Trying to get your foot on the first rung of the property ladder? Want a home, but need a smaller loan? Shared ownership of a property can help you head towards property ownership without huge downpayments on a mortgage.
Shared ownership of a property is a way for those who do not own a home or for first-time buyers to get a foothold on the property ladder. It’s a way to reduce those mortgage costs and can even allow a path to full ownership as you find your feet.
But what does shared ownership mean, and how does it work? Learn more with this Norton guide to shared ownership of a property.
What is Shared Ownership?
Part-rent, part-buy schemes – or shared ownership of a property is a way to climb the ever-steeper property ladder. It’s about as a straightforward a term as you’d hope too. Quite literally, it means you own part of a property and pay your mortgage on that part – the rest you rent. In practice though, things can be trickier and may become expensive.
Introduced in the 1980s, part-rent, part-buy schemes were introduced as a way for would-be homeowners to get started on their journey onto the property market. Instead of owning your home, you own a share in your home. If you part-rent, part-buy, there’ll be the option to buy more shares, a practice known as staircasing.
Note: While similar forms of co-ownership exist in Wales, Scotland and Northern Ireland, this article will focus on the scheme in England.
In England, less than 1% of all households are shared ownership homes - that’s roughly 202,000 partial homeowners.
These types of home payments mean they don’t pay for the house outright. Instead, your payments are split into:
- The share you own, which you’ll pay a mortgage on.
- The share you don’t, which you’ll pay rent on.
- The property service charge, which is a monthly payment often associated with shared ownership properties.
Partial home ownership is often thought of as a choice for first-time buyers – especially those struggling to get on the property ladder. However, part-rent, part-buy schemes aren’t exclusive to first-time buyers like Help to Buy schemes. There are three scenarios where you can apply for a partial home ownership:
- You are classified as a first-time buyer.
- You are a previous homeowner, who is struggling to get back on the ladder.
- You are a current shared property homeowner.
Note: If you haven’t owned a property for three years, some banks may still consider you eligible.
There is one final caveat too: your total income needs to be under £80,000 annually (£90,000 in London). That includes your combined income if you are buying with a partner.
What are the benefits of shared ownership of property?
There are a few benefits to a shared ownership of property that might suit you – and don’t worry, it doesn’t mean sharing the bathroom. As far as you’re concerned, the house is yours – the benefits are in the nitty-gritty.
Here are some benefits to shared ownership of a property:
- Pay a smaller deposit. Because you’re paying a smaller mortgage, you can expect to pay a smaller deposit.
- Increase your share over time. With staircasing, you can take steps to full ownership by increasing your share over time as your financial situation changes.
- Be an owner-occupier. As an owner-occupier, you can leave your share of the house to a beneficiary. Additionally, you’ll be viewed as more responsible for the house.
- Cheaper mortgage, higher-approval rate. Part-rent, part-buy schemes mean you’ll have a smaller mortgage compared to getting a loan for a house outright. That means smaller payments, and a higher chance of being approved for that reduced loan.
- Sell your share. Generally, most housing associations stipulate you need to be in your shared ownership property for at least 12 months. After that period, you can sell your shares.
- Home stability. Not paying for a rental means you’re not at the whims of a landlord.
What are the costs associated with share ownership?
Earlier, we touched on the costs associated with buying a property on part-rent, part-buy schemes. However, with home purchases – whether partial or full, there can be a suite of phantom costs you might not expect in addition to those main payments.
Before you jump into a part-rent, part-buy scheme, you’ll want to build a cushion fund so you don’t end up with empty pockets and no fallback.
Reservation fee
When you find a home you want to buy into you’ll often need to pay a reservation fee of up to £500. By paying this fee, no one else will be able to reserve the house for a set amount of time.
Fortunately, on completion day this sum will be deducted from the final amount you pay. However, if you don’t complete the purchase, you usually do not get the fee returned.
Buying and ownership costs
Buying a home can be expensive, there’s no way around it. When you buy into a part house ownership, you probably expect to pay a 5-to-10% deposit on the share you’re buying.
In addition to this, you’ll need to pay:
- Solicitor fees.
- Monthly mortgage repayments.
- Rent to the landlord (the owner of the other shares, who is not the occupier).
You may also need to pay:
- Monthly charges, such as maintenance fees for any communal spaces. These could be payments like estate charges or service charges.
- Stamp duty.
- Management fees, to cover any administration costs incurred by the landlord.
Your solicitor will break these payments down, so you won’t be in the dark with what you need to pay.
Repairs fund
With some part house ownerships, you may need to pay into a repair (or sinking) fund. It’s not a bad idea to protect your home against unforeseen costs, and this fund can cover major works that are required, such as a leaky roof.
Usually, you can’t withdraw money from these funds. That means if you leave or sell the property, that money is locked into the fund. Sinking funds are less common with houses, and usually reserved for shared ownerships of apartments.
Extending your lease
If you want to extend the lease on your shared ownership property, you’ll need your landlord’s permission and costs will be incurred. If the remaining lease on your home is too short, selling or remortgaging your share may become difficult.
It’s worth checking what your landlord’s rules are on extending your lease before you buy, so you don’t end up surprised by fees after purchasing.
Do you need a deposit for shared ownership?
Yes, a deposit is usually required for shared ownership – usually, this is roughly 5% to 10%. Though, you can pay more. That may not seem any different to a deposit on a regular mortgage, but you’re only paying a deposit on the share your purchase.
To break this down further, a deposit may look like this:
- You buy a 25% share of a £300,000 property.
- That 25% share would be £75,000.
- You pay a 5% or 10% deposit based on that share, meaning you put down £3,750 (5%) or £7,500 (10%).
Remember: The bigger the deposit you put down, the smaller your monthly mortgage instalments – but rent remains unaffected by the size of your deposit.
In rare instances, you may not need to pay a deposit at all – though be wary, that means higher monthly payments.
Do you have to pay rent on a shared ownership home?
Yes, you will need to pay rent on a shared ownership house. Part ownership of a house means you have a landlord – that is, the person (or entity) you’re purchasing shares from.
In the example from earlier, we discussed buying a 25% share of a £300,000 house – £75,000. Typically, the rate of rent is 2.75% a year, so using prior example:
- We paid 25% of £300,000, that means the other owner has 75% of the share – £225,000.
- You pay 2.75% rent on that remaining £225,000.
- Rent to your landlord or housing association would be 2.75% of £225,000, which is about £6,187.50.
- That works out to monthly payments of about £515.
- This rent payment is in addition to mortgage costs, maintenance fees, service charges, and other house payments or funds.
Note: What you pay in rent can increase over time – however, it can go down the more shares you buy. Once you own 100% of the property, you no longer need to pay rent.
Pros and cons of shared ownership
Partial house ownership can be useful, but those pros don’t come without cons. How you weigh the benefits against the negatives will depend on your circumstances.
Pros of shared ownership
- Early repairs can usually be claimed from your housing association or landlord in the first five years.
- With a smaller deposit, you can buy sooner by getting on the property ladder early.
- Staircasing means you increase your share in the property when you can afford it.
- Many shared ownership schemes are on new-build properties.
Cons of shared ownership
- Selling can be complicated, as you may not be able to sell on the open market.
- You do not own the land the property is located on. Shared Ownership Properties are leasehold, which means, unlike freehold, you don’t own the land your home is built on.
- Services and charges are common, regardless of the size of your stake in the property.
- As the occupant, you are responsible for repairs even if you have a low percentage of the shares.
Shared Ownership vs. Help to Buy
Part-rent, part-buy schemes like Shared Ownership are often considered as a way for first-time buyers to get the feet on the first rung of the property ladder. However, there are other schemes that fulfill a similar niche. Most notably, the Help to Buy scheme.
So, with two options – which scheme could suit you?
Help to Buy
Before looking at any benefits of a Help to Buy, it’s worth noting that unless you have an active Help to Buy account, you can no longer open one.
Note: As of 31st March 2023, the Help to Buy Equity Loan scheme is closed. However, if you already opened a Help to Buy ISA, you can continue to add money to it until 30th November 2029.
Through the Help to Buy scheme, first-time buyers can get a 20% equity loan from the government on their first home. Assuming a 5-10% deposit from the buyer on top, that means a new buyer only needs to borrow 75-70% of the property’s value.
Because you need to borrow less, it can make a mortgage easier to apply for.
Note: The equity loan can be up to 40% for properties in London.
Shared ownership
With Shared Ownership properties, you don’t mortgage the entire property – only your share. Then, in addition, you pay a percentage of rent on the part you don’t own. To give an idea of what that looks like compared to a Help to Buy:
- You buy a 20% share of a house, meaning you get a loan for 20% of the value minus your deposit.
- On the 20% share, you pay a minimum 5% deposit. You do not pay a deposit on the full sum.
- Then, you pay rent on the leftover 80% at a limit of 3%.
Eventually, you can work your way up to buying more shares and owning more of the property through a method called staircasing.
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