Shared ownership mortgage

Last updated: May 2024 | 3 min read

Shared ownership schemes allow buyers to purchase a portion of a property while paying rent on the remaining share. This makes home ownership more affordable for many in the UK by requiring a smaller upfront cost and mortgage amount. This government-backed programme aims to help those struggling to get on the property ladder due to soaring house prices and inflation.

Thinking about mortgage for your first home purchase in the UK? Explore shared ownership mortgages, a practical solution for buying a house.

This guide breaks down how shared ownership can work for you, especially if you are a first-time buyer. Gain knowledge to make confident and informed decisions about a safe investment.

What is a shared ownership mortgage?

Shared ownership mortgages offer an exciting pathway to home ownership. They allow first-time buyers to purchase a portion of a property while paying rent on the rest.

These mortgages involve buying between 25% and 75% of a property, with the opportunity to increase your share later.

Housing associations usually own the remaining share of the property. You pay rent to a landlord on the portion you don't own.

For those struggling to afford the total cost of a home, shared ownership presents a feasible alternative.

Differentiating between shared ownership and full ownership

Full ownership implies that the buyer owns 100% of the property, bearing all the mortgage costs, maintenance, and other charges. In contrast, shared ownership allows buyers to own a part of the property while a housing association owns the remainder.

This setup means shared ownership buyers pay mortgage payments on their share and rent on the portion owned by the housing association.

While less rent is due compared to full renting, shared ownership brings a blend of rent and mortgage payments, offering a more manageable step onto the property ladder.

Eligibility for a shared ownership mortgage

Assessing your household income and credit history

Shared ownership mortgages hinge on specific financial criteria. Your household income is the most important factor in eligibility.

Housing associations set upper limits on household income for shared ownership buyers. This ensures the scheme remains accessible to those who most need it.

For first-time buyers or people in certain professions, such as key workers, the eligibility criteria can sometimes be more flexible.

Your credit history also plays a role. Lenders review your credit score to determine your reliability in managing loans and debts. A strong credit history indicates a lower risk for lenders.

However, don't lose heart if your credit history isn't flawless. Mortgage advisers can offer tailored advice, suggesting the best steps forward for your specific situation. They might recommend waiting to improve your credit score or searching for lenders with more lenient criteria.

Housing associations and your eligibility

Housing associations are central in the shared ownership scheme. They not only manage the properties but also set eligibility criteria for prospective buyers.

Each housing association might have different rules. Common criteria include being a first-time buyer or not currently owning a home. In some cases, if you've previously owned a home but can't afford to buy one now, you might still qualify.

Housing associations also consider your financial stability. They assess whether you can afford the costs of shared ownership, which include mortgage repayments, rent on the unsold share, and other costs such as service charges for communal areas. Housing associations aim to help you avoid overstretching financially, ensuring you can comfortably manage the expenses associated with a shared ownership property.

Your residence status can also affect eligibility. Many housing associations require you to either live or work within a certain area. This local connection criterion is designed to support community cohesion and local economies. If you're eyeing a shared ownership property in a specific location, check with the relevant housing association for any residency requirements.

Read our article on buying with a partner or a friend.

Applying for a shared ownership mortgage

1. Contact a housing association

Shared ownership mortgages provide a stepping stone towards owning a first home. The application process starts with a simple inquiry. Housing associations usually manage shared ownership properties, so the initial step involves contacting one.

You'll discuss your financial situation, property preferences, and eligibility criteria. Transparency about your income, savings, and credit history speeds up this phase.

2. Find a suitable property

Next, comes the hunt for a suitable shared ownership property. Shared ownership homes aren't just any properties; they're part of a scheme aiming to help first-time buyers or those with lower incomes. Once you find a property, the housing association assists with the next steps: applying for a mortgage.

3. Apply for a mortgage

Applying for a mortgage for a shared ownership property isn't radically different from other mortgages. However, you're borrowing less, as you're not buying the whole property.

This smaller loan amount generally means a lower deposit requirement, easing the financial burden significantly.

After choosing a property, securing a mortgage approval involves providing detailed financial information to your chosen lender. This process includes property valuation, to determine how much you can borrow.

Finally, approval from both the lender and the housing association marks your entry into shared ownership. The dual approval underscores a unique aspect of shared ownership mortgages: balancing the interests and requirements of two key parties – the lender and the housing association.

Selecting the right lender and mortgage product

Selecting a lender for a shared ownership mortgage demands careful consideration. Not all banks and building societies offer these specialised mortgage products.

Start by researching lenders familiar with shared ownership schemes. They understand the nuances and can offer products tailored to these arrangements. Read in detail about the types of mortgages in the UK.

Your choice of mortgage product impacts both your immediate finances and long-term commitments. Shared ownership mortgages come in various forms: fixed-rate, variable-rate, and tracker mortgages are common options. Each has its benefits and risks.

Fixed-rate mortgages offer payment stability; your mortgage payments remain the same for a set period.

Variable-rate mortgages, however, might provide initial lower rates but pose the risk of rate increases, impacting your monthly payments.

Read our detailed comparison of fixed and variable rate mortgages.

When comparing mortgage products, pay close attention to the interest rates, fees, and the flexibility to make overpayments or changes to your mortgage.

Overpayments can reduce your total interest cost and mortgage term. Additionally, consider the possibility of staircasing- purchasing additional shares in your property at a later date. Ensure your mortgage product accommodates this without hefty charges.

Another factor in your decision is how comfortable you feel with the mortgage's terms, costs, and the lender's customer service reputation. You're entering a long-term financial commitment; choose a lender you trust and a mortgage product that fits your current and future financial circumstances.

Your journey towards a shared ownership home combines careful planning, astute decision-making, and a blend of expert advice and personal judgement.

Here's a very important article that tackles the question, 'Is shared ownership actually worth it?'

Owning a home is both a capital commitment and a lifestyle choice. Choose a path that aligns with your financial reality and homeownership dreams. Read more about costs of buying and moving into your new home.

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