Is shared ownership worth it

Last updated: March 2024 | 3 min read

Considering your first home? Shared ownership could be the key to unlocking your property aspirations. In this article, we unpack the shared ownership route, a practical solution for new homeowners. We’ll compare it with other paths like the right to buy scheme and the help to build scheme, shedding light on various strategies to claim your own space. Understand how shared ownership can transform the daunting prospect of buying into an achievable dream, offering a viable alternative to the traditional property ladder.

Introduction to shared ownership

Defining shared ownership

Shared ownership is a housing scheme in the UK, offering a path to homeownership for those who might otherwise find it out of reach. It allows you to buy a share of a property (between 25% and 75%) and pay rent on the remaining share. Housing associations, a key player in this scheme, own the part of the property you don't. This setup is especially appealing to first-time buyers and those with limited deposits.

The evolution of shared ownership schemes in the UK

The shared ownership concept in the UK has evolved significantly since its inception. Originating as a means to assist low-income households in the late 20th century, it has become a mainstream option for a broader demographic.

This evolution reflects changes in house prices, incomes, and the housing market's overall dynamics. Shared ownership has adapted to meet the diverse needs of modern homebuyers, particularly in high-cost areas.

Understanding the mechanics of shared ownership

How shared ownership works

Shared ownership offers a unique path to home ownership. It allows you to purchase a portion of a property, typically ranging from 25% to 75%, while paying rent on the remaining share. This arrangement, often managed by housing associations, is designed to make home ownership more accessible.

The initial share you buy depends on what you can afford. Over time, you have the option to buy larger shares of the property, a process known as staircasing.

Eligibility criteria for shared ownership

To qualify for shared ownership, there are certain criteria you must meet. Firstly, you're typically required to be a first-time buyer. Your annual household income must also fall below a certain threshold, which varies depending on where you live in the UK.

Additionally, you need to demonstrate that you cannot afford to buy a home outright on the open market. Housing providers may also assess your credit history and current debts to ensure you can manage the financial responsibilities.

Process of buying a shared ownership property

Buying a shared ownership home involves several steps. Initially, you need to apply through a housing association or a similar provider. Once approved, you select a property within your budget and pay a deposit equivalent to a percentage of the property's price. This is followed by securing a shared ownership mortgage for the share you're buying.

The process includes standard buying procedures, like property valuation, legal checks, and mortgage approval. After purchase, you pay monthly repayments on your mortgage and rent for the remaining share.

Shared ownership properties: The financial breakdown

Mortgage requirements and repayments

When buying a shared ownership property, securing a mortgage is a key step. You only need a mortgage for the share you're purchasing, which means a smaller mortgage than if you were buying the property outright. Monthly mortgage repayments are then combined with rent payments. The amount you repay varies based on the share you own and your mortgage terms.

Rent payments and service charges

In addition to mortgage repayments, you pay rent on the share of the property you don't own. This rent is typically below market rates, making the overall monthly payments more manageable than traditional home ownership. However, it's important to account for potential rent increases over time. Service charges are also applicable, covering maintenance and communal area costs.

Additional costs: Stamp duty, legal fees, and more

There are additional costs involved in shared ownership. You may need to pay stamp duty, depending on the purchase price and your circumstances. Legal fees, survey costs, and other expenses related to buying a home also apply. It's crucial to factor in these costs when considering shared ownership.

Pros and cons of shared ownership

Advantages of shared ownership

Access to the property ladder with a smaller deposit

The shared ownership scheme enables you to embark on the property ladder with considerably less financial strain. Typically, in a conventional home purchase, the deposit is a substantial percentage of the entire property value. However, with shared ownership properties, your deposit is solely based on the share you're acquiring.

This dramatically lowers the initial deposit requirement, making it feasible for you, especially if you're a first-time buyer with limited savings, to own a home. It's a practical step in the current housing climate, where saving for a full deposit often seems insurmountable.

Opportunity to increase owned share over time

One of the most attractive features of shared ownership is staircasing. This process allows you to gradually buy more shares of your home. Initially, you might own a smaller percentage, but as your financial circumstances improve, you can invest in larger shares. This flexibility is especially beneficial if your income is likely to increase over time. With each share purchase, the portion of the property you own increases, simultaneously decreasing the rent you pay to the housing association. It's a tangible way to transition from part-ownership to potentially owning your home outright.

Flexibility and affordability for first-time buyers

Shared ownership is particularly appealing for first-time buyers like you. It merges the perks of ownership with the affordability of renting. The combined monthly costs of mortgage payments and rent in a shared ownership arrangement often equate to or are less than what you would pay for a comparable property in the private rental market. This arrangement can be a more manageable way to juggle homeownership costs while still enjoying the benefits and stability of owning a home.

Challenges and considerations

Potential for rising rent and service charges

While shared ownership has its benefits, it also comes with certain financial uncertainties. The rent you pay on the portion of the property you don't own is subject to annual reviews by the housing association.

This means your monthly rent could increase each year. In addition, service charges, which cover the maintenance of communal areas and general upkeep, can vary and may rise over time. These fluctuations can impact your monthly budgeting and should be considered when evaluating the long-term affordability of a shared ownership property.

Limitations on property modifications

As a shared owner, you'll encounter restrictions regarding alterations to your home. Major modifications usually require approval from the housing provider. This can limit your ability to customize and upgrade your home.

For those who view their first home as a canvas for personal expression and renovation, these restrictions can be a significant drawback. It's vital to understand the extent of these limitations before entering into a shared ownership agreement.

Risks involved: Negative equity and market fluctuations

The housing market is inherently unpredictable, and shared ownership homes are not exempt from its fluctuations. A key risk is negative equity – when the market value of your property dips below the outstanding balance of your mortgage. This situation can be problematic if you're planning to sell or buy more shares. Market conditions can also affect the value of your share when you decide to sell, potentially impacting your return on investment. It's important to be cognizant of these risks and to plan accordingly for potential market changes.

Real-life experiences: Case studies

Success stories of shared ownership

Shared ownership schemes have transformed lives across the UK. Jane, a teacher in Bristol, shares her journey. With a modest income, the open market seemed out of reach. Enter shared ownership.

Partnering with a housing association, she purchased a 40% share of a two-bedroom flat. Her monthly costs, combining mortgage and rent, mirrored her previous renting expenses. But now, a portion of her payments built equity. Over time, Jane increased her share, a process known as 'staircasing'. Today, she owns 70% of her home. "It's empowering," she says, "I'm no longer throwing money away on rent."

Challenges faced by shared owners

Despite many success stories, shared ownership isn't without challenges. Take Michael's case. An IT professional in Manchester, he bought a 50% share in a flat. Initially, the costs were manageable. However, unforeseen service charge hikes and ground rent increases strained his finances.

Additionally, when house prices fell, his property's value dipped, leaving him in negative equity. "It's a double-edged sword," Michael reflects, "Affordable at first, but you're not immune to market risks and other costs."

Shared ownership in different regions

Shared ownership in London: Unique aspects

London's property market stands apart. Here, shared ownership is a lifeline for many, offering a foothold in an otherwise inaccessible market. However, high property prices mean even a small share can be costly.

The capital's housing associations often require a lower starting rent to offset this. For instance, a 25% share in a London flat might equal a 50% share elsewhere. But the city's dynamic market also presents a benefit: property appreciation can be significant, offering substantial equity growth over time.

Regional variations: Scotland, Wales, and Northern Ireland

Each UK region has its own twist on shared ownership. Scotland's 'New Supply Shared Equity' scheme, for example, differs slightly. Buyers own the property outright but the government holds a security for the percentage of the funding it provided.

In Wales, the 'Homebuy' scheme helps buyers purchase a property on the open market with a shared equity loan. Northern Ireland's 'Co-Ownership' scheme is similar to England's, but with different rules around selling and staircasing. Understanding these regional nuances is crucial for potential buyers exploring options outside England.

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