Shared Ownership Properties – Eligibility, Benefits and Disadvantages

If you are struggling to find an affordable home, one solution worthy of consideration is shared ownership. This is halfway between renting and buying and aims to reduce the considerable obstacle facing first-time buyers — the need to raise a big enough deposit.

For many, shared ownership bridges the gap between renting and getting on the property ladder and can be a positive step on the road to full ownership. However, as with anything, there are some potential pitfalls, too.

What is shared ownership?

Most shared ownership schemes are run by housing associations and tend to be only available to first-time buyers. They enable people to take out a mortgage on a share of a property, typically ranging between 10 and 75 percent, and then pay rent on the remainder share retained by the housing association. It is also possible to ‘staircase’, purchasing more and more of the property over time, although this must be bought in increments of at least 1%.

Who is eligible?

Eligibility for shared ownership differs between housing associations. There are also different rules for England, Wales, Scotland and Northern Ireland. However, general rules are:

• The purchaser must be 18 or over
• They must earn an annual income of less than £80,000, which is increased to £90,000 if you live in London
• They must not already own a home, although it is within the rules for existing shared owners to move into another shared ownership property
• They must be unable to afford to buy a home on the open market
• They must not be in rent or mortgage arrears
• They must be able to prove they can afford the combined monthly rent and mortgage repayments, and have a good credit score
• They must either be renting a housing association or council property

For anyone who is over the age of 55, they can apply for Older People’s Shared Ownership. This scheme allows people to buy up to a 75% share of the property. Once they own 75% they do not need to pay rent on the remaining 25%.

Benefits of shared ownership

• The deposit required is much smaller on a shared ownership property because the mortgage required is smaller, and deposits are taken as a percentage of the share price rather than the entire property. A buyer must still be able to afford survey costs, conveyancing fees and removals expenses on top of the deposit.
• Rental payments on the portion owned by the housing association are much lower than renting privately. This is usually around 2.75% per year of the property’s value.
• Lower income earners are much more likely to be approved for a mortgage because the amount borrowed will be much lower.
• A buyer can decide how to pay Stamp Duty Land Tax (SDLT). This can either be done in one lump sum or paid in stages as they ‘staircase’.
• The shares owned in the property can be sold at any time.
• When ‘staircasing’, the buyer will get more security than they would by renting privately.
• Owners can eventually staircase up to 100% of the property, meaning they will own the property outright. The buyer may then be able to buy the freehold from the housing association.
• Owners do not have to staircase if they don’t want to. Deciding not to staircase means they are less vulnerable to market changes.
• The landlord or housing association will cover the costs of repairs and maintenance for a shared ownership property for a 10-year period after purchase.

Disadvantages 

• Because shared ownership properties are always leasehold, ground rent may apply, which must be paid in full whatever the size of share is purchased or owned. The same applies to service charges.
• The smaller the share of the property that is owned, the less benefit will be received from the property increasing in value.
• If could be harder to find a mortgage provider who offers shared ownership mortgages. Although an increasing number of lenders offer them as standard now.
• There may be restrictions on what alterations can be made to the property.
• Staircasing can be expensive. Each time you staircase, you will need to save up for deposits, surveys, legal fees and mortgage fees. Whilst buying a house in a conventional way only requires these costs to be met once.
• The staircase price is based on an independent valuation at the time. This means the price paid per share is likely to rise with house prices over time.
• There are likely to be restrictions on whether the property can be rented out. In most cases, sub-letting is prohibited.
• Selling a shared ownership property can be a little more complicated than ordinary sales. For those owners who don’t own the entire property, there may be a requirement to offer it to the housing association before putting it on the market. This is called ‘first refusal’. If the housing association cannot find another buyer within a specified timeframe (typically 6-8 weeks), the owner can then sell it on the open market. Even in cases of 100% ownership, they may be unable to sell it on the open market because they do not own the freehold.

Is shared ownership a good idea?

It is important to do your research into all the housing schemes available and think carefully before making a decision. Although some things are not necessarily drawbacks, they should be taken into account when deciding whether shared ownership is suitable for you.

• Shared ownership properties are always leasehold, so you will need to decide whether this suits your needs.
• Different housing associations in different parts of the country may have specific rules relating to priority. For example, in England, military personnel are given priority over other shared ownership applicants.
• There may be a limit placed on the number of occasions you can staircase.
• There can also be circumstances where staircasing is capped or restricted in another way. This tends to be around 80% and is more common in rural areas in order to deter buyers from making the property a second home.
• There may be a certain amount of time you must wait before being able to staircase for the first time. This is usually a year or two.
• If you have a lifetime ISA, you can use it for the deposit of the initial share of the shared ownership property. However, if you want to use it to buy any further shares, you will be required to pay the 25% government withdrawal charge.

Shared ownership can offer first-time buyers a great way to get onto the housing ladder without having to save up for a huge deposit. However, to make sure it is right for you, be sure to do your homework and budget around the long-term costs.

Just because shared ownership is backed by the government does not mean it gives you any more protection. Costs can spiral. Check you can afford increased maintenance and service charges. While rents start low, they are likely to increase and it is your responsibility to pay both the rent and mortgage repayments. If you cannot pay the rent on the part of the property you don’t own, the housing association can take court action to repossess the property for rent arrears. This may involve you losing your initial investment. One homeowner was evicted from her shared ownership property after a court ruled she had no right to the £30,000 she had already paid for her share.

An alternative to shared ownership is the government’s Help To Buy scheme. Where instead of renting part of the property, you receive an equity loan to cover a portion of the cost.