Shared ownership is a scheme introduced by the UK government to help first-time buyers get onto the property ladder. The scheme was launched in 2006 and helps to make property affordable to people who otherwise couldn’t get a large enough mortgage. It was a reaction to increasing house prices and the affordability problems first-time buyers were facing.
What is Shared Ownership?
How shared ownership works
The shared ownership scheme allows you to purchase between 10% and 75% of the full market value of a property. You’ll need to take out a mortgage to fund your share. The remainder of the property belongs to the landlord, they will charge you rent. This is defined as “affordable” and is significantly less than commercial rent on an equivalent-sized property.
It’s important to speak to a specialist mortgage adviser to ensure you can locate a lender offering shared ownership mortgages and get the best deal possible.
The good news is, that once you’ve got shared ownership, you can increase your share. This process is referred to as “staircasing”. The standard approach allows you to increase your share of the property in steps, you need to purchase an additional 5% or more of your property, but you can do it whenever you want. The alternative is to use gradual staircasing. This allows you to increase your ownership by 1% each year. Of course, you need to be able to fund that additional purchase. You should note, that the landlord can charge an administration fee if you purchase 5% shares, they can’t if you opt for 1%.
Eligibility criteria for shared ownership
Buying a property can be daunting for any first-time buyer. Therefore, it’s important to note you must meet certain criteria to qualify for the shared ownership scheme:
- At least 18 years old
- Your household income must be below £80,000, (£90,000 in the London area)
- You cannot already own a home
- You must be able to show you can’t afford a suitable home without the scheme
- Applicants can’t be in mortgage or rent arrears
- You need a good credit score (you won’t qualify if you have CCJ’s)
- Your debt-to-income ratio must be below 30%
- You’ll still need a deposit – usually between 5-10% of the property share you wish to purchase (not the full property value)
Shared ownership is aimed at first-time buyers. However, you may be able to benefit from it even if you have a property, provided you are in the process of selling it.
Benefits of opting for shared ownership
The biggest benefit of shared ownership is that you can purchase a property of your own, something that you wouldn’t be able to do without the scheme.
Shared ownership schemes require lower deposits than traditional property ownership. That makes them more accessible and more affordable, particularly to people on lower incomes. Being on a low income is a common barrier to homeownership for younger people just starting in their careers.
Shared ownership can save you money as you can purchase a more desirable house in a better location, this could save you multiple moving and remortgaging costs.
The scheme is designed to maintain affordability but still allows you to gradually increase your share, until you own 100% of the house.
As well as getting your foot on the ladder early, you are also likely to find your new property is located with lots of other shared ownership properties. You’re likely to be surrounded by like-minded neighbours!
Potential drawbacks and considerations
Shared ownership isn’t the right option for everyone. You should be aware of these drawbacks:
The biggest issue with shared ownership is that you only partially own the property. That means upgrades and alterations are limited as you will need the landlord’s permission. It can make it hard to turn the home into the property of your dreams.
Equally, unless you’ve staircased to owning 100% of the property, you can only sell the property after telling your landlord. They will usually have first refusal, meaning you can’t put the property onto the market without allowing them to buy it back or find a buyer.
In addition, you can only increase your ownership level in increments. You need to decide between, gradual and standard. Gradual staircasing can take a long time to purchase the property, standard staircasing will incur charges along the way. You need to be prepared for these.
Of course, shared ownership also means you’ll be paying a mortgage and rent, and probably a service charge. It’s important to verify you can afford this.
Steps to increase your ownership share
Staircasing allows you to increase your share of the property. In most cases, you can eventually own 100%. However, there are rules which need to be followed.
The rules regarding staircasing were changed in 2021. For any shared ownership property bought between 2021 and 2026, the minimum staircasing values have been reduced. For gradual staircasing, it has gone from 10% to 5% increments. Homes purchased before must still staircase in a minimum of 10% increments.
Additionally, schemes started between 2021 and 2026 can benefit from gradual staircasing, that’s the option to buy 1% of shares per year for the first 15 years of shared ownership. This is done annually following the landlord supplying you with a property valuation.
The standard scheme can, be applied for at any time, simply check your lease and ask your landlord. Before you apply, make sure you have access to the required funds to increase your share.
Is shared ownership right for you?
Shared ownership is rising in popularity, however, it isn’t the right answer for everyone. There are several help to buy options worth looking at. In general, it’s a viable option if your current financial situation won’t allow you to purchase a property outright. You do need to consider your future financial position and lifestyle commitments. Bear in mind that the cost of mortgage, rent, and service charges can be surprisingly high. Make sure you’re comfortable with this figure before you commit.
Selling a shared ownership property can be a difficult and slow process. It’s important to consider this. For example, if you’re hoping to have a family you need to make sure your property can accommodate your growing family.
Opting for a shared ownership scheme can be a great way to get on the property ladder, just make sure you’re aware of all the advantages and disadvantages first. Get professional advice by arranging a consultation with us today.
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