Shared ownership is an affordable way for first-time buyers to get on the property ladder - but there's a lot to consider before using the scheme. John E Jones examines the advantages and disadvantages
Shared ownership is again in the spotlight following the launch of a new industry body committed to helping consumers have a better experience of buying shared ownership properties.
The Shared Ownership Council will have a new Code of Conduct to help drive improvements and encourage more people to buy using shared ownership.
The idea of shared ownership is simple – it enables people to buy a home of their own by part-buying and part-renting with a housing association, other social landlord or a developer.
As a buyer you obtain a mortgage for the share of the property you buy, while paying rent to the ‘landlord’ on the remaining share. This is cheaper than paying for a full mortgage on the property as ordinarily the rental is lower than the equivalent mortgage payment.
Shared Ownership properties can be either flats or houses. The homes are always leased and as a buyer you will take a share of the property from a ‘landlord’ – either 10%, 25%, 50% or 75% depending on the scheme with the aid of a mortgage which is topped up with an affordable rent payable to the landlord on the remaining share. The rent can be up to 3% of the share’s value.
After you have had the property for 12 months or more, you are then able to increase your share in the property by purchasing a further percentage share or alternatively by purchasing the property outright. This process is called staircasing and you can do this up to 100% ownership and acquiring the freehold (if a house) or acquiring a full lease (if a flat).
Shared ownership rules in Wales are similar, but the criteria around income eligibility and staircasing rules differ slightly, so do make sure you check with your conveyancer.
If you’re considering such a purchase as a way of getting onto the property ladder, it is important that along with getting proper advice, you consider the pros and cons.
What are the ‘cons’ of shared ownership?
Let’s start with the cons:
- You will pay rent until you own the property outright. Yearly rent reviews, meaning the rent will increase as the value of the property increases. Failure to pay your rent or breach the lease imposes a risk that you may be evicted.
- Legal fees on purchase are generally higher due to the additional work involved. Also, you will be expected to pay service charges (which will increase each year) for the ‘landlord’ maintaining the common parts and pay towards insuring the property.
- You may need to pay all repair costs regardless of how much of a share you own. This is especially true for properties bought under older schemes. However, the latest scheme has an ‘initial repair period’ of 10 years where the ‘landlord’ is responsible for the costs of some repairs.
- Most leases will not permit sub-letting, nor for it to be used as a holiday home. Secondly, landlord consent for alterations or other plans you have for the property.
- Staircasing can be expensive. It will be necessary to pay fees for a valuation, legal services, to your lender (for consent to staircase) and possibly Stamp Duty Land Tax (SDLT) to pay depending on the increased share being bought.
- There are fewer mortgage products available for shared ownership matters than traditional mortgages, and with a higher interest rate. You need to shop around.
- It is unlikely you will have difficulty selling the property if you bought using the new model shared ownership lease with a term of 990 years but if selling an older one (with a 99-year term), your buyer will either want you to staircase to 100% ownership as part of the sale or extend the lease first (if the term has dropped below 80 years) or both.
What are the ‘pros’ of shared ownership?
Balance all that with the pros for shared ownership:
- It is an affordable way to buy a home. You will be able to buy using a smaller deposit and a smaller mortgage.
- You can increase the amount of your home you own over time but deciding to staircase or not is your decision. You are also free to sell.
- Far more secure than renting in the private sector.
- Your monthly payments will be less than if you were renting privately.
- If the property value increases, so will the value of your share.
- No SDLT may be payable if you are able to make a market value election when buying or it can be deferred until your share reaches 80% or more.
- It is your home for the long-term, if you choose.
As with any house purchase, there’s always a lot to consider, but with the right advice from a broker and a conveyancer, shared ownership is a straightforward way of buying a property.
John E Jones is director of Residential Property at Jackson Lees
