Shared Ownership Scheme - What It Is & How It Works
Shared ownership schemes are rising in popularity among first-time buyers and people who do not own a home. The schemes allow you to buy shares in a property and slowly but surely buy the property over months or years.
In the UK, the government has created a budget of £12.2 billion to build over 180,000 affordable homes by 2026. A large proportion will be available to purchase via shared ownership schemes.
Shared ownership properties are fast becoming some of the most sold properties — one of the largest property developers in the UK, Peabodys, has found a buyer for 98.8% of shared ownership properties within eight weeks.
In this article, we will cover what shared ownership is, how it works, the pros and cons, what regulation changes are coming, and if you should consider a shared ownership property.
What Is Shared Ownership?
Shared ownership is one of the most affordable routes to becoming a homeowner. Unlike a regular property purchase, with shared ownership, you buy shares in a property.
Shared ownership is advantageous for first-time buyers as you'll have smaller mortgage repayments or at least to start with.
As a shared owner, you can buy more shares in your property until you're the owner. While doing so, you'll pay a small rent to the housing association, which owns the remaining shares in your property.
What Is The Shared Ownership Eligibility?
To be eligible for a shared ownership scheme, you have to be:
Over 18 and a first-time buyer.
A citizen of Britain, the EU or the EEA (European Economic Area).
Employed permanently with no probationary period.
Pass an affordability check and prove you are not in mortgage arrears or debt.
Have enough savings to cover your mortgage deposit & roughly £3,000 to cover any fees.
But, the household will need to earn less than £80,000, £90,000 in London.
Without a second home.
Is It Possible To Get Shared Ownership With Bad Credit?
Whether you can get shared ownership with bad credit depends on what you consider bad credit. If you have a couple of black marks on your credit file, then the lenders will consider this in their assessment, but it won't stop you completely.
They will also factor in your current financial situation, age and whether you meet the eligibility criteria.
Is Shared Ownership Only For First-Time Buyers?
While most shared owners will be first-time buyers, there are some exceptions.
Shared ownership is also an option for anyone who can't afford to buy on the open market due to a lack of savings after a divorce, paying off debts, etc.
How Does Shared Ownership Work?
Shared ownership schemes work on four fundamental factors; the share you buy, your deposit, your mortgage payments and your form of rent.
You can buy an initial share between 10% and 75% of the home's total market value and further shares in the future (which is known as staircasing).
A deposit on a shared ownership property is calculated differently from a mortgage. With a shared ownership property, the deposit is a percentage of the share you intend to buy in your property.
Buy a 25% share in a property worth £400,000, and your deposit will be calculated based on that figure, so in this case, the share would be £100,000.
Therefore, a 5% deposit would mean you only have to deposit £5,000.
Your Mortgage Payments
Your mortgage payments act much as they would with a conventional property purchase; only with a shared ownership, you don't pay it off on the total value of the property, only the remaining percentage of your share.
Using the £400,000 example, your mortgage repayment would be £95,000.
Your Form Of Rent
The rent you pay for a shared ownership property all depends on the share you buy. The larger the share is, the smaller your rent will be.
But don't let the thought of rent put you off if you can only buy a small share. The rent is roughly half what it would be on the open market - 2.75% of your property's annual value.
How Does Shared Ownership Work If You Want To Increase Your Shares?
Increasing the shares in your property is known as staircasing.
Staircasing will decrease the portion of your rent you pay to the housing association but increase the amount you pay on your mortgage repayments.
In many cases, staircases won't make a massive difference to your monthly outgoings, but it allows you to accrue more equity. If you staircase to 100%, you will own your property outright.
What Is The Older People's Shared Ownership (OPSO) Scheme?
If you are over 55, you can buy up to three-quarters of your home via the OPSO scheme, after which you will not be liable for any rent.
Similarly, if you have a long-term disability and other Help to Buy schemes don't meet your needs, you can apply for the Home Ownership for People with a Long-Term Disability (HOLD), which allows you to buy up to 25% of your home.
What Are The Pros & Cons Of Shared Ownership?
All schemes like shared ownership come with a broad mix of Pros and Cons as they are designed to assist someone in a specific situation or with particular needs.
It's important to consider whether shared ownership suits your financial situation and life goals.
What Are The Pros Of Shared Ownership?
Shared Ownership Schemes Are Financially Accessible
The main advantage of shared ownership is that the properties have low deposits;
Sometimes, these can be as small as 5%. Although, the 5% is of the share you're buying and not the property's market value.
Therefore, if you were to invest in shared ownership when prices are low, you could see the value of your shares increase.
Your rent is charged at a far lower rate than the open market.
You don't have to pay stamp duty on shared ownership properties until you've accrued an 80% share.
Plenty Of Options When Selling
When looking to sell a shared ownership property, you can sell your shares in a property in three different ways.
You can sell your shares, which involves you selling the shares in your property to another property, who, in essence, would pick up the deal where you left off.
You can simultaneously staircase, where the buyer pays the total market value for the property regardless of how many shares you own.
Then as the sale completes, their money is used to pay off any shares you've not purchased from the housing association, and what's left goes to you.
If you have purchased 100% of the property shares, you can also sell your property conventionally with an estate agent, auction or cash buyer.
Shared Ownership Offers Stability
Unlike renting, as a shared owner, you don't have to worry about spontaneous rent increases or being a victim of no-fault evictions.
Your payments remain structured, and keeping up with them keeps your home secure.
What Are The Cons Of Shared Ownership?
Shared Ownership Limits Personalisation
When buying a new shared ownership property, you can cosmetically change it as much as you want. From the countertops and wall units to the carpets and furniture – it's up to you!
But, you are prohibited from making any structural changes to the property unless you have consent from the housing association, as the property is still rented.
Structural changes include loft conversions, garden landscaping, and garage renovations, which can become an issue if you have a growing family.
Shared Ownership Properties Are Leasehold
Most shared ownership properties are leasehold, meaning you may be liable to pay a service charge or peppercorn ground rent.
The service charge will likely go to find the upkeep of communal areas if you are on a new build estate or block of flats.
On the other hand, the peppercorn ground rent will be paid to the freeholder, as with the property being leasehold, you technically don't own the land it's built on.
However, if you have staircase to 100%, you can purchase the freehold.
Making A Profit On A Shared Ownership Property Isn't Easy
With shared ownership properties, capital appreciation is slightly different. Typically when you sell a property, the more equity you have in a property, the more you'll make when it sells.
However, in a shared ownership property, any capital appreciation you receive will be diluted by paying off a percentage share of a share in your property.
However, one way to get around this is to sublet the shared ownership property to a friend and gain rent. But, you must be living within the property also.
What Regulation Change Has There Been For Shared Ownership Schemes?
Affordable Homes Programme 2021-26
If you are considering buying shares in a new build property that was built under the government's Affordable Homes Programme (AHP) 2021-26, then there are some new regulations in town:
Buyers can now purchase a minimum of 10% of the property; previously, the minimum share was 25%.
Shared ownership buyers will secure their mortgage to purchase a stake in a property while paying rent on the remaining share to the property owner or housing association. This allows buyers to buy a smaller initial share, and secure a smaller mortgage deposit for doing so.
However, the lower initial share may expose shared buyers to the possibility of rent burn on the remaining shares. The United Kingdom faces the highest inflation rate in 10 years, meaning shared buyers will see their rent payments increase.
Households can staircase in 1% increments for the first 15 years, up from 10%.
1% increments may be more affordable for many homeowners. However, it may also be less strategically advantageous. If a shared ownership buyer purchased a 10% initial share, an additional 1% for 15 years, then they will have staircase to 25%.
But, they would be faced with a limited reduction on rent payable, equity or the prospect of staircase to 100%.
Housing associations must contribute to the costs of essential repairs during the first ten years. Previously, this was down to shared buyers.
Although this lifts a burden off shared ownership buyers, the maximum essential repairs budget for every housing association is £500 per year, which isn't a great deal, especially if you factor in the share held.
Housing associations have exclusive rights to market the property for four weeks instead of eight weeks. After four weeks, shared buyers can sell their property on the open market.
Shared ownership resales are less attractive to home buyers than new builds because high inflation rate rent increases mean that rent ends far higher than other local properties.
Currently, housing associations and landlords have the first pick over marketing the property to sell, called the nominations period.
The lease Length is 990 years, up from the original lease of 99 years.
990-year leases remove the need for costly lease extensions, but this could create a two-tier market where short leases are standard on older properties and force them to become even more unattractive to home buyers
Peer To Peer Financing
Aside from government regulation changes, a new form of financing may allow you to buy a property through shared ownership — without the need for a housing association.
Peer To Peer, or P2P financing, allows you to buy a shared ownership property without having to apply for a mortgage. Deposits for P2P shared ownership are low – just 5% of the property's value.
The development of Peer To Peer financing has opened an entirely new opportunity for shared ownership, allowing property investors to battle housing associations and offer potentially more attractive shared ownership deals.
Should You Consider Shared Ownership?
Shared ownership can be an affordable way to get onto the property ladder, as long as you remain strategic with how much you decide to staircase or how you buy shares.
While strict, entry requirements for shared ownership are financially low, and it's far more manageable than buying a house with a mortgage conventionally.
If you can purchase the shares in your property quickly and in large chunks, it can help you get back into traditional ownership in a matter of years, unlike if you tried to rent your way out of a financial blip.
It's much the same for first-time buyers, as building equity through shared ownership will prove more beneficial than straight-up renting — something the P2P scheme could well expand on.
If shared ownership fits your circumstances and you want to get moving fast, then a speedy house sale is likely to be on your to-do list, and if that's the case, we can help…
Being a reputable cash buyer of a property with over 50 years of combined experience, we can help you move on fast …. So fast you could be moving into a new home as early as next week!