Many who want to get on the property ladder can’t afford to buy a house alone.
This is where shared ownership comes in. It is one of the most affordable property ownership types available.
Below, we’ve explained what this is and the pros and cons of shared ownership.
What is shared ownership?
Shared ownership is when you take out a mortgage on a share of a property.
This means that you pay rent and service charge on the remaining share.
For example, if you buy a 50% share in the property, half of your payments will go towards your mortgage.
The other half will go towards paying rent to the landlord.
Shared ownership is designed to help first-time buyers get onto the property ladder.
It means that you can build equity in a house with a smaller sum of cash.
You can then staircase (see below) your way to owning the entire property outright if your income increases.
Pros of shared ownership
1. Helps you get onto the property ladder
Investing in property is strongly recommended by lots of experts. And shared ownership allows you to do that.
You can get onto the property ladder and build home equity with a smaller amount than would usually be needed.
Once you put money into your house, it remains until you sell. This means you can benefit from increases in the house’s value, as your share will also become more valuable.
You can’t benefit from these things when renting a property.
2. Security
Compared to renting, you have the security of tenure when you have a shared ownership property.
In the latter scenario, your landlord can evict you at any time.
But this isn’t the case when you have equity in your property. You can live there until your lease runs out.
3. Staircasing
Shared ownership involves a process known as staircasing. This is when you buy more shares in your property and thus increase your equity.
Staircasing ensures that you aren’t stuck on the amount of ownership that you start with.
If you save up more money or your salary increases significantly, you can improve your situation by buying more of the house.
This means that the percentage of your outgoings on rent goes down. This manoeuvrability helps you to improve your situation. (This is a popular option for probate properties.)
4. Leave your share to someone else
When you own part of a shared ownership property, you can leave your share to someone else if you pass away.
This allows you to transfer wealth in a way that you can’t when renting.
5. Inexpensive rent
Most experts and studies suggest that the portion of rent you pay in shared ownership is far less than would normally be the case.
The housing association (who usually owns the property) gives you a discounted rate on this portion of your outgoings.
Although this is very common, you should check with each situation.
Cons of shared ownership
1. Staircasing fees
Staircasing your shared ownership property comes with additional costs.
Each time you do it, you’ll need to spend money on legal fees, surveys, mortgage costs, and more.
This is a drawback that you don’t encounter when buying a property outright.
Furthermore, while most first-time buyers don’t pay stamp duty, this exemption doesn’t always apply with a shared ownership property.
If you pay stamp duty on a portion of the property, you won’t qualify for an exemption. You’ll thus need to pay it every time you buy a bigger share in the house.
2. Uncapped service charges
Most shared ownership houses don’t have a limit on how much service charge you must pay.
This means that the figure might rise higher than you first expect. This extra cost sometimes cancels out the financial steps forward you’re making as part of shared ownership.
This isn’t the only additional cost you’ll have to pay. You’ll still be responsible for utility bills, ground rent, and council tax.
Even if you own a very small share of the property, you must pay 100% of these fees.
3. Limits on mortgage lenders
Not every bank or lender offers money on a shared ownership property. This might limit your options when the time arrives to buy one.
Perhaps you’ll need to compromise on the interest rate as a result.
Some lenders and housing associations introduce other restrictions, too. You could be limited about how/if you can transfer or sell your shares.
4. Your lease can run out
Almost all properties sold through the shared ownership scheme are leasehold. This means that you have a lease that could potentially run out.
If it nears its end, you’ll need to extend your lease and still want to live in the house.
This comes with extra legal fees. Your landlord often wants to recoup half the growth in value that the lease extension triggers. Be prepared to pay several thousands of pounds.
Secondly, your property value will decrease as the lease drops below 80 years.
From this point, the lower it falls, the less you can expect to receive when selling your portion of the house.
5. Selling your property can be tricky
Selling your shared ownership house will come with some challenges. Many housing associations ask for ‘first refusal’, which often takes up to 8 weeks.
You’ll need to sit tight during this period to see if they find a buyer.
From then onwards, you’ll typically try to sell on the open market. However, the net of people interested in shared ownership is smaller than a regular property.
This means it can take longer to find a suitable buyer. You may need to compromise on price, which risks putting you into negative equity.
Remember that once you’ve staircased your ownership, a new buyer will need to take on this same share. You can’t sell less than this to them. This can limit your options further.
Should I buy a shared ownership property?
Your circumstances make a huge difference to the best route forward.
If you are a young person keen to get onto the housing ladder, then shared ownership is a viable option.
Perhaps you don’t have the deposit or income to buy a property outright. Finding a suitable roommate to split this purchase with can also be difficult.
Where you’re currently living is also a necessary factor to consider.
For example, if you’re living with your parents for very little rent, it might be best to wait longer and build up your savings.
But if you’re currently renting, you are losing considerable cash. You could be keen to change this and start building equity as soon as possible.
When you view a shared ownership property, get clear details on the:
- Lease length
- House condition
- Selling price
- Share percentage
- and more.
All of these will factor into your choice. And get support from a property expert for more guidance.