you’re not sure that shared ownership is right for you – perhaps you don’t like the idea of being a tenant – there are other options available.

Guarantor mortgage

A guarantor mortgage involves a parent, relative or close friend agreeing to make your mortgage repayments if you are unable to. In some cases, you may be able to secure a mortgage of up to 100% of the property’s value.

Joint mortgage or JBSP mortgage

You may prefer to get a joint mortgage with your parent. You will both be named on the property deeds as well as the mortgage. Alternatively, a joint borrower sole proprietor (JBSP) mortgage names you both on the mortgage but just you on the deeds.

Help to Buy: Equity Loan scheme

For first-time buyers, another option is the government’s Help to Buy: Equity Loan scheme, which allows you to borrow an equity loan of up to 20% of the property’s value (or up to 40% in London). A 5% deposit is payable on exchange of contracts and you need to have a repayment mortgage for at least 25% of the purchase price.

Before you make a decision, speak to a professional mortgage broker for advice. He or she will find the best mortgage solution to fit your needs and circumstances.