Getting a foot on the property ladder can seem like an impossible task. Whether you’re struggling to get a deposit together or feel like you’ve been priced out of the market, the good news is there are options available.
One of the routes to home ownership to consider is shared ownership.
It’s no surprise that younger generations are finding buying their first home difficult. There are two key challenges:
- Getting a deposit: The average first-time buyer is using a deposit of £33,127, according to Halifax. It’s a sizeable sum that can seem like an impossible target if you’re already paying rent and have likely been affected by low wage growth compared to inflation.
- Mortgage approval: The average salary required by a first-time buyer to purchase a home in the UK’s 20 biggest cities has increased by 18% since 2015 to almost £53,000, according to Hometrack. It can mean you struggle to access a mortgage that will allow you to buy a home, even if you have a deposit.
Shared ownership could provide a solution to both these issues.
What is shared ownership?
Shared ownership means you buy a portion of a property. You will take out a mortgage on the percentage you want to buy, making standard mortgage payments, and pay rent on the remainder. Think of it as a hybrid between renting and buying a property.
How does this help?
The value of the loan you need to apply for will be less. If you’ve found that mortgage providers aren’t willing to lend you enough to purchase, this can make the market far more accessible. This, in turn, means that the deposit you need to save will be less too. A mortgage provider will typically expect first-time buyers to have a minimum 5-10% deposit. As a result, if you’re buying 50% of a property, the time it takes to get that deposit together is halved.
Shared ownership gives you a chance to step onto the property ladder with a smaller deposit and mortgage. If you’ve been struggling to either gather the capital required for a deposit or have been priced out of the market in your area, shared ownership may be worth investigating.
Using shared ownership to move up the property ladder
Once you’ve purchased a shared ownership property, you’ll have taken that all-important first step on the ladder. But your thoughts will probably turn to how you can climb it pretty quickly.
Shared ownership provides you with two options.
- Increasing the portion you own
When you purchase a shared ownership property, you have the option to increase the portion you own. This process is known as ‘staircasing’.
Usually, the portion you can buy is flexible, starting from 25%. As you build up more equity in the property, you’re able to use this to buy more. If you use this process, you can eventually work your way up to 100%, owning the property outright. This is a good option if the shared ownership home is somewhere you’d like to live long term.
- Selling and moving on
You also have the option to sell the portion of the property you own and move on. When the time comes to move, you will (hopefully) have built up a track record for paying your mortgage on time and the equity in the property will give you a deposit to put down on your next home.
If you view shared ownership as a stepping stone to your next property, this may be the best option for you.
Seven things to be aware of when buying a shared ownership property
If you’re tempted by shared ownership, it’s important to do your research first before you dive into buying a property. Among the areas to look out for are:
- The portion you own: This should be right at the top of your list when purchasing a shared ownership property. Most housing associations will offer several different options for new buyers. It’s worth seeing what the other percentages are and how this would affect your outgoings. You may find that you’re able to purchase a bigger portion while the combination of mortgage and rent remains broadly the same.
- Rent to be paid: Next up, clarify how much your rent will be. It will play a role in how much you can borrow from a lender. On top of this, check how often and when it will increase and what limits there are on this.
- Other fees: Shared ownership properties are sold under a leasehold, where you don’t own the land the property is built on. As a result, you’ll likely need to pay other fees, such as maintenance and service charges. Again, check how and when these can increase. Most first-time buyers of shared ownership properties will no longer have to pay Stamp Duty under measures accounted in the 2018 Autumn Budget.
- Eligibility criteria: Many shared ownership properties will only be sold to aspiring homeowners that meet certain eligibility requirements, for example, being a first-time buyer. This will vary between housing associations, so it’s worth checking what it is early in the processes.
- Increasing ownership: Even if you’re not sure if you want to increase your ownership of the property in the future, it’s worth understanding the process. Be sure to ask how you increase ownership and when this can be done. You should also check any restrictions, and the costs of doing so, as some associations will only allow you to staircase a set number of times.
- Making alterations: As you don’t own the whole property outright, you may face restrictions when you want to make alterations. While some associations are very flexible, others may limit what you can do, and you could face charges. Take a close look at your contract to see what limits there are before signing.
- The selling process: When you’re purchasing a property, selling it probably isn’t even on your radar. But it’s likely to be in the future. Often with a shared ownership property, you will have to give the housing association you’ve bought it from the first refusal if you’re looking to move. They may also handle finding another buyer. Check what the process is; it could have a big impact in the future.
If you’re planning on taking your first step on the property ladder, we can help. Whether you choose to go with a shared ownership home or an alternative, please get in touch for support with your mortgage application and the home buying process.