shared ownership – what makes it good or bad

Getting on the property ladder is a dream for many. It is also true that many can’t afford this. This is where help to buy schemes come to play. One of the ones that can often become the first step on this journey – shared ownership. 

The scheme is great at helping people to get on the property ladder without a need to save a massive deposit. This can become a make or break scenario for many potential home owners out there. Becoming an owner of a property has many pros and cons which you can learn about here.

I have experienced the scheme first hand and want to cover the pros and cons of shared ownership. While I think pros outweigh cons in this instance – it is worth knowing the full picture before you dip your toes. 

The below will be an overview based on my personal experience and not all of the pros might be seen in the same light by others when it comes to shared ownership. 

low entry requirements

The first point to start with – shared ownership makes getting keys to your first own property a lot easier financially. This is due to the fact you are only looking to buy a share of 25-75% of a full value of a property. 

What the above means – you need to apply for a much lower amount of mortgage. In addition, you need a significantly smaller deposit to start the climb up the property ladder. 

The combination of the above will often make shared ownership properties accessible to people on much lower income levels. 

There is however a negative to buying only a share of a property which I will cover lower. 

build equity while in shared ownership

The next point that made shared ownership attractive to me is the equity I’m building. There are two ways you benefit from this so definitely worth considering. 

Firstly, as you pay mortgage back you will be slowly increasing your cash stake within the property you buy. This is a nice perk you fully benefit from the same as any person who buys full property with a mortgage. 

Secondly, you also benefit from the property increasing in value. The slight issue here is the fact that you will only gain a share of the value that property increases over time. 

As you probably guesses – the share of value increase you get will be equal to the share of the property you purchase initially through the shared ownership. 

Some people will say that this isn’t great as you are losing money here. They are partially right. The way I see it – you can start benefitting way sooner than you otherwise could. 

The time you stay in the rental market you will be losing the benefit of gaining at least a share of property market increasing in its value as well as not gaining from the fact you are paying out mortgage. 

avoid paying stamp duty with a shared ownership

This is another benefit to consider. Stamp duty in the UK can be very expensive. With shared ownership there is a way to avoid paying it.

Whenever you buy a property in the UK there is a stamp duty to be paid. There is a sliding scale depending on the value of a property.

With a shared ownership you can defer paying this until you own 80% of the property. This will only be applicable to you if the share you are buying is under £125,000. If you know that the shared ownership property is just a stepping stone for you and you are planning to sell quickly to buy a full property – this can be a great way to avoid paying any stamp duty on this home.

The other option you have – pay the whole value of stamp duty at purchase. If you are planning to eventually buy out the whole flat through staircasing than you can save yourself some money in the long run.

The above assumption is based on the fact that the future share of the property will be more expensive due to the nature of the property market. As most will know – property prices tend to only move in one direction in the long run. 

I would discuss the above with your mortgage advisor and solicitor. They will be the ones to give you advice on what is the best thing to do in your situation.

staircasing – increase your share of the property

Staircasing is a process that allows you to increase your share of the property over time. This is another feature that makes shared ownership a great way to get onto the property ladder.

When you are buying your home there is a set percent of the property you are buying. The scheme however allows you to increase your share within the property over time.

With the current shared ownership scheme – there is a minimum of 10% that you need to buy at a time. You can however buy more if you want to.

You can continue this process all the way up to becoming full owner of the property. There are some potential restrictions where some properties can only be staircased up to 80%. 

Before buying – make sure you check this. It can be one of those things that potentially makes you change your mind on where to buy. There is a further rule to consider – often you have to buy the last 25% in one go.

You will also need to cover a list of expenses in the process so keep this in mind too. You will need to pay for an independent valuation of the property, cover the legal fees, etc.

There is security element to it

One of the big advantages to part owning vs renting – security you get. If you have been in a rental market for a while, you will know that landlords can ask you to move out or increase the rent.

With a shared ownership – no one can ask you to move out. You are the only person to make that decision based on your personal circumstance.

I would imagine – if you decide to move out, this would be due to you looking to buy a bigger and nicer place. That’s the type of change that is extremely pleasant and is worth the hustle of packing all the boxes. 

you have to pay both – rent & mortgage

Shared ownership however is not the perfect scheme and there are some cons to these as well. As I have mentioned before – the pros outweigh the cons in my view. You will however be the one to decide if that is the same as you view it.

As you are only buying a part of the property – the other part will have to be covered by rent. This is paid to the housing association which owns the building.

There are rules around how much rent can be charged etc. This makes it a bit more predictable and easier to plan your future expenses in my view.

For those wishing to not waste money on rent and pay their own mortgage instead – shared ownership isn’t the perfect solution unfortunately.

If you calculate how long you would have to stay in the rental market to save the deposit – shared ownership still might make more sense when you add the equity gain into the mix.

One other thing I would do before buying – have a look at the rental market where you are looking to buy. In many cases mortgage + rent will come out cheaper than renting on a second hand market. This way you save vs rent and pay out some of your own equity.

I have however seen instances when you can find a rental property cheaper than rent and mortgage combined. These are the instances I would consider if buying is the right strategy.

shared ownership mostly has short lease

One of the biggest watch outs and learnings for me personally was the lease conditions. In the UK there is a large proportion of properties sold as leaseholds.

What leasehold means – you are buying a long term rent in a way. New properties will normally have a lease anywhere between 99 and 999 years. The later one is obviously not a concern at all as you are fairly unlikely to see the end of this. Same as anyone likely to inherit the property.

The main problem with shared ownership properties I have seen – they tent to have a short lease. When I say short – it is anything between 99 and 125 years.

You might say – I am fairly unlikely to see the end of this lease either. While that is true, there are few other points to consider here.

When properties get to below 85 years remaining on their lease – their value starts dropping. Some lenders start becoming unwilling to mortgage these as well. This might make you pay higher interest on those couple of lenders you might find.

There is a way to renew and extend the lease however this process comes at a cost and should be taken into account before buying a property with fairly short lease. Also keep in mind – selling a property with short lease might be more difficult.

fewer mortgage options

Getting a mortgage for a shared ownership can also be slightly tricky. It’s not that the process is any different or more complex.

The main reason for this is the fact that there are less lenders willing to give mortgages out. Don’t get me wrong – there are plenty of mortgages on the market for these.

But as the basic economic principles suggest – the less offer there is, the higher the equilibrium point. In this case – it results in mortgage rates on shared ownership being somewhat higher than normal mortgages offered.

I would however say – don’t let this discourage you. There are plenty of offers on the market and the rate difference isn’t that significant.

ground rent and service charge are on you

One other point that many people find not to their liking – the situation with service charge and ground rent.

While you are only buying a share of the property – you will have to cover the whole of the value for these fees. Many will say that this isn’t fair as they only own part of the property.

While in principle that would be a correct statement I would suggest not to get bogged down with it. Look at it differently. 

This is simply an additional fee you have to pay for the privilege of getting onto the property ladder much earlier that you would otherwise be able to do.

While yes, you will over pay your fair share of ground rent and service charge in the years of owning the property. On the flip side – you will build equity in a property years ahead of you otherwise being able to do so.

improving property can be tricky

One other thing to be aware of – improvements to property are a bit more tricky than if you were to buy a whole property. This will depend on the significance of what you are trying to achieve.

My previous shared ownership flat had a list of these. One example – to change carpets for wooden floors would have to be agreed with the housing association first. 

Making any significant changes could fall into this category. While getting the permission wouldn’t be hard or impossible – there could be some admin fees to be paid.

Before you start the whole process – make sure you are fully aware of what happens to the value that property gains as a result of the improvements as well. 

You want to be confident that any things that you add to your home end up in your bank account when you sell. I am sure you wouldn’t want to end up with only a share of this value.

shared ownership can’t be sublet

The last point to cover – since you aren’t a full owner of the property, you can’t sublet it. This most likely won’t be a surprise to most however the ones who were looking for potential investment opportunities might become less excited.

Do keep in mind the real purpose of why you want to buy. If it is a property to get you on a property ladder and a place to call home – this point isn’t an issue at all.

summary

Shared ownership is a great little scheme to help you get on a property ladder. While property prices have pushed many people away from ever owning, schemes like this can really help.

Shared ownership isn’t the ideal scheme by any means and has a long list of cons. I would however suggest to consider if actually the pros are worth it. This can really help you become a home owner years ahead.

Not only that, you will start benefitting from a bullish property market as well as pay out equity in a property of your own. Even though this will only be a share of the property.

If the above makes sense to you and you would like to start exploring further – have a look at the below.

You can start looking at shared ownership properties near you here. More ways to find these can be through mainstream property search web sites. Also, this article covers the fees you should start planning for when looking to buy your home.