In the UK, there are many different routes available for both buying and selling a home. And this can be overwhelming. What is the right choice for your needs and goals? What makes the most sense for your budget? What information do you need in order to make the best decision for your life, your household, your lifestyle and your future plans? So many questions! Now let’s get to work on the answers.
What Is Shared Ownership?
Imagine a scenario where you want to own a property but you simply do not have the funds necessary to make this happen. Is your dream over? You may not be imagining this scenario at all; you may be living it. With shared ownership, you can take out a mortgage on a portion of a property and pay a landlord on the remaining share. So, for example, you may be able to afford 50% of the cost and secure a mortgage for that amount. For the remaining 50%, you pay the rent to the landlord or owner.
In this way, you can gradually increase the percentage of the home you own – thus gradually reducing the rent you pay for the remaining portion. Ultimately, you will own the home 100% outright.
Typically, shared ownership – also known as part-buy part-rent – you can purchase a share equalling 25% and 75% of the home. Typically, the remaining portion is rented at below market value.
This sounds like a dream come true for those who thought the idea of home ownership was completely out of reach. And, indeed, in some cases, it can be a great solution with many benefits. However, it is important to weigh the pros and cons. Being as informed as possible is always essential when it comes to financial decisions – especially ones that affect our living spaces.
The Pros and Cons of Shared Ownership
We’ll start with the benefits that can be realised with shared ownership:
- You can get on the property ladder as an ‘owner-occupied’ for stability without overextending yourself financially.
- Deposit requirements are typically much lower than if you bought via a traditional process.
- You can access a mortgage, even if you make lower wages.
- You may find your monthly payments are less expensive than they would be with a traditional mortgage or with traditional rents.
- According to newly introduced rules, people can buy as little as a 10% share of a property. They can also increase their share by 1% a year with reduced fees.
- You can ‘staircase.’ This means that you can purchase more shares of the home. Typically, you can staircase your way to 100% ownership. In this case, you no longer pay rent, just the mortgage, relevant service charges and ground rent, if applicable.
- You can sell shares that you own anytime you choose.
- You do not have to pay Stamp Duty on an initial purchase.
What about the cons of shared ownership?
- Some lenders do not offer mortgages for shared ownership situations.
- Regardless of your share of the property, you must pay 100% of ground rent and service charges.
- If your share of the property is 80% or more, you must pay Stamp Duty on the whole property.
- Your property will be a leasehold. This is essentially a long tenancy. Your lease gives you the right to occupy the home for a specified period (typically 99 or 125 years). If you staircase to 100%, you can shift to freehold if agreed upon by the housing provider however.
- While you can sell your shares anytime, you may not have any or much equity into the process at that time to make a return on your investment.
Weigh the pros and cons of shared ownership. It is a scheme that works beautifully for many people. For others, it can be a challenge. It depends on your needs, your goals, your budget or your vision of home ownership.
If you want to buy into a shared ownership situation or if you want to sell your shares, it is important to consult a financial advisor, conveyancer or solicitor. In this way, you can take steps to recoup your investment and prepare yourself for the next steps in your journey.