Shared Ownership mortgages are primarily aimed at first-time buyers. They fall somewhere in between buying and renting a property; in taking out this type of mortgage, you will own a share of the property (usually 25 per cent minimum) and then pay rent on the remaining share. This rent is often cheaper than private rental accommodation, helping to make a house more affordable.
For example, if you wanted to purchase a 40 per cent share of a property worth £150,000 you would own £60,000 of your home. You would only need a deposit on the 40 per cent - just £3,000 on a typical 95 per cent loan to value mortgage. You would be charged rent on the remaining 60 per cent share (£90,000). This would equate to a maximum of £2,700 over the year, or £225 a month. See below for more information:
|Total property value:||£150,000|
|Purchase 40% share:||£60,000|
|Deposit (assuming 95% LTV):||£3,000|
|Rent 60% share:||£90,000|
So, how do shared ownership mortgages work?
When obtaining a mortgage via the shared ownership route, you will typically purchase a stake of between 25 to 75 per cent of a property using a deposit and a mortgage.
Helpfully, you only need to save enough of a deposit for the portion of the property you want to buy - not the total value. This is really important as many people can afford to make monthly mortgage repayments but simply can’t seem to save up for the deposit required by mortgage lenders.
To put this in to context, if you were buying the property above for £150,000 you’d normally be required to stump up £7,500 as a deposit (the equivalent of 5 per cent.) However, if you’re only purchasing 40 per cent of the property through a shared ownership scheme, then you’d only be required to put down a £3,000 deposit initially - that’s quite a difference.
As well as making repayments to your mortgage company, you then pay a monthly rental amount on the remaining share of the property - which is generally owned by a local housing association or similar property organisation. The rent charge can be up to 3 per cent of their share in the property's value.
You may have the option to buy a bigger share in the property at a later date - this process is known as ‘staircasing’ and is explained in more detail below.
Shared ownership properties are classed as leasehold (rather than freehold) due to part of the property being rented. Usually this lease is for a fixed period of time - typically 99 years.
In addition, you may also pay a monthly service charge for the property - this is an additional charge to towards the cost of maintaining communal areas or services around a block of flats for example. This would be payable whether or not you were part of a shared ownership scheme but is something you should be aware of as it will be an additional monthly outgoing.
Who can apply for shared ownership?
Shared ownership schemes are generally aimed at low-mid earners, who aren’t able to easily buy their home outright. Most of the properties available through shared ownership are new-builds, but some may be older.
The criteria for shared ownership scheme eligibility in the UK varies between the four countries, and also between regions.
In England, for example, the following criteria applies to shared ownership mortgages:
● Suitable for first-time buyers or those who used to own a home but can’t afford one now
● Suitable for those currently renting a council or housing association property
● Suitable for military personnel as these individuals will be given priority. In the past, teachers and nurses were also prioritised but this has changed
● If aged 55 or over, there is a different shared ownership scheme available named ‘Older People’s Shared Ownership’ - a similar process but it is only possible to purchase a maximum share of 75 per cent of the property.
What is 'staircasing'?
Usually once you have lived in a shared ownership home for a certain period of time (depending on the terms outlined in your lease), you may be able to purchase further shares in your property. This process is known as staircasing, enabling you to own a greater proportion of your home - up to 100 per cent ownership.
The cost of increasing your share will depend on the market value of the property at the time - you'll need to pay for the housing association or shared ownership scheme provider to carry out a valuation of the property and ensure you have the funds or mortgage finance in place to pay for the extra share(s).
The greater the share you buy in your home the less rent you will pay to the housing association. If you staircase to 100 per cent you become the outright owner of the property, and you will no longer need to pay rent.
Each housing association will have its own rules, with many only allowing staircasing up to a total of three times. Some will only let you staircase a third and final time if you intend to buy the entire remaining share of the property, taking your ownership up to 100 per cent.
Lots of people have already taken advantage of shared ownership schemes - It’s certainly made home ownership more affordable and more accessible to a lot of people who would otherwise still be in rental property. However, if you’re unsure if it’s the right decision for you, always seek advice from an expert independent financial advisor.