Shared Ownership is an initiative that makes it easier for people to purchase a property or a share of a home if they cannot qualify for a conventional mortgage.
Still, it is very different from living in shared accommodation.
This type of mortgage works by offering the opportunity to partially mortgage a property (the clue is in the name!) – so even if you do not earn sufficient income to buy outright, you own a percentage.
As time goes on, you can increase your share and lower the rent paid on the balance.
There are many benefits, from a reduced deposit requirement to lower monthly repayments, but we will explain this in more detail below.
Shared Ownership as a First-Time Buyer Mortgage Option
A Shared Ownership mortgage means that you buy a proportion of the equity through a mortgage loan and pay rent against the other share, normally owned by a local housing association.
You live in your own home as a legal owner and begin the journey towards full ownership with a smaller financial commitment and, therefore, less rigid affordability requirements.
The housing association normally sells available Shared Ownership properties, and they may have qualification rules in addition to the mortgage initiative itself.
The big advantage is the long-term security of owning your property, and you can gradually increase your percentage share until you own 100% of your home.
Eligibility Requirements for Shared Ownership Mortgages
There are a few requirements, as you might expect:
- Your investment must be between 25% and 75% of the total property value (which may vary depending on affordability).
- Applicants must be 18 or above and earn no more than £80,000, or £90,000 in London as a household.
- Shared Ownership is available to first-time buyers or purchasers that do not already own a home in the UK, or are currently selling one.
- Applicants cannot be in mortgage or rent arrears and must have a good credit history without bad debts or CCJs.
The deposit requirement will depend on the value of the share you are buying, but you will need to have at least £4,000 in available funds as a rough guideline.
Down payments tend to be between 5% and 10% of the equity share purchased.
Otherwise, provided you are eligible for Shared Ownership, mortgage approvals are down to the lender, who will use the normal multiplier against your annual income to identify the maximum you can borrow.
Although mortgage caps vary between lenders, most will use around a four per cent multiple – in that case, a salary of £28,000 a year would mean you are eligible to borrow up to £112,000.
Rent Payments on Shared Ownership Mortgage Agreements
The housing association will issue a rental agreement for their share of a Shared Ownership property, which includes details such as:
- Monthly rental cost and payment schedule.
- How long the lease runs for (normally 125 years).
- Your responsibilities as a tenant.
Rent is usually calculated as 3% of the equity owned by the housing association, although they will provide exact figures during the viewing.
If you buy 50% of a £200,000 property, that means you will pay approximately £3,000 in rent per year – or £250 a month.
These charges are usually extremely competitive compared to average rental costs, even when added to the mortgage repayment.
Costs of Taking Out a Shared Ownership Mortgage
Like all long-term financial commitments, it is important to understand all the costs involved.
Deposits for Shared Ownership Mortgages
As above, you will need around 5% to 10% as a deposit against the share you buy. Exact deposits vary between properties and lenders.
If you buy through Shared Ownership as a first-time buyer, you are exempt from Stamp Duty up to £425,000.
However, there are options:
- You might opt to pay Stamp Duty on just the value you buy (if owing). There might also be Stamp Duty charges against the rent payable over the lease term.
- You can also choose to pay Stamp Duty on the full property value – although that may mean a higher initial cost, you can proceed with the assurance that you will not pay this again if you buy the equity balance.
Homeowners that go with the first option will not need to pay Stamp Duty on incremental equity purchases until they reach 80% ownership.
Shared Ownership Mortgage Fees
Applicants will need to cover the cost of a solicitor or conveyancer to deal with the legal aspects of purchasing a property.
Charges can vary, but most legal professionals will offer a fixed cost to allow you to budget.
Brokerage fees will also apply if you opt to use a skilled broker to identify the optimal borrowing products and negotiate on your behalf.
You will find a full breakdown of the Think Plutus charges on our fee structure page.
Moving costs are another factor – an average expense of between £3,000 and £5,000.
Otherwise, you will need to look at the monthly mortgage repayments, the rent owing, buildings and contents insurance and any service charges levied by the local housing association.
Service charges usually refer to building management, maintenance, and cleaning common areas.
Frequently Asked Questions – Shared Ownership Mortgages
Still unsure whether Shared Ownership is likely to be a good option for you? Please look through our FAQs below for answers to some of the commonly asked questions.
Does Shared Ownership Mean Buying Part of a House Share?
No – a Shared Ownership mortgage and a house share are two different situations. Shared Ownership means that you share the property’s equity with the housing association.
You take out a mortgage to borrow the funds needed to buy your share (from 25% up to 75% initially), and the housing association owns the rest of the property.
Each month you pay a nominal rental charge for the equity you do not own and can purchase additional chunks of ownership as you go.
Who Can Apply for a Shared Ownership Mortgage?
Unlike several mortgage support programmes, Shared Ownership is not reserved solely for first-time buyers.
You can consider Shared Ownership as one of many first-time buyer mortgage options but are eligible if you meet the following:
- Deposit available of between 5% and 10% of the share you would like to buy.
- Not an existing property owner (or own a property that you are selling).
- Have a household income of £80,000 or less, or under £90,000 in London.
- Possess a good credit record without any serious defaults.
- Evidence that you can afford to make your mortgage repayments plus the rent.
Think Plutus can advise if you are unsure whether you qualify for the Shared Ownership initiative.
What Sort of Property Can I Buy With a Shared Ownership Mortgage?
Most Shared Ownership properties are made available for partial purchase either as a new-build or a home being re-sold by an existing Shared Ownership homeowner.
You can search online to find available properties through your local housing association.
Alternatively, the Help to Buy Agent portal allows you to look at affordability calculators and search for properties by postcode and whether you would like to rent or buy a home.
What Does Staircasing Mean in Shared Ownership?
We mentioned that you could choose to buy extra chunks of equity in your Shared Ownership property as you go, perhaps building up to 100%.
There is no obligation to purchase additional equity if you do not wish to, but if you do, this is called staircasing.
Most housing associations have no cap on the amount of equity you can purchase, but some may have specific limits, so it is worth checking before applying.
Can I Decorate a Shared Ownership Property Under the Rental Terms?
Shared Ownership is unusual because although you are a legal owner, you continue paying rent for the proportion of the home that still belongs to the housing association.
Generally, you can decorate however you like but need approval from the landlord before you make any bigger adjustments, such as renovation works.
Your tenancy agreement will outline the rules about owning pets – this is usually fine in a house but may be restricted if you buy an apartment.
Shared Ownership allows you to sell your property share at any point to another buyer through the housing association.
If you own 100% of the property, you can sell or refinance as you wish, depending on the specific eligibility and affordability assessments.
Professional Advice on Shared Ownership Mortgage Options
The Shared Ownership initiative is doubtless beneficial to many prospective homeowners who find that property prices and deposit requirements make it financially impossible to purchase a home otherwise.
There are pros and cons, and even if you have successfully applied to the programme, you then have the challenge of identifying suitable Shared Ownership mortgages and selecting a lender.
For more information about Shared Ownership or professional guidance comparing the various mortgage support initiatives available, please get in touch with Think Plutus, and we will arrange a good time to discuss.