Shared Ownership - What It Is?

There are many ways to acquire property ownership in the UK. With the ever-increasing prices of houses and apartments in the UK, all sorts of assistance programs are gaining in popularity. In today’s article, we will take a look at an extremely interesting solution - Shared Ownership. So let’s find out what shared ownership is all about and when it pays to use it.

When you buy a home under the Shared Ownership system, you buy a share of the property and pay rent for the rest.

One of the challenges faced by those wishing to buy a property in the UK is to accumulate a sizable deposit. Recall; the average price of a house in the UK is already over £280,000, while in England alone it is over £300,000. It doesn’t take a mathematical genius to know that with a five percent deposit, an average of £15,000-£20,000 in cash is needed to buy a house. Raising such a sum is possible for most of us, but in many cases it will be a huge challenge requiring financial discipline for up to several years.

Of course, you can shop around for cheaper properties however, the result of such “saving” is insufficient square footage, poor location or the need for renovations. For the rest, even buying a cheaper property you will still need a ten or twelve thousand pound deposit. Quite a lot, right?

Many people forget that the deposit is not the only expense when buying a property that you have to pay out of your own pocket - you often have to pay Stamp duty land tax, conveyancing service, mortgage broker, insurance and the so-called Homebuyer’s Survey. This adds up to anywhere from £2,000 to as much as £4,000. You can read more about this in the article entitled 7 Steps to Buying Property in the UK.

The second potential obstacle standing in our way may be the more advanced age of buyers. People in their twenties, thirties or even forties still have many years of professional work ahead of them and the ability to pay a mortgage. But what about those in their fifties, who are a dozen years short of retirement? Let’s face it, they are less likely to take out a large mortgage.

After this lengthy introduction, let’s finally move on to explain what Shared Ownership is. For the sake of argument, let’s add that a third group of people - the self-employed - should be interested in this mechanism. The income of entrepreneurs is unstable, which discourages banks from granting mortgages to these people.

Shared Ownership, what it is?

To explain the Shared Ownership mechanism, let’s use the definition found on the government’s website:

When you buy a home under the Shared Ownership system, you buy a share in the property and pay rent for the rest.

The share you can buy is usually between 25% and 75%. In some houses you can buy a 10% share.

Affordable home ownership schemes, Gov.uk

Thus, we have a combination of rental and ownership of a residential unit. This, of course, has both advantages and disadvantages.

Why buy a property under Shared Ownership?

All of the above-mentioned groups of borrowers - those with limited incomes, people over fifty as well as entrepreneurs - often have difficulty obtaining a mortgage. This is due to relatively low affordability, a shortened repayment period or a small amount of accumulated funds.

Shared Ownership can be a good solution to this problem - by buying only half of the shares in a property, you will pay half the installments and will need twice as small a deposit, in many cases less than £7,000. Of course, you’ll have to pay rent, but over time, you’ll be able to buy more shares, and thus, get closer to financial freedom.

How is Shared Ownership different from renting?

Shared Ownership is, in part, renting a property, but it is done on an entirely different, much more preferential basis - as a tenant, you are protected by a special agreement, which guarantees you additional rights that arise from the fact that you are also a co-owner of the property you are occupying.

The main advantage of this form of property ownership is that by repaying your mortgage, you increase your assets, which is not the case with renting. What’s more, landlords can only be certain companies and institutions, which provides additional stability and certainty.

Remember also that having an additional influx of cash, for example, coming from an inheritance, a bonus at work or thanks to a promotion, you can increase your share of the property, and thus, lower your rent. This is an excellent way to reduce the cost of living in the UK, which has risen sharply in recent times.

How much is the rent in Shared Ownership?

Typically, the annual rent paid to the Housing Association will be 2.75% of the value of your landlord’s share. If you own 50% of a house worth £300,000, the rent will cost you £344, but you will have to expect to pay a mortgage on your share of the property. There will most likely also be other fees, known as service charges.

Shared Ownership Scheme - terms and conditions

In order to take advantage of this way of buying property, you must meet two basic conditions:

• Your family’s annual income must not exceed £80,000 (£90,000 for those living in London);

• Your family cannot afford to accumulate a deposit and pay the full mortgage and purchase a property suited to your needs, for example, due to the number of rooms;

At least one other condition from the list below must also be met:

• You are buying your first property (known as a first-time buyer);

• You have owned a home in the past, but now you cannot afford to buy a property;

• You own a home, but want to move and can’t afford a new home adapted to your needs;

• You are forming a new relationship, such as after the breakup of a previous one;

• You own part of the property (shared owner) and want to move.

Some of the houses offered under the Shared Ownership Scheme were built in protected areas. Then, their availability is limited - they can only be purchased by people with ties to the area. If you buy such a property, two additional restrictions will be imposed:

• You will be able to own no more than 80% of the property;

• You will be able to sell your property to the landlord or his designee, but no longer on the open market, as would be the case with a “normal” house.

You can find all the information about the rules of the Shared Ownership program on the government website.

Shared Ownership - advantages and disadvantages

Let’s start with the advantages of Shared Ownership:

• The rent paid for shares owned by the landlord is very low - usually, it is up to 2 times less than on market terms;

• The rent is on a predictable and very stable basis - there is no question of sudden or very drastic rent increases;

• Over time, you will be able to increase your share of the property, thereby reducing your rent;

Unfortunately, Shared Ownership also has disadvantages:

• The rent you will come to pay will negatively affect your creditworthiness, as it is a fixed liability for several hundred pounds per month;

• Property bought under Shared Ownership cannot be sublet;

• For properties bought after April 1, 2021, you can only redeem 1% of the shares per year for the first 15 years. Only after that period will you be able to redeem the rest.

• If you redeem more than 5% of the shares, you must expect an additional cost in the form of a property appraisal by a real estate appraiser.

When does Shared Ownership pay off?

If you are over 50 years old, have limited savings or have an unstable income, Shared Ownership may be the only option you will be able to afford. However, there are some people who opt for this program even though they would theoretically be able to purchase a property on market terms.

In our opinion, the Shared Ownership Scheme is a great solution for people who currently have a fairly small amount of cash, but would like to tie themselves to a place for many years.

In a large proportion of cases, it is possible to buy as little as a 10% share, which will require a commitment of less than £5,000 in cash, while still allowing you to rent a low-cost property very profitably. Buying a 1/10th share in a house worth 300,000 will pay just £620 in rent, and your mortgage installment will most likely not exceed £300. In addition, from the second year you will be able to buy more shares, which will lower your rent. By adding £2,000-3,000 at a time, you will increase your equity and build a stable financial future.

Shared Ownership is a sensible idea for both the very young and the elderly who, for various reasons, are unable to take out a mortgage for £200, 250 or 300 thousand. It’s the first step toward financial freedom and into capital accumulation.

However, if you know that by showing a little financial discipline you would be able to raise the required down payment and buy a house on normal terms, it is definitely worth considering. Remember that every year, rents go up, while mortgage payments depend on interest rates. This means that, with tracker (zeinnoproperty) mortgages, the installment for a house in 2024 will be exactly the same as in 2007. By comparison, due to inflation, rents on Shared Ownership properties have risen by about 88% in that time. They are still extremely attractive, but think for yourself, in 20 or 25 years, you may be paying up to twice as much for rent as you are now.

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We are a licensed broker and provide comprehensive assistance in buying property in the UK. We will be happy to advise you and answer any questions, not only strictly related to credit matters. We will support you in your property purchase as much as possible and make your Shared Ownership home purchase fast, efficient and affordable.

We hope that this article has made you already know what Shared Ownership is. If you are interested in this form of property purchase and our services, please contact us to schedule a free, no-obligation consultation.