During the summer of 2020, applications for shared ownership contracts with a particular housing association have rocketed, revealed a report by the BBC. Where the association receives typically around 50 applications a week, during July, it was receiving 1,000.
In addition to those applicants on lower incomes, the association was now also receiving requests from key workers such as nurses, police officers and teachers.
The news comes at a time when first-time buyers are finding it increasingly difficult to secure an affordable standard mortgage, according to a report in the Guardian newspaper recently. Against that background, shared ownership certainly offers a solution – and, fortunately, home ownership scheme mortgages continue to be available.
What are shared ownership mortgages?
A shared ownership mortgage is a long-term loan that allows you to buy a percentage in a shared ownership home, where you are buying part of the property and renting the remainder. So, you part buy and part rent.
The website of the London Assembly, for example, explains that shared ownership gives access to affordable homeownership by applicants taking out a mortgage for a share in a property and paying rent to the landlord – typically a housing association – on the remaining share.
How do shared ownership mortgages work?
You might purchase a 50% share on the home, for instance, and pay rent on the remaining half. You may then “staircase” your ownership by buying further shares in your home, decreasing the amount of rent you have to pay, until you may end up owning 100% of the property outright.
As far as the mortgage is concerned, you are likely to need a deposit equal to around 5% to 10% of the value of your share in the property. If you are buying a 50% share in a home, costing a total of £240,000, for example, the value of your share is going to be £140,000. A housing association mortgage will require a 10% deposit – a sum of just £14,000.
Once you move in, you also need to pay rent on the remaining share of the property. But housing associations typically charge a lower rent than elsewhere in the private rented sector. The subsidy can considerably lower the rent you have to pay. If the discounted rent on the housing association’s property is £80 a week, for instance, and you have to pay half of that, you will be paying just £40 a week in rent.
Shared ownership schemes may be likely to prove a considerably more affordable option than having to buy your home outright straight away.
Don’t forget to check the likely amount of rent and service charge you’ll be paying on the share you won’t own.
Who can get a shared ownership mortgage?
The government website explains your eligibility for participation in a shared ownership scheme – and qualification for a shared equity mortgage, therefore:
- in England your household income is less than £80,000 a year (this ceiling is £90,000 a year in London); and
- you are a first-time buyer looking to get on the property ladder, have previously owned your home but can no longer afford to do so, or you are already participating in a shared ownership scheme.
If you live in Scotland, you can find out more about shared ownership on the Shelter Scotland website. For Wales, please visit https://gov.wales/shared-ownership-wales.
What are the advantages of shared ownership property?
The most obvious advantage – and the one for which shared ownership schemes have been devised – is to give lower-income households an opportunity of getting on the housing ladder.
If you own at least a share in your home, you have greater security of tenure, a bigger financial stake in it, and can also enjoy the benefits of any increase in its capital value (the value of your equity in the home also increases).
Since shared ownership is also often cheaper than renting, there may be compelling reasons for obtaining a housing association equity loan. Beware that it not always the case, however, so make sure to do your sums carefully to ensure you can comfortably afford the mortgage payments and other expenses such as service charges, stamp duty etc.
Is Help to Buy the same as shared ownership?
The Help to Buy equity loans scheme, in which the government lends money to buyers of new-build homes, is very popular – but is not the same as shared ownership.
Shared ownership allows you to buy a share in a home. You will pay a mortgage on the share that you own, usually between 25% and 75%, and pay rent on the remainder to a housing association.
Help to Buy is a government-backed scheme which allows buyers to purchase a new build home with the help of a low-interest loan towards your deposit. This is called an equity loan – also known as shared equity.
Which mortgage lender or building society offers shared ownership mortgages?
Given the somewhat specialist nature of shared ownership mortgages in the UK, you might think that it will be correspondingly difficult to find the deal that suits you and your particular circumstances.
The market is quite wide and includes those lenders offering mortgage products specifically designed for shared ownership schemes and others who tailor existing mortgages to match your shared ownership plans.
As ever, of course, a qualified mortgage broker may help you make sure that you have all bases covered. They will find a product whose eligibility criteria matches your household income as well as other financial circumstances such as your credit rating. Plus, one that offers an attractive interest rate.
What happens if the property value of my house changes?
Any increase in the value of your home is reflected in an increase in your share of it. If the home is sold at that higher value, you share the increase with the housing in proportion to the percentage you both own.
If the property price has fallen, it may have to be sold at a loss – so you lose some of the money you invested in your share of the home. Rather than selling it at this time, however, you might decide to capitalise on the situation and buy a bigger share in the home while prices are lower.
Can I buy a bigger share of my home at a later date?
This is known as staircasing. The process of staircasing has been described already. You can staircase in parcels of 10% a time until you own the full 100% equity in your home, so you own the whole property.
For the housing association to determine the value of each 10% increase, a new mortgage valuation on the whole of the property needs to be made – and the cost of that 10% share is set accordingly. That cost may have gone up or down since your initial participation in the shared ownership scheme, depending on the current valuation of the property.
At a time when first-time buyers, in particular, might be finding it increasingly difficult to get that initial step on the housing ladder and get a standard mortgage, shared ownership mortgages offer an affordable solution.
With shared ownership schemes, you have a greater financial investment in the property and stand to benefit from any future increase in house prices generally. Speak to your mortgage broker for financial advice to find out more.