Estate agent Savills are predicting a 150% rise in the use of shared ownership once the Help to Buy scheme ends in 2023. We’ve listed some of the pros and cons of owning a shared ownership property below.
Opportunity to staircase
Usually once you have lived in your property for a certain period of time as the shared owner (depending on the terms of your lease), you can buy additional shares in your property until you own 100%. This process is known as staircasing.
By reducing the percentage of your property that you rent from your local housing association you will cut your monthly rent bill and your mortgage repayments will go up.
Smaller mortgage needed
With Shared Ownership you only take a mortgage out on the % of the property you will own.
Example of mortgage needed with shared ownership
- Property price = £300,000
- % purchased using shared ownership = 50%
- Mortgage needed: £150,000
This is particularly useful for those that don’t meet the affordability requirements to cover the cost of a mortgage on a property that is fully owned.
Allows you to get on the property ladder with a small deposit.
You only need to put down a deposit on the share of the property you are purchasing when using shared ownership.This should allow you to get on the property ladder more quickly as you will not have to save such a big deposit.
The example below shows how using shared ownership could allow you to put down a deposit of £7,500 for a £300,000 property rather than £30,000 deposit if you owned the property as a whole.
Example of deposit with shared ownership
- Property price = £300,000
- % purchased = 25%
- £ owned = £75,000
- Deposit = £7,500 (10%)
- Mortgage needed (£ owned – deposit) = £67,500
Example of deposit without shared ownership
- Property price = £300,000
- % purchased = 100%
- £ owned = £300,000
- Deposit = £30,000 (10%)
- Mortgage needed = £270,000
Savings on stamp duty
You only need to pay stamp duty on the share of the property that you own.
(If you’re a first-time buyer in England or Northern Ireland, you will pay no stamp duty on properties worth up to £300,000. For properties costing up to £500,000, you will pay no stamp duty on the first £300,000. You will pay stamp duty on the remaining amount, up to £200,000.)
If you buy any more shares in the property, you do not have to pay any more stamp duty or send a return to HMRC until you own more than an 80% share.
Once your share of the property goes over 80% you must send a return and pay stamp duty on:
- The transaction that took you over 80%
- Any transactions after that
The rate of stamp duty applied to these payments is based on the total amount you have paid for the property so far. This is because the transactions are treated as “linked transactions” for stamp duty purposes.
3% rent limit
With shared ownership, you take out a mortgage on the amount you own and you pay rent on the remaining share (which is owned by the housing association).
However, the housing association can only charge rent of up to 3% of their share of the property’s value.
- 50% share owned in a property worth £350,000
- You would pay rent on 50% of the £350,000 (£175,000)
- 3% of £175,000 = £5250
- This means the total rent payable per year is £5250 (£437.50 a month)
Restrictions on where you can buy
When using Shared Ownership you must buy a newly built home or an existing one through resale programmes from housing associations.
In addition to paying for your mortgage on the portion of the property you own, you need to pay rent on the share of the property that you do not own. The money you pay towards rent goes to the housing association and does not go towards paying down your mortgage on the share you own.
As a shared owner, you are responsible for 100% of maintenance costs. This means that even though you don’t own 100% of the property you will need to cover 100% of costs incurred. E,g, service charge, ground rents etc.
Cost of staircasing
Staircasing comes at a cost. Each time you staircase you will have to pay for the following
- Valuation fee
- Mortgage broker fees (if used)
- Mortgage fees
- Legal fees
The cost of increasing your share will depend on the market value of the property at the time of staircasing. It will cost:
- More than your first share if the price of your property has gone up
- Less than your first share if the price of your property has gone down
You can only staircase at a minimum of 10% a time
At present, if shared ownership homeowners wish to buy more of their home they can only do so by staircasing a minimum 10% at a time.
NB. In August 2019; the government unveiled plans for homeowners with Shared Ownership properties to be able to buy shares in their homes in increments of just 1%. This is expected to be confirmed in 2020.
Not all mortgage providers offer shared ownership to homeowners. Therefore the pool of mortgages you have to choose from will be smaller compared to if you were buying a fully owned property.
First refusal/Nomination period
If you own a share of your home, the housing association has the right to buy it first. This is known as ‘first refusal’.
The housing association also has the right to find a buyer for your home. This is known as the ‘nomination period’. Nomination periods vary depending on the housing association. Some have very short periods, such as 30 days, whereas others require 2 months.
May be difficult to find a buyer
If you do not own a 100% share in the property, you can only sell your property to someone that meets the eligibility criteria for shared ownership. Therefore, you will have a smaller pool of potential buyers to choose from.
As all Shared Ownership properties are leasehold; therefore, you may need the freeholders permission to make certain alterations and improvements to the property.
*This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published.