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The Ultimate Guide to Shared-Ownership Mortgages in the UK

Staircase made of house-shaped blocks illustrating staircasing in Shared Ownership

Table of Contents

Shared Ownership is often a contentious subject amongst brokers. Of any type of lending available at the moment, opinions differ amongst my peers more on this than any other. Why is that, and what do you need to know if Shared Ownership is the right choice for you? In exploring this, we will cover both the hard facts of the process – allowances, affordability, lease conditions, and the layers of expensive bureaucracy that surrounds these. We’ll also look at the nuances, how it helps, and where the pitfalls can be, as well as a strategy to make it work for you over the longer term.

Why Shared Ownership Exists

To begin, I think we need to consider why Shared Ownership exists at all. The shift started when Thatcher’s Right to Buy scheme gave large numbers of people previously excluded from capitalism and home ownership a way to get on the ladder. Shared ownership schemes started to appear in the 90’s as a way to ensure affordable homes for those in expensive areas like the capital and then further legislation cemented the scheme that we see today. Shared Ownership properties are concentrated in the South East where property prices are highest. For someone looking to buy in London at the moment, the options are finding a deposit to purchase homes in excess of £450,000 or to buy just a share in this, and hope to grow that share down the line. The rationale is that it’s better to be on part of the ladder and get some benefit from rising house prices than sit and watch things get more unaffordable. Does it always make sense, though?

Is Shared Ownership for you?

The rent payable on the remaining balance is fortunately capped by the local authority, and so Shared Ownership buyers often find the remaining rent is far better value than comparable market rates from private landlords. The interest rates on a Shared Ownership mortgage are not significantly higher, and overall, the legal costs should be broadly similar, perhaps with some premium for dealing with the Local Housing Association.

The problems usually occur later in the process when clients are looking to grow the share they own. This can be very tricky and dependent on house prices in the area. There are also significant costs added when dealing with the LHA each time, and because staircasing is often in 10% tiers, if the values don’t match up, you might not be able to raise enough to buy a greater share and be forced to wait, save or attempt again later. Ironically, the one advantage – rapidly rising prices – can also be a disadvantage, as that 10% might be a much greater sum of money than your mortgage lender or your budget allows. You also face the issue that introduced you to Shared Ownership in the first place: the price of housing and the deposits required. If you only own 50% of the property when you sell, you will only see 50% of the benefit of property inflation, and the likelihood is that there won’t be enough left to buy property outright. Generally, while it’s a great option for those who can’t quite achieve full ownership, it’s better than waiting most likely.

Understanding the Pros and Cons of Shared Ownership Mortgages

Let’s dive into how Shared Ownership actually works in detail and the pro’s and con’s.

Shared Ownership Mortgage Eligibility

Before considering a Shared Ownership mortgage, you need to determine if you’re eligible for the scheme. The program primarily targets first-time buyers, individuals who have previously owned a home but are currently unable to afford one, and existing shared owners looking to move. To qualify, applicants must meet specific income requirements, generally a household income of £80,000 or less (£90,000 in London).

In terms of mortgages it can be complex to work out a single limit because the rent is a factor, and that will vary for each property. As such its wise to find some examples that suit your budget and play with some online calculators. Legal and General offer a simple calculator that gives a general idea, but remember each lender might have slightly different figures and we will factor that into our recommendation.

Purchasing Process and Property Types

Once deemed eligible, aspiring homeowners can begin their journey by purchasing a share of a property, typically ranging between 25% and 75%. A deposit is required, usually between 5% and 10% of the share being purchased. Shared Ownership properties can be a house, flat, or apartment, with both new build and resale properties available under the scheme.

Mortgage Options and Interest Rates

The process of applying for a mortgage doesn’t differ much to any other. Most of the differences will be felt in the legal process afterwards as the solicitors must deal with both lender and Local Housing Association who own a share. On top of that you have the considerations of the vendors. As a result you might find the conveyancing process more drawn out than usual, and of course slightly more expensive. Interest rates for Shared Ownership mortgages might be slightly higher than traditional mortgages, but they are generally competitive and shouldn’t be a concern.

Lease Conditions and Service Charges

Shared Ownership properties are typically leasehold, meaning buyers are granted a lease for a fixed term, usually 99 or 125 years. As leaseholders, Shared Ownership homeowners are responsible for service charges, which cover the maintenance of common areas and building insurance. Some properties may also have specific restrictions on property alterations or subletting.

Rent Payable and Affordability

For the remaining share of the property, buyers pay rent, which is usually below market rate as it’s capped by the local authority. This makes Shared Ownership an attractive option when compared to renting from private landlords in terms of affordability.

Staircasing Challenges

A key aspect of Shared Ownership is the option to purchase additional shares in the property over time, a process known as “staircasing.” This allows homeowners to increase their ownership share, ultimately reaching 100% ownership. However, staircasing can present challenges due to the costs involved, potential fluctuations in property values, and the requirement to engage with the Local Housing Association (LHA) each time a new share is purchased. Additionally, the minimum staircasing increment is often set at 10%, which can be a substantial sum, especially in areas with rapidly rising house prices.

Resale and Long-Term Implications

When selling a Shared Ownership property, the housing association typically has the right of first refusal, and there is usually a nomination period during which the association has the opportunity to find a suitable buyer. If the property is not sold within this timeframe, it can then be placed on the open market.

It’s essential for Shared Ownership homeowners to be aware of the potential long-term implications of their decision. Upon selling the property, they will only receive a percentage of the property’s increased value proportional to their ownership share. This could make it difficult for homeowners to accumulate enough capital to purchase a property outright in the future.

Conclusion

In summary, Shared Ownership is a valuable tool, especially in the capital where prices are unattainable for most. Shared Ownership allows people to remain in their communities rather than being pushed out of the capital, but unless there’s a solid strategy to acquire extra equity, which might involve significant savings as much as property inflation, then you might find that it simply leaves you where you started, facing the same issues this scheme aimed to solve. As a result, we strongly recommend speaking to an experienced and knowledgeable broker like AALTO Mortgages, providing advice on Shared Ownership properties for over 15 years. Talk to us and benefit from the experiences of all those that have come before. We will gladly understand your circumstances, advise the financial limits and realistic options, and guide and handle the process from start to finish. Call us now on 0207 183 1101 to chat with one of our brokers waiting for your call.

Author: Stuart Phillips

Author: Stuart Phillips

Fully CeMap qualified, Directly Authorised by the FCA and with over a decade of experience, Stuart has a wealth of experience in both specialist BTL and residential mortgages.

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