How does shared ownership work

UK house prices have consistently hit record highs over the last two years, and whilst growth is expected to slow down over the next 12 months, prices are still increasing at a fast rate.

The average wage growth in the UK has increased by 4.8% from November 2021 to January 2022, but this is still below the national inflation rate. With the rising cost of living, wages not increasing fast enough to compensate, and house prices skyrocketing, more and more people are left frustrated with their inability to afford housing.

As such, we’ve seen a trend towards shared homeownership. Shared ownership allows buyers to purchase a part of a property, with home-buyers feeling like it’s currently the only way to get on the property ladder. Whilst the concept of shared ownership is pretty straightforward, in practice, it can be complex and confusing.

Therefore, in this article, we will explain what shared ownership is, how shared ownership works, what criteria you must meet to be eligible for shared ownership, and its pros and cons. Let’s dive in!

How does shared ownership work?

Most first-time buyers looking to get onto the property ladder cannot afford the mortgage on the total price of a home – especially for those living in the London area, where the average house price is higher than £500,000. Shared ownership allows eligible buyers to get on the property ladder in a different way – by purchasing a share of a home.

Shared ownership, also known as part buy/part rent, enables buyers to buy a share of a home. Instead of paying a mortgage on the total price of the house, they will only pay mortgage repayments on the percentage they own, usually between 25% to 75%. This considerably lowers the amount of money they need for a deposit. They will then pay rent on the remainder of the property but at a subsidised rate. Therefore, shared ownership gives buyers the flexibility to have long-term security by owning a property, but at a much more affordable price and without the need for a substantial down payment.

Am I eligible for shared ownership?

Shared ownership is seen as the first step for those who are looking to purchase a property that they can call home but can’t entirely afford to buy a whole house at the current market value. As such, not everyone can be eligible to qualify for shared ownership; there are specific criteria that need to be met:

  • You must be 18+ years old
  • You are a first-time buyer and do not own, or part-own, another property at the time of completing your purchase, or you used to own a home but cannot afford to buy one now at current market prices
  • Your pre-tax combined household income is less than or equal to £80,000 per year (less than or equal to £90,000 in London)
  • You have a deposit equal to the value of the share you are purchasing (either through a mortgage or your savings)
  • You are not in mortgage or rent arrears
  • You have a good credit history, rent and/or mortgage history, and can afford to pay the monthly payments associated with buying the property

It’s worth noting that not all mortgage providers will offer shared ownership mortgages. Therefore you may need to visit a specialist mortgage provider.

What is the shared ownership prioritisation hierarchy?

Although shared ownership programmes are an excellent way for first-time buyers to get on the property ladder, it’s not exclusively for them; anyone can apply for the shared ownership scheme as long as they satisfy the eligibility criteria. Having said that, there are some groups of people who may be prioritised more than others.

When it comes to government-funded shared ownership schemes, military personnel will get the nod over other groups. After members of the military, priority will be given to groups determined by local councils. Your local authority may prioritise groups based on local housing needs; for instance, they may want more homeowners to be people that work in the local area. As such, they would be prioritised over those people who don’t work in the local area.

Isn’t paying both a mortgage and rent expensive?

Generally speaking, there are two main ways to live in a property – you either pay rent every month, or you pay a monthly mortgage payment on your home loan. That’s why the idea of paying both a mortgage and rent every month is quite unnerving. But when it comes to shared ownership homes, both costs tend to balance each other out, meaning it’s not quite as expensive as you might think – and can sometimes even work out to be cheaper.

Suppose you purchase a 50% share of a property valued at £200,000 using a mortgage. You will only pay mortgage payments on the 50% you bought, and you will be charged rent on the remaining 50%. However, instead of being charged rent at the full rate, you will pay a subsidised rental fee. This subsidised rental fee will be much lower than otherwise; therefore, your total cost for rent and mortgage payments could be the same – or even lower – than if you were paying an entire mortgage or full rental amount.

Can I increase my share of the property over time?

Over time your circumstances may improve, and you may want to increase the percentage of the property you own. For instance, you may receive a sizable pay rise, a lump-sum gift from a family member, or you have just saved diligently and would like to put that money towards the property – that is certainly possible. You are able to increase your share of the property by a process called ‘staircasing’.

Most housing associations will require you to staircase by at least 10% in equity and can go all the way up to 100% ownership. Each time you staircase, a valuation of your property will be conducted to find its current market price. You will then be able to purchase your increased share of the property at this current price, not the price you bought your original stake at. This is something to keep in mind when deciding to staircase since the timing of your purchases can drastically affect how much you end up paying in total.

Also, before making a shared ownership purchase, it is vital to check your housing association’s terms and conditions because they can vary. Some may only allow you to staircase up to a maximum of three times. For example, you can purchase 25% initially and then go up in 25% increments until you own the home outright. Whereas other housing associations may only allow you to staircase up to a certain percentage of ownership, for example, having an ownership cap at 50%.

It should be noted that staircasing can be pretty costly. Each time you look to increase your share, there will be additional fees that you will have to pay. This includes valuation fees to a surveyor to confirm the full market value of the property, legal expenses involved with solicitor services, and mortgage fees associated with making changes to your current mortgage payments.

Are shared ownership homes sold as leasehold?

Most properties sold within a shared ownership programme will be leasehold. This means that the landlord – usually the housing association – will give you the right to live at that property for a much more extended period than usual, called the ‘term’ of the lease. The term is usually either 99 or 125 years, and the home can be bought and sold during that time period.

However, once you have purchased 100% ownership of the property, it will become freehold. Freehold means that you will have outright ownership of that property until you sell it or it passes onto your family after you have deceased.

How does stamp duty work with shared ownership?

Most first-time buyers will be exempt from paying stamp duty, but this exemption may not apply to a shared ownership property; stamp duty is a little more complex when it comes to purchasing shared ownership homes. There are two options to choose from.

Option 1 is to pay stamp duty on the total value of the property upfront. You can choose this option even if you are only purchasing 25% of the property. Whilst this method will see you paying much more in advance, it will give you peace of mind knowing you won’t have to pay stamp duty on the property again. For first-time buyers, paying upfront also ensures that you are qualified for the stamp duty exemption (on properties valued at up to £300,000). If you’re not a first-time buyer, the standard threshold of 0% stamp duty on properties up to £125,000 still stands.

Option 2 is to pay stamp duty only on the share of the property you’re purchasing. This method will ensure your upfront costs are much lower, but as you staircase your ownership, you may be liable to pay stamp duty again. Not only that, if property prices have gone up since your initial share, you may end up paying more than you would have initially.

One thing to note with option 2 is that you will only have to pay stamp duty again if your shared ownership exceeds 80% of the property. For instance, suppose you initially had a 25% share of the property, which you have since increased to 75%. You will not have to pay stamp duty again until your ownership share reaches 80%. As such, if you don’t plan on owning more than 80% of your property, this may be the most financially viable option.

Can I sell a shared ownership property?

If you have staircase your ownership up to 100%, then selling your home is virtually the same as selling a typical home. But, if you only own a share of the home, then the process will be more intricate. Housing associations tend to have slightly different rules for selling a property. However, they tend to follow two main steps.

First of all, you will have to notify the housing association that owns the remainder of the property. This would have to be done as a formal notice that outlines your goal to sell the property. You may find that you will have to notify them even if you own 100% of the house – you can check if this is the case with the housing association.

Depending on the rules with your housing association, they may have first refusal. First refusal means that the housing association has the opportunity to sell the property themselves, typically looking to find another shared ownership buyer. In the event that they cannot find a buyer, they will usually then pass the responsibility back to you. Here is where you can list the home on the property market and advertise it for sale using the usual channels (e.g. through an estate agent).

What are the fees for selling my property through a housing association?

Selling your property through the housing association comes with various costs and may result in you forking out a bit more money than you had anticipated.

Housing associations will tend to charge you for marketing fees, valuation fees, and legal fees – essentially any costs related to putting your property up for sale, making the sale, and finalising the sale. The financial responsibility will be put onto you, so you must ensure that you have the finances available to cover the costs. If you are wary of how much it will total up, you can always ask the housing association for a rough estimate of the total costs, as these can vary throughout the country.

What are the benefits of shared ownership?

The glaring benefit of shared ownership is that you’re able to get your foot on the property ladder without the enormous costs of buying your home outright. You will need a smaller deposit and also a smaller mortgage, making a first-time purchase much more manageable even for lower-income individuals. Other benefits include:

  • Your total monthly payments can be lower than if you rent or buy outright via a mortgage
  • As your financial situation improves, you can buy a more significant share of your home, thereby ‘staircasing’ your way up to 100% ownership of the property
  • Shared ownership gives you long-term security and stability, unlike private renting
  • You can sell your ownership share at any time. As the property value goes up, your increased equity can be used to take the next step on the property ladder

What are the downsides of shared ownership?

Whilst shared ownership can sound like the perfect way to get on the property ladder, there are some downsides to be aware of:

  • Not all mortgage lenders will offer to provide loans for shared ownership properties
  • All properties are leasehold. Most can be freehold after staircasing to 100% ownership, however, clarify this with your housing association beforehand
  • Stamp duty has to be paid on the whole property after an 80% share of ownership
  • All maintenance and repair costs have to be borne by you, even if you only own 25% of the property.
  • Sub-letting your property is usually not allowed
  • Alongside the cost of buying a greater share of your property, staircasing can be costly due to valuation, legal, and mortgage fees
  • You are responsible for paying all of the ground rent and service charges of your property
  • Usually, you are restricted in terms of the home improvement changes you can make to the apartment, even for things such as redecorating
  • Selling your property can be complicated and time-consuming if you don’t own your property outright
  • You’re still paying rent on the share of the property you don’t own. Thus, you’re a tenant, and you can be evicted for things like with most private rental properties

What about shared ownership in Scotland, Wales, or Northern Ireland?

Whereas this article has mainly focused on England, shared ownership is available in all of the other UK countries as well.

Similar to England’s shared ownership scheme, shared ownership in Scotland is mainly aimed at getting first-time buyers and priority groups onto the property ladder. Here you have the option to buy between a 25%, 50%, or 75% share of the property initially, with the remaining percentage being owned by a housing association. Buyers will also have to pay an occupancy charge on the remaining share that they do not own. You can find more information on the Scottish government’s website.

The Welsh shared ownership scheme is similar to the one in England and Scotland. The significant difference is that the maximum household income has to be £60,000 or less each year. You can find more information on the gov.Wales.

In Northern Ireland, it is called Co-ownership and works the same as in the rest of the UK. However, a key difference is that the maximum price of the property cannot exceed £175,000, and you have to buy at least a 50% share to start with. You can find more information on the Northern Ireland government’s website.