Shared Ownership Mortgages: Fab option for low deposit buyers?

Is a Shared Ownership Mortgage the Right Way Onto the Property Ladder?

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 a prospective home buyer doesn't have to put down as much money as 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; it's 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 homeownership model that involves buying a share of a property and renting the remainder. This means you’ll buy a portion of a house with a mortgage (or in 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% and 75% of a property (depending on where in the UK you live). So you’d end up with a smaller mortgage than if you bought 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 it's great if your financial situation doesn't mean you have to put down a larger deposit.

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 as little as 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 might otherwise have 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:

1. 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.

2. 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.

3. 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 percentage.

4. 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.

5. 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:

1. 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, and these additional fees may increase, making your house more expensive over time and raising your monthly payments.

2. 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. That is why buyers should compare different routes into home ownership, including resale properties, shared ownership options where available, and new-build communities in their preferred area. In Kansas, a search such as gardner ks new construction for sale can help buyers review newer homes by location, layout, and availability.

3. Rent payments: With Shared Ownership, you’ll have to make both mortgage and rental payments. This can make the overall cost of the property higher than if you were to buy it outright, although it should still be cheaper than renting a home if you're already doing this and you actually own a part of the home!

4. Staircasing can be costly: although it is an option, 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.

5. 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 on a percentage of the property's value, and the housing association takes out a loan for the remaining amount. 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 additional costs, such as service charges and ground rent, which can be higher than those of 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 a cheaper way to own a home than 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.

FAQ's

Can you sell a shared ownership home?

Yes. You can sell your share of a property with shared ownership at any time. In many cases, the housing association has the first opportunity to find a buyer during a nomination period, which is usually around eight weeks. If they cannot find a buyer, you may be able to sell the property on the open market, subject to the terms of your lease.

Can you own another property?

Generally, no. Shared ownership is designed for people who do not already own a home. If you currently own a property, you'll usually need to sell it before completing your shared ownership purchase. There can be exceptions in certain circumstances, so it's worth checking the eligibility criteria with the housing association or your mortgage adviser.

What is staircasing?

Staircasing is the process of buying additional shares in your shared ownership home over time. For example, you might initially purchase a 25% share and later increase this to 50%, 75%, or even 100%, depending on the property and the lease. Each time you staircase, the value of the additional share is based on the property's current market value, and you'll usually need to pay valuation and legal fees.

Can you remortgage a shared ownership property?

Yes. You can remortgage a shared ownership property, although the process can be slightly more complicated than with a standard mortgage. Many lenders offer remortgages for shared-ownership homes, whether you're looking for a better interest rate or to borrow more money to buy additional shares through staircasing.

Who pays for repairs on a shared ownership home?

In most cases, you are responsible for maintaining and repairing the property, even if you only own a share of it. This includes routine maintenance and many structural repairs. If you live in a flat, you'll usually also contribute towards the upkeep of communal areas through your service charge. Some new-build homes may benefit from a warranty during the first few years, which can cover certain defects.