For aspiring first-time buyers, taking that first step on the property ladder can be a challenge. From saving a deposit to securing a mortgage, there are numerous obstacles. With Shared Ownership Week approaching on 18–23 September, is it something you should be considering?
Shared ownership can help those who find out they’re priced out of the property market by reducing the deposit needed and the amount they need to borrow through a mortgage. It can help you buy your first home sooner, but it does come with drawbacks that you need to consider.
How does shared ownership differ from buying a home the traditional way?
Traditionally, you’d purchase a home as a first-time buyer using a 10% deposit and taking out a mortgage to pay for the rest. As house prices have soared in the last few decades, this is becoming more difficult to achieve.
The latest Halifax House Price Index shows the average home in the UK is now £261,743. That would mean needing to save a deposit of around £26,000. Of course, there are regional differences. If you live in London or the south of England, you could find you need a much higher deposit.
So, to purchase an average home after putting down a 10% deposit, you’d need a mortgage of around £235,000. Lending criteria varies and will depend on your circumstances, but, as a rule of thumb, you can usually borrow 4.5 times your household income. To secure a mortgage of that size, you’d need an income of around £52,000. With wage growth far behind property price rises, it could mean securing a mortgage of that size is out of reach.
Where shared ownership is different is that you’re only purchasing a portion of a property, while renting the rest. This means that your deposit and the amount you need to borrow will be lower. So, if you’re purchasing a 25% share of an average-priced home, you’d need a deposit of around £6,500 and a mortgage for £58,750. It can mean buying your first home is within grasp.
As your circumstances improve, you can gradually increase the portion of the property that is yours, either by taking out a larger mortgage or paying a lump sum. This is known as “staircasing”.
So, is it something you should look into? Here are seven things you need to consider first.
1. There are usually restrictions around who can buy
Shared ownership properties are offered through housing associations, and they will usually have restrictions around who can buy them. This varies between different organisations, but restrictions may include an upper household income limit or being reserved for local families. If you’re interested in shared ownership, do your research first and make sure you’d be eligible for the options where you hope to purchase.
2. You will have less choice
While shared ownership properties are becoming more popular, there’s still a limited number. As a result, there will be less choice when you’re looking to buy your new home. If you have a really clear idea about the type of home you want, shared ownership might not suit your needs.
3. You need to consider the impact of paying rent
While your mortgage payments will be lower, as you’ve bought a portion of a property, you will still need to make rent payments on the remaining amount. You need to calculate how these two payments will add up and how they could change in the future.
4. Shared ownership properties are usually leasehold
A leasehold property means you own the property but not the ground it’s built on. A lease will last for a set number of years. So, you may need to factor in renewing your lease in the future and it could make it more difficult to sell. You will usually need to pay 100% of the ground rent and service charges associated with the leasehold, even if you only own a portion of the home. In some cases, a property will become freehold once you own 100% of it, but this isn’t always the case.
5. Staircasing can end up more expensive
Shared ownership is a great way to gradually increase the amount of equity you own. However, it can end up more expensive than the traditional route. Each time you increase the amount of equity you own, you may also need to pay for things like legal fees, Stamp Duty, and mortgage fees. You’ll also purchase each new portion of the property at the current market value. So, if property prices rise, additional equity will cost more.
6. There may be restrictions on what you can do to the property
One of the reasons you may want to purchase a property is to make it your own. However, as you still rent a portion of the property, there may be limits on what you can do. For instance, the housing association may not approve of you knocking down internal walls to create an open-plan living area. If you’re thinking about shared ownership, make sure you fully understand any restrictions.
7. It could limit your options when selling
When buying your first home, selling it may not even have crossed your mind. However, it’s important to think about your long-term plans. If you want to sell, you’ll usually need to give the housing association first refusal. This may limit your options and how much it sells for.
If you’re looking to buy your first home, we’re here to help you understand the process and secure a mortgage, whether shared ownership or the traditional route is right for you.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.