Shared Ownership Mortgages- The Pro's & Con's
Our family rents the house we live in, and although it's been really useful as we wouldn't have been able to get a mortgage due to my personal bankruptcy caused by business debt, it's not our intention to stay renting; we're actively looking at our options for buying a house within the next year. We really want to get involved in home ownership, so we no longer have to worry about a landlord needing us to move, and we want our own home we can call ours!
We're not going to have much in the way of a deposit, and this isn't likely to improve anytime soon, so we've been looking at schemes where prospective a home buyer doesn't have to put down as much money by way of a deposit, but can still buy a house.
After a fair bit of research, it's looking like shared ownership is going to be the best way we're going to be able to afford to get our own home; its a combination of both home ownership and rent and it's a popular choice for those prospective buyers getting on the housing ladder.
What Are Shared Ownership Mortgages?
A Shared Ownership mortgage is a hybrid model of homeownership that involves buying part of a house and renting the remainder. This means that you’ll buy a portion of a house using a mortgage (or cash). The rest of the property will be owned by a housing association (also known as a registered social landlord) or a local authority (like a council). Because you own some of the property and rent the rest, you’ll usually make both mortgage and rental payments. So basically, with a shared ownership home, you'll own a share of the home, as will a financial institution, and so the home won't be all yours, but you'll own a share of the property, and as time goes by, you can buy additional shares in your home, and eventually you could become the sole owner.
How Does the Scheme Work?
This scheme can be an excellent stepping-stone and allows you to buy between 10% to 75% of a property (dependent on where in the UK you live). So, you’d end up with a smaller mortgage than if you were to buy the house outright. Another benefit is that your deposit is calculated based on the portion you’re buying, not the total value of the property, so great if your financial situation doesn't mean you have a larger deposit to put down.
The Shared Ownership scheme is often aimed at first-time buyers looking to purchase a new-build home, but that’s not always the case. If you don’t fall into this category, there may still be options. It’s also worth bearing in mind that these will always be leasehold mortgages.
Deposit Requirements
With some lenders, you’ll be able to buy a new home and just put down a deposit of between 5% and 10%. For Shared Ownership, this can mean just 5% of the portion you’re buying. So, if you were only buying 25% of the house, the deposit could be just 5% of that. This means that your deposit may only need to be equal to 1.25% of the property’s total value.
Under some circumstances, it can be possible to get a Shared Ownership mortgage with no deposit if you speak to the right lender. Bear in mind a higher deposit is likely to get you more favourable mortgage terms and better rates. You'll really want to speak to a financial advisor about zero-deposit mortgages, as it's a bit of a minefield.
How Much Can You Borrow?
Typical income multiples will be used as if you were getting a normal mortgage, but the nature of Shared Ownership means you’ll likely need to borrow less. There’s often no minimum income for Shared Ownership, but it depends on the lender. Although you may only be able to borrow 4-4.5x your salary, there’s a better chance this will be enough to purchase the home you really want or one that may have otherwise been outside your budget. The mortgage applicants will still need to have reasonable credit scores to be able to get the mortgage from the mortgage lender, but as you are, in essence, borrowing less, as its a shared ownership property, the amount you need to put down on your mortgage applications is much lower than if you were looking to buy a home on your own, and so you are more likely to be offered the funding.
Pros of Shared Ownership Mortgages:
More affordable: Shared Ownership is a way for first-time buyers and those with lower incomes to get onto the property ladder. Because you only have to purchase a portion of the property, you may be able to afford a home that would otherwise be out of your price range.
Smaller deposit: One of the main benefits of Shared Ownership is that your deposit is calculated based on the portion you’re buying, not the total value of the property. This means you may not have to put down as much deposit as you would with a traditional mortgage.
Flexibility: Shared Ownership mortgages can be a flexible option as you can usually increase your share in the property over time. This is known as “staircasing” and means that you can buy additional portions of the property until you own it outright. This can be a great option if you want to start small and work your way up to full ownership. So if your household income increases, you could look to buy more of the home, increasing your ownership per cent.
Protection from negative equity: With Shared Ownership, you only own a portion of the property, which means that you are protected from negative equity. If house prices fall, you will only lose money on the portion you own, rather than the entire property.
Support from Housing Associations: Shared Ownership schemes are usually run by housing associations or local authorities, who are there to support you throughout the process. This can be helpful if you’re a first-time buyer and unsure about the steps involved in buying a home.
Cons of Shared Ownership Mortgages:
Leasehold: Shared Ownership mortgages are always leasehold, which means that you will not own the land on which the property is built. This can be a disadvantage as you may have to pay ground rent plus a service charge on top of your mortgage and rent payments, and these additional fees may increase, making your house more expensive over time and increasing your monthly payments.
Limited choice: Shared Ownership homes are usually new-build properties, and the choice of properties can be limited. This means that you may not be able to find a home in the area you want to live in or with the features you’re looking for.
Rent payments: With Shared Ownership, you’ll have to make both mortgage and rental payments. This can make the overall cost of the property more expensive than if you were to buy it outright, although this should still be cheaper than renting a home if you're already doing this and you do actually own a part of the home!
Staircasing can be costly: Although staircasing is an option, it can be expensive as you will need to pay for a valuation and legal fees each time you increase your share in the property. If you're going to buy bigger shares, it's best to save up a larger chunk of extra money and then buy extra shares in one go rather than buying smaller amounts of shares more often.
Not available everywhere: Shared Ownership schemes are not available everywhere, and the availability of properties can vary depending on the area you live in.
Other schemes worth considering
While Shared Ownership is a popular scheme, it’s not the only one available. If you’re looking to buy your first home or move up the property ladder, there are other options worth considering. Sadly the Help To Buy government scheme has now ended, but there are other options:
Guarantor Mortgages - This scheme involves having a family member act as a guarantor for your mortgage. This can help those who have a poor credit history or those who can’t afford a large deposit. If you’re unable to meet your mortgage payments, your guarantor will be responsible for paying them.
Shared Equity Mortgages - This scheme is similar to Shared Ownership, but you own 100% of the property rather than a portion. You take out a mortgage for a percentage of the property value, and the housing association takes out a loan for the remaining percentage. This loan is interest-free for the first five years.
Shared Ownership can be an excellent way for first-time buyers and those with a low deposit to get on the property ladder. However, it’s important to weigh up the pros and cons of the scheme before committing to it.
While owning a portion of a property can be seen as an investment, it also means that you’ll need to seek permission from the housing association to make changes or improvements to your home. It’s also worth considering the extra costs involved, such as service charges and ground rent, which can be more expensive than a standard mortgage.
However, with the right lender and financial planning, Shared Ownership can be a great way to take your first step onto the property ladder, and it can be a cheaper way to own a home compared to renting. Additionally, if you’re unable to meet your mortgage payments, the housing association or local authority may be able to assist you, which can provide a level of security for those worried about the stability of their income.
Ultimately, it’s up to you to decide which mortgage scheme is right for you. It’s always advisable to seek professional financial advice before committing to any mortgage scheme to ensure you fully understand the risks and benefits involved.