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Shared ownership mortgages
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What is a shared ownership mortgage?
Any mortgage that can be used with the shared ownership scheme may be referred to as a shared ownership mortgage. They are no different to any other residential mortgage, and you will still be able to choose from fixed-rate deals, where the interest rate stays the same for a specific period, or variable-rate deals, where your interest rate can go up or down.
Lenders who are happy to accept mortgage applicants looking to use the shared ownership scheme may advertise their products as a shared ownership, or part rent, part buy mortgages, but they are simply highlighting which type of applicants will be accepted. Not all lenders offer mortgages for this purpose, but a mortgage broker will be able to help you find one that does.
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How does a shared ownership mortgage work?
The mortgage itself works the same way as a standard residential mortgage - put at least 5% deposit down and borrow the rest from the lender. As you're only buying a part of the property, 5% will be much less than if you were buying the whole thing. For example:
A 25% stake in a £200,000 property would cost you £50,000 in total. 5% deposit would therefore be £5,000 and you would borrow the remaining £45,000 from the mortgage lender.
You repay the loan every month for the full length of the mortgage term - usually around 25 years, but can be longer or shorter.
The remaining share (75% if using the above example) is owned by the housing association and you rent it from them.
Rental costs
It might seem a little daunting to have to pay rent and a mortgage at the same time, but the good news is that housing associations cannot charge an annual rent of more than 3% of the total property value.
So if we stick to the example of a £200,000 property:
The maximum rent they could charge would be £6000 per year, or £500 per month on the entire property. If you’re only buying 25% of that property, they can only charge you for 75% worth of that - which is £375.
Service charge
On top of your rent, some housing associations add a service charge to cover the upkeep of communal areas. This may vary annually, or be a fixed fee. Always check your lease to make sure you understand the full costs.
Staircasing
You can increase the share of the property that you own over time - which is known as staircasing. In many cases you're able to eventually increase ownership to 100%, but not all housing associations allow this, so be sure to check if you intend to fully own the property one day.
What is the shared ownership scheme?
The shared ownership scheme is a government initiative that allows you to buy a share of a property from a housing association.
You can buy between 10% and 75% to begin with, so you won't need to take out such a large mortgage to become a homeowner. This also means that your deposit can be smaller.
There are certain criteria to meet, and you can only use it to buy specific properties, not to buy a home from the open market.
Shared ownership is available in Scotland, Wales and Northern Ireland as well as England, although all of the schemes work slightly differently.
Who qualifies for the scheme?
Before you get to the mortgage application stage, you will need to register for the scheme in your region. The scheme varies a little depending on your country, but the eligibility criteria is similar. In England you need to:
Be either a first-time buyer, no longer own your own home and be unable to afford a new one with a traditional mortgage, or be unable to afford a home that meets your needs
Have a total household income of less than £80,000 per year, or less than £90,000 per year in London
Not be in rental or mortgage arrears (debt)
Be able to afford the costs associated with buying a home
How do you apply to the scheme?
To apply for the scheme you'll need to register with your regional shared ownership contact. Follow the links below for further information:
Shared ownership application in England (outside London)
Shared ownership application in London
Shared ownership application in Scotland
Shared ownership application in Wales
Shared ownership application in Northern Ireland
If you apply and find out you’re eligible, the next step is to find a property that you want to buy. Suitable properties will usually be advertised on the agents’ websites, by housing associations, local councils, home builders and on property listing websites.
Once you’ve chosen a home, it’s time to decide what percentage of the home you would like to buy. A broker can help you calculate how much a lender is likely to offer you and what size of share you can afford to purchase.
Deposit needed for shared ownership mortgages
The amount you need for a deposit depends on the value of the property and the size of share you’re buying. Lenders will need a minimum of 5% of the cost of the portion you're buying. If you can afford to put more than 5% down, you'll have access to better rates.
On a £200,000 home the minimum share you can buy using the scheme is 10% - £20,000. So 5% deposit would only be £1000
If you chose to buy 50% of the property, you'd need to borrow £100,000 - so 5% deposit would be £5,000
Shared ownership mortgage properties
Shared ownership homes are purpose-built by housing associations, and usually in a larger development. You can either buy a newly built home or one that’s being sold by someone who bought the property through shared ownership previously.
Buying a new build means you’ll be the first person to own the property and won’t be part of a chain when you buy it. But you may have to wait for it to be built if you buy “off plan” (before it’s completed).
A resale property will be easier to view, but you’ll need to buy at least the same share as the current owner holds, so there is less flexibility. You may not want to purchase that size of share.
Fees involved with a shared ownership mortgage
As you are taking out a mortgage, albeit for a percentage of the home, rather than the whole property, you will have to pay the typical mortgage fees involved with buying a home. This includes:
Arrangement fees
Legal fees
Valuation fees
Stamp duty
How does Stamp Duty work for shared ownership properties?
If you’re a first-time buyer and the home you’re buying is worth £425,000 or less you won't have to pay Stamp Duty. If you’ve owned a home in the past, however, you will be charged stamp duty if the property is above £250,000.
As you aren’t taking on the full property, you won’t have to pay the total stamp duty charges when you buy the home, however, and will be able to make payments in stages - Or you can choose to make a one-off payment for the value of the whole property at the outset.
If the price you pay for the property is above the stamp duty threshold you will make one payment at the start of the mortgage, then you won’t need to pay any more towards the stamp duty that you owe until you own more than 80% of the property.
Can you buy a bigger share of your shared ownership property?
Yes, you can, in most cases. Once you’ve lived in your home for a certain amount of time - set out in your lease - you can buy more shares in stages, until you own 100% of the property. Some properties have a limit to the share you can own, however. This is usually on shared ownership scheme properties for over 55s, but some housing associations prevent all scheme users from owning 100%.
You’ll need to increase your existing mortgage or get a shared ownership remortgage to pay for the bigger share. You'll also need to pay valuation fees, legal fees, mortgage fees and possible stamp duty fees when staircasing. You may want to make fewer large percentage increases, rather than multiple 1% increases, to minimise these costs.
Can you sell a shared ownership home?
You can sell your shared ownership home at any time, but it will usually need to be through the housing association unless you own 100% of the property. Even then, you may have to offer it to the housing association before putting it on the open market, so be sure to check the scheme details.
The housing association will value the property and set the price, and either buy the property back from you, or advertise it for resale to other shared ownership applicants. If it doesn’t sell after a certain period (set by the housing association) you may be able to advertise it for sale yourself.
Can you make a profit?
You can make a profit from selling your shared ownership home, if your home has risen in value since you bought it, however, you only profit on your share.
If you own 50% share of your home, the proceeds of sale (including any profit) will, therefore, be split equally between you and the housing association.
You are not allowed to make a profit through renting the property out.
Can you remortgage a shared ownership home?
You can remortgage shared ownership properties, but only those lenders that offer shared ownership mortgages will provide them. Like any remortgage, this will be easier to qualify for when you've gained a good amount of equity in your home.
Many people remortgage shared ownership homes to increase the size of their share, but it's also possible to switch mortgages simply to access a better interest rate, or to borrow money for another purpose.
Something to be aware of when considering this is that lenders offering shared ownership mortgages tend to charge slightly higher rates and fees for remortgages than other lenders, as there is less competition. A broker will be able to help you access the best rates available to you.
Advantages of shared ownership
There are a number of advantages to buying a home through shared ownership rather than buying a complete home, such as:
You will need to borrow much less and therefore need a smaller deposit and meet the affordability criteria more easily
The mortgage and rent charges combined will typically still be less than renting an equivalent property privately
It’s usually possible to increase your ownership to 100% of the property as and when you can afford to do so
You can sell your home at any time, whether you own 100% of it or not
If the value of your home rises, so will the value of your share in the property
Disadvantages of shared ownership
Although this can be a great way to get onto the property ladder if you can’t otherwise afford to, it’s important to be aware of the potential pitfalls when you’re deciding whether to buy a home through shared ownership:
Shared ownership properties are sold on a leasehold basis, meaning you will also need to pay a service charge for the upkeep of grounds and communal areas
Not all lenders offer mortgages to suit the shared ownership scheme, so you will have less choice than the average mortgage applicant
When you come to sell your home, the housing association typically has to have first refusal to buy it back from you, and this can make the process more difficult than advertising it on the open market
You won’t be able to sublet your home, although you may be able to have a lodger
Getting on the property ladder is hard, so schemes like shared ownership can really help. But your mortgage options will be more limited, so speak to an expert to find the right lender for you”Kellie Steed, Mortgage Content Writer
