Shared Ownership – A Cheap Way to Get on the Ladder, or the Worst of Both Worlds?
As the price of property has risen exponentially over the years, many people have been forced to look for creative ways to finance homeownership. One industry that has gained traction in recent years is shared ownership, aka part buy, part rent.
The idea of shared ownership is simple. Rather than purchasing a property outright, you buy a share of it – usually 25%, but potentially up to 75%. The remaining percentage of the property belongs to the housing developer, to who you will pay rent.
Shared ownership is designed for first-time buyers or people that cannot afford a home in the open property market. To this end, there are certain restrictions on eligibility. For example, you will be unable to apply for shared ownership if your household income exceeds £80,000 PA (£90,000 in London).
Beyond the question of whether you can enjoy shared ownership, there is also the matter of whether you want to. Let’s discuss whether this is the best option for you, and your circumstances.
Benefits of Shared Ownership
There are several positives to the idea of shared ownership. The key reasons to consider this choice include:
Arguably the greatest selling point of shared ownership is the financial flexibility it provides. If you only need a mortgage for 25% of a property, you can request a far lower loan from a lender. This means that people on lower incomes are presented with further options. In addition, your deposit will pertain to your stake, not the total price of the property.
In a shared ownership scenario, you’ll need to make two monthly payments; a mortgage repayment and rent to the property developer. In most cases, however, this total is more reasonable than an outright mortgage of rental agreement.
In addition, you may not even need a mortgage. If you have been saving for a deposit on a home, you may find that the sum you have amassed matches the asking price for a 25% stake in a shared ownership property.
As discussed, you will initially purchase part of the property in a shared ownership scenario. This does not mean that you are restricted to this agreement, though. Most developers will allow you to purchase more of the property over time. This is known as staircasing.
If your financial circumstances change, you could purchase larger shares of the property, eventually culminating in 100% and outright ownership. This can be achieved over time, with no obligation to complete a purchase or take out a full mortgage in one fell swoop.
Just be aware of the implications of the staircasing. Ensure that the price you pay is relevant to the value of the property. In addition, be wary of stamp duty. You will likely need to pay this tax once your ownership stake exceeds 80%.
Security in the Lease
One of the great drawbacks of renting, other than the expense, is the inherent insecurity. If you rent a property, it belongs to somebody else. This means that it could be sold from under your feet at a moment’s notice.
This is not the case if you enter a shared ownership agreement. Even if you only own 25% of the property, the lease is guaranteed for at least 99 years on the remainder, often 125. This means that your investment is safe, and you can relax knowing that any departure will be on your terms.
Drawbacks of Shared Ownership
Naturally, every rose has its thorn. Shared ownership will not suit everybody’s needs. Think carefully about whether this lifestyle choice and financial commitment is the one for you.
Selling May be Difficult
If you purchase a share in a property, it is likely to be a new build. This means that you’ll enjoy all the excitement of being the first to live in a home. You can put your own stamp on it, and tailor everything to your personal tastes – within reason.
What happens if you wish to sell your share in the property, though? A potential buyer will no longer be moving into a new, untouched home. They will be second occupants. In addition, not everybody will be interested in just owning a share of a property.
You will likely find a buyer eventually. It is unlikely to be fast and straightforward as selling a conventional property, though. Bear this in mind before committing to shared ownership, as you may find vendors unwilling to involve you in a future sales chain.
Living on a Building Site
Most shared ownership properties are new builds, frequently on unfinished sites. This means that you will potentially be living on a building site for some time. Ask yourself if you are OK with that. Once the initial thrill of moving in wears off, while your home be less sanctuary and more sinkhole?
In addition, consider the risks inherent with such an undertaking. Property developers are famously ambitious. Like Icarus, however, they can be prone to flying too close to the sun. Ensure that the development will not be abandoned before completion in the event of financial hardship on behalf of the developer. That will leave you trapped in a perpetually half-finished environment.
Restrictions on Home Improvements
You will be perfectly entitled to decorate a shared ownership home as you see fit. You must remember that you do not own the property outright, however. This means that any major works, such as structural changes, must be approved by the property developer.
That may not seem like a big deal when you first move in. After all, you’ll just be thrilled to own a home, even if it’s just a percentage. Think about the future, though. If you wish to start a family, you may need to look into building an extension. if you find that house is a little dark, you may want to build a sunroom. You may see wasted space in the attic and desire a conversion to a bedroom.
All of this possible, but only with permission. if you want the complete freedom and flexibility that comes with home ownership, you’ll need to look into a more conventional purchase model.
Shared ownership is ideal for some people, but an imperfect option for others. You know your personal circumstances better than anybody. Weight up the pros and cons of this housing option and discuss it with a professional. You may find that shared ownership is the ideal way to begin an ascent up the property ladder.