Unable to afford a mortgage on your own? Purchasing a stake in a property might make more financial sense.
At a glance
- A shared-ownership scheme is a combination of owning and renting a property, mostly provided through housing associations
- Shared-ownership schemes make home ownership a possibility for people who might not otherwise be able to afford a property
- The deposit required tends to be smaller, with less borrowing required
- There may be fewer choices in terms of where you can live
- Alternative schemes such as NewBuy and Help to Buy are available
If you’re finding it hard to get on the housing ladder, you may still be able to become a homeowner via a shared-ownership scheme.
What is shared ownership?
Shared-ownership schemes are a combination of owning and renting a property. They’re designed to help people who might otherwise be unable to become homeowners to purchase a stake in a property.
This includes young people and first-time buyers, people who have recently separated from a partner and cannot afford a large mortgage on their own, or older people looking to downsize who need to release some of their capital to supplement their pension income.
Shared-ownership schemes can help people who have been unable to save up enough of a deposit to qualify for a traditional mortgage.
They’re also useful for people who live in an area where house prices are too expensive for most first-time buyers, or who would struggle to get a mortgage loan approved because their income is not sufficient to meet affordability criteria set out by mortgage lenders.
Who provides shared-ownership schemes?
Most shared-ownership schemes are provided through housing associations. These are private, non-profit making organisations. They offer the sort of low-cost housing that many local councils do. The term ‘social housing’ covers people who need a home but cannot afford one in the traditional way.
In England, the shared-ownership scheme gives you the choice of buying a 25%, 50% or 75% stake in a property owned by the housing association. You buy the portion of the house you can afford using a normal mortgage from a bank or building society. You rent the remaining portion of the property from the housing association, and pay them rent as you would for a rental property.
If you can afford it at a later date, you have the choice of buying shares in the remaining portion from the housing association. You can gradually increase your share until you own the property outright.
How do shared-ownership schemes work?
The shared-ownership housing scheme enables people with a small deposit to become property owners.
It isn’t open to people who own another property (unless they are selling it to downsize or divorce) and your household income needs to be less than £80,000 or £90,000 in London.
You’ll need to save up a deposit, but it can be between 5% and 10% of the value of the property – whereas traditional mortgage lenders prefer to see a deposit of 15% in order to offer you the best deals.
The main difference is that you won’t own your home outright until you have bought the 100% share. Until then, you’ll have a lease from the housing association.
What are the benefits of shared ownership?
Shared-ownership schemes puts home ownership within the reaches of people who might not otherwise be able to afford a house or flat – and could make more financial sense than continuing to rent.
For first-time buyers especially, a major benefit is that you don’t need as large a deposit as a traditional mortgage lender would require – and you don’t need to borrow as much on the supporting mortgage.
And you have complete freedom to make the property your own, decorating it and living there as long as you wish – subject to any legal conditions.
Because you cannot be evicted, in the way that a private landlord could ask you to leave, you enjoy greater security than you would renting.
You could, of course, benefit from the increase in value of your shared-equity property – and again, you always have the option of increasing your stake in the property as and when you can afford to do so.
Moreover, most properties available through shared-ownership schemes are new builds – which means you’re more likely to have new, energy-efficient appliances and infrastructure, with lower running costs.
Sometimes, you might also find a great-value property within commercial new-build schemes on a new estate. This is because a condition of the house-builder’s planning application approval is that it provides a certain number of affordable homes for local people as part of the development.
What are the drawbacks?
As with any traditional mortgage, you’ll need to keep up with repayments on your mortgage and rent, otherwise you might be at risk of losing your home.
You’ll also need to have a good credit record, and be able to demonstrate to the housing association and lender that you’re responsible with money and have sufficient funds to cover the cost of repayment.
There may be less choice about where you live, as housing association shared-ownership schemes only operate in certain areas.
What are the alternatives?
NewBuy
This scheme is open to people buying newly-built homes or flats, who have at least a 5% deposit to put down. Not all builders take part in this scheme and you’ll still have to have your mortgage approved by a traditional lender.
Help to Buy equity loan
Help to Buy allows you to borrow up to 20% of the value of the property you want to purchase – from the government.
You’ll need to have at least a 5% cash deposit and arrange a 75% mortgage for the balance. You won’t be charged loan fees on the 20% loan for the first five years of owning the home.
Unlike shared-ownership schemes, you won’t be renting any part of the property – which must be valued at less than £600,000.
95% mortgage from a traditional bank or building society
You put down a 5% deposit and the bank will loan you the rest, subject to you meeting their lending rules and criteria.
However, there are a limited range of 95% mortgages available and the interest rates are less competitive than those for buyers who have at least a 10% or 15% deposit.
You’ll need a good credit record in order to be considered – and make sure you repay your mortgage instalments on time.
The verdict
Shared ownership can be a low-risk way to get on the housing market, but it is a long-term financial contract. It’s important to get legal advice and ensure you understand all the terms and conditions before you sign up.
Your home may be repossessed if you do not keep up repayments on your mortgage.
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This article was provided to us by Geoff Day at Wilcox Day Wealth Management Ltd. Please note that this does not imply an endorsement by us.
You can review further articles that may be relevant, please visit www.wilcoxday.co.uk
Wilcox Day Wealth Management Ltd is an Appointed Representative of and represents only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the Group’s wealth management products and services, more details of which are set out on the Group’s website www.sjp.co.uk/about-st-james-place/our-business/our-products-and-services.
