What is A Shared Ownership Mortgage & How Does it Work?

Shared ownership in property & how it works

Updated: November 2023

Are you dreaming of homeownership but daunted by high costs? A shared ownership mortgage could be your key to unlocking the door to your own home.

This approach combines the benefits of buying and renting, making property ownership more accessible than ever.

What is Shared Ownership?

Shared Ownership is an innovative housing scheme designed to ease the journey into homeownership, particularly for first-time buyers or those who find it challenging to purchase a property outright. This scheme is a part-buy, part-rent approach, providing a practical solution for many who are navigating the often challenging property market.

Understanding the Basics

At its core, Shared Ownership allows individuals to purchase a portion of a property, typically ranging from 25% to 75%, and pay rent on the remaining share. This share is usually owned by a housing association. The idea is to reduce the initial financial burden of buying a home, making it a more attainable goal for a wider range of people.

The Process of Shared Ownership

When you opt for a Shared Ownership property, you’re essentially buying into a leasehold agreement. You pay a mortgage on the share you own and a subsidized rent on the portion owned by the housing association. This dual aspect of ownership and renting makes it a unique and flexible option for many potential homeowners.

The beauty of Shared Ownership lies in its flexibility. You can start with a share as little as 25% and gradually increase your ownership over time, a process known as ‘staircasing’. This means that as your financial circumstances improve, you can buy more of the property until you eventually own 100% of it.

Who Offers Shared Ownership Properties?

Shared Ownership properties are typically offered through housing associations. These properties can be new builds or resales and are often found in both rural and urban settings. What makes these properties particularly appealing is their modern design and adherence to contemporary building standards, often incorporating eco-friendly features.

The Appeal of Shared Ownership

This scheme is not only aimed at young professionals or first-time buyers but also appeals to a broader demographic, including older individuals looking to downsize or those on moderate incomes. The lower deposit requirement and the ability to scale up ownership over time make Shared Ownership a practical and appealing pathway to full homeownership.

Who is Eligible for Shared Ownership?

Understanding who qualifies for Shared Ownership is crucial in determining whether this homeownership route is the right choice for you. Shared Ownership is specifically designed to assist certain groups of people in achieving their dream of owning a home. Let’s explore the eligibility criteria that applicants must meet.

Income Thresholds:

Generally, your household income should not exceed a certain limit, which is set to ensure the scheme remains accessible to those who need it most.
For most regions, the income cap is typically around £80,000 per annum, while in higher-cost areas like London, this cap may be higher.

First-Time Buyers and Specific Demographics:

Shared Ownership is primarily targeted at first-time buyers who have never owned a property before.
It may also be available to those who have previously owned a home but are now unable to afford one, as well as existing Shared Ownership property owners looking to move.

Local Connection and Employment Status:

Some schemes require you to have a connection to the local area where the property is located, such as currently living or working there.
Stable employment and a steady income are often key factors in eligibility, as they demonstrate the ability to meet ongoing mortgage and rent commitments.

Credit History and Financial Standing:

A good credit history is generally required to qualify for Shared Ownership. This means no outstanding bad debts or County Court Judgments (CCJs) against you.
You should be able to prove that you are not in arrears with current mortgage or rent payments and can afford the regular payments involved in buying a home.

Other Specific Requirements:

Each housing association or provider may have additional specific criteria based on their policies or the local authority’s regulations.
It’s advisable to check directly with the housing association or a local agent for any unique requirements pertinent to your desired property.

Financial Aspects of Shared Ownership?

Navigating the financial aspects of Shared Ownership is a crucial step towards understanding how this scheme can fit into your budget and long-term financial plans. This section will delve into the intricacies of mortgages, deposits, and rent calculations associated with Shared Ownership.

Mortgages for Shared Ownership

Specialized Mortgages:

Shared Ownership mortgages are tailored to suit the unique structure of the scheme. They differ from standard mortgages as they are calculated only on the share you purchase.

Mortgage Rates:

The rates for Shared Ownership mortgages can vary. It’s important to shop around and compare rates from different lenders to find the most favorable terms.
Keep in mind that these rates can be influenced by factors such as the size of your share and your credit history.

Mortgage Approvals:

Approval for a Shared Ownership mortgage typically involves a thorough assessment of your financial situation, including income, outgoings, and credit score.

Deposit Requirements

Lower Deposit Amounts:

One of the major appeals of Shared Ownership is the reduced deposit requirement. Deposits are generally calculated based on the share you are buying, not the full market value of the property.
This significantly lowers the entry barrier for prospective homeowners.

Deposit Calculations:

For example, if you’re buying a 50% share in a property valued at £200,000, and the deposit requirement is 5%, you would need to pay £5,000, which is 5% of the £100,000 share.

Rent Calculations on the Remaining Share

Subsidized Rent:

On the share of the property you don’t own, you pay rent to the housing association. This rent is usually subsidized and lower than the market rate.

Rent Calculation Example:

Rent is typically calculated as a percentage of the housing association’s share of the property’s value. For instance, if the rent is set at 2.75% and you own 50% of a £200,000 property, your annual rent on the remaining £100,000 would be £2,750.

Budgeting for Combined Costs:

When considering Shared Ownership, it’s essential to budget for both mortgage repayments and rent payments. Tools like a Shared Ownership rent calculator can be immensely helpful in this planning stage.

Related: Buying vs Renting

Benefits & Challenges of Shared Ownership?

Shared Ownership is an increasingly popular route to homeownership, offering several benefits while also presenting certain challenges. Understanding these pros and cons is essential to determine if this scheme aligns with your homeownership goals.

Benefits of Shared Ownership

Accessibility to the Property Market:

Shared Ownership makes property ownership more accessible, especially for first-time buyers and those with limited savings for a deposit.

Lower Initial Financial Burden:

The need for a smaller deposit and the option to buy a portion of a property reduces the initial financial strain compared to buying a home outright.

Flexibility to Increase Ownership:

The staircasing process allows you to increase your share in the property over time, offering a path to full ownership as your financial situation improves.

Subsidized Rent Rates:

The rent paid on the portion of the property you don’t own is usually set below market rates, making monthly outgoings more manageable.

Exposure to Property Market Gains:

As you own a part of the property, you benefit from any increase in its value proportional to your share.

Challenges of Shared Ownership

Restrictions and Eligibility Criteria:

Shared Ownership comes with specific eligibility requirements, which can limit accessibility for some potential buyers.

Complexity in Selling:

Selling a Shared Ownership property can be more complex than selling a fully owned property, particularly due to the housing association’s right to find a buyer first.

Limited Control Over Property:

As part-owners, you may face restrictions on property alterations or improvements without the housing association’s consent.

Service Charges and Fees:

Shared Ownership properties often come with service charges and ground rent, which can add to your monthly costs.

Risk of Negative Equity:

If property values fall, you could find yourself in negative equity, owing more than the property’s worth, especially if you own a smaller share.

Additional Costs with Staircasing:

Increasing your share through staircasing involves additional costs, including valuation fees, legal costs, and potentially higher stamp duty.

Long-term Financial Commitment:

While the initial costs are lower, Shared Ownership is still a long-term financial commitment, requiring careful consideration of your future financial stability.

Staircasing in Shared Ownership?

Staircasing is a fundamental feature of the Shared Ownership scheme, allowing participants to gradually increase their stake in the property over time. Understanding how staircasing works can help you strategically plan for full homeownership. Let’s delve into the details of this process.

The Basics of Staircasing

Gradual Increase in Ownership:
- Staircasing allows you to purchase additional shares of your Shared Ownership property after the initial buy. This process can be undertaken multiple times until you own a larger portion or even 100% of the property.
How It Works:
- To begin staircasing, you need to inform the housing association of your intention to buy an additional share.
- The price of the new share will be based on the current market value of the property, as determined by an independent valuation.
Financial Considerations:
- The cost of the new share will depend on whether your property’s value has increased or decreased since your initial purchase.
- You may need to arrange for additional mortgage financing or use savings to pay for the increased share.

Advantages of Staircasing

Reduced Rent Payments:
- As you increase your ownership share, the rent you pay on the remaining share decreases, potentially leading to lower monthly outgoings.
Building Equity:
- With each additional share you purchase, your equity in the property increases, enhancing your investment in the property.
Flexibility in Homeownership:
- Staircasing offers flexibility to match your investment in the property with your evolving financial capability.

Things to Consider

Costs Associated with Staircasing:

Apart from the cost of the additional share, staircasing involves other expenses, such as valuation fees, legal costs, and possibly higher stamp duty.

Limitations in Some Cases:

Some Shared Ownership properties may have restrictions on how much you can staircase, especially in the case of new builds.

Long-term Financial Planning:

Consider your long-term financial situation before staircasing, as it involves a commitment to higher mortgage repayments.

Market Value Fluctuations:

Keep in mind that the property market can fluctuate. Increases in property value could make staircasing more expensive over time.

New Developments & the Future of Shared Ownership?

The landscape of Shared Ownership is continually evolving, with new developments and changes being introduced to make the scheme more accessible and beneficial for a wider range of people. Understanding these updates, especially regarding new build options and recent policy changes, is crucial for anyone considering Shared Ownership.

Increased Availability of New Builds:
- The Shared Ownership scheme has expanded to include a variety of new build properties. These modern homes often come with energy-efficient designs and contemporary amenities.
Advantages of New Builds in Shared Ownership:
- Opting for a new build property in a Shared Ownership scheme can offer several benefits, such as modern facilities, lower maintenance costs, and sometimes, incentives from developers or housing associations.
Diverse Range of Properties:
- The range of new build properties available under Shared Ownership has broadened, catering to different preferences and needs, from urban apartments to suburban houses.

Recent Changes to the Shared Ownership Scheme

Lower Initial Share Purchase:
- Recent changes to the Shared Ownership scheme have made it possible for buyers to start with a smaller share purchase, lowering the initial financial barrier to homeownership.
Flexible Staircasing Options:
- The updated scheme now offers more flexible staircasing options, allowing owners to increase their shares in smaller increments, making it easier and more financially feasible to staircase over time.
Introduction of Repair and Maintenance Warranties:
- Some new changes include the introduction of a repairs and maintenance warranty for new builds, alleviating the financial burden of unexpected repairs for new homeowners.
Future of Shared Ownership:
- Looking ahead, the Shared Ownership scheme is poised to become an increasingly significant part of the housing market. With these changes, the scheme aims to be more adaptable to the needs of a diverse range of potential homeowners.
Implications for Potential Buyers:
- The recent updates mean that Shared Ownership is becoming more tailored to the needs of first-time buyers, lower-income families, and those looking for a viable route to full homeownership.

Final Thoughts & Key Takeaways

Shared Ownership stands out as a transformative approach to homeownership, particularly for those who find the traditional route financially daunting. Here are the key takeaways from our exploration of this scheme:

Gateway to Homeownership:

Shared Ownership is a valuable option for first-time buyers and those with limited means, offering a more accessible path to owning a home.

Financial Flexibility:

With lower initial deposit requirements and the ability to staircase to full ownership, this scheme provides financial flexibility and a gradual approach to investing in property.

Evolving Opportunities:

The continuous evolution of the Shared Ownership scheme, including the introduction of new build properties and updated policies, reflects its growing role in addressing housing needs and preferences.

Considered Decision-Making:

While Shared Ownership presents numerous benefits, it’s vital to consider the long-term financial commitment, potential challenges, and your personal circumstances before proceeding.

Empowered Choices:

With a clear understanding of eligibility criteria, financial implications, and the staircasing process, prospective buyers are better equipped to make informed decisions that align with their homeownership goals.

Shared Ownership is more than just a housing scheme; it’s a strategic step towards achieving the dream of owning a home, tailored to meet the needs of a diverse range of people in today’s dynamic property market.

Comments are closed.