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How does shared ownership work?

by | Dec 8, 2022

Home $ How to buy a property $ Help To Buy Properties scheme $ How does shared ownership work?

Shared ownership can be a good option for those who cannot afford to buy a property outright, but have the means to pay a mortgage on a portion of the property.

In this article, we will explain how shared ownership works, the advantages and disadvantages of this type of housing arrangement, and how to buy a property with the shares ownership scheme and know it is the right option for you. We will also provide some tips for navigating the process of purchasing a shared ownership property.

What is the shared ownership scheme?

Shared ownership is usually used by first time buyers and those who are struggling to gain entry to the housing ladder as it provides a way to buy new build homes. There are also Help To Buy Shared Ownership schemes available where a buyer can take advantage of putting down a 5% deposit by taking a government equity loan with the help of a housing association.

A property under shared ownership

How does shared ownership work?

Shared ownership works by the buyer paying a proportion of the mortgage and therefore paying a subsidised rent at the same time to a housing association. This results in the buyer getting away with having less money for a deposit rather than if they bought the property conventionally without a housing association involved with housing costs.

As time goes on, the buyer can take on the option to increase the share of the mortgage on the property which is known as “staircasing”. This process can result in the buyer owning the entire property and as they pay more on the mortgage, they pay less in rent until they own the property outright and they have no mortgage left to pay.

Shared ownership is therefore a very good way to get on the housing ladder if you do not have the money for a deposit and do not mind stretching out the length of time it would take to pay off a mortgage.

What are the disadvantages of shared ownership?

Before you go ahead with the purchase of a shared ownership property you must carefully consider if it is the right thing for you. There are risks and issues that you should be aware of that may impact your decision and you may find that saving a bit longer for a deposit or continuing to rent is a better option.

Restrictions on how you can use the property

Depending on the agreement, you may have to ask the housing association for any changes you make to your home. This may mean you have to ask for structural changes to occur, redecoration or even renovation. So, before you actually own the home you have to treat it as if it is a rented property.

If you were to go with a normal mortgage where you pay for the entire deposit up front, you could do renovations straight away and have the creativity to do whatever you want.

Risk of negative equity

Most of the time, new build properties only make sense if you are buying for the long-term. This is because they typically cost a bit more in comparison to another property of the same requirement which is a second-hand home.

The premium you have to pay is there because the property is new and there is a lot less that can go wrong structurally. Also, new builds are often sold with the idea that they will go up in price in the future as additional homes are built on the development and the housing block becomes more desirable after work is complete so demand increases for the area over time.

Having said this, sometimes this doesn’t go to plan and perhaps due to economic conditions, house prices could fall into negative equity and there could be a depreciation of the asset a buyer has bought. This means, if you want to remortgage the property, you likely won’t be able to and if you want to move soon, you may sell for a lower price than you initially bought for.

In general, over a long enough time period house prices do tend to go up. So even if you think you are in an economic downturn, over decades you will likely see it appreciate.

Sign showing negative equity of a shared ownership property

Prohibited from renting the property

Because of the terms of a shared ownership agreement, you will not be able to sublet the property. This also includes lodging agreements a lot of the time.  The reasons for this are the housing association still has an interest in the property being kept in good condition before you completely pay it off.

As a result, the housing association would want to preserve the quality of the property in case they have to sell it to another owner whether that be through shared ownership or on the open market if they have to repossess. Hence, the housing association will always want to keep it in good condition.

Issues when selling your shares while moving

As you can imagine, if you do not end up paying off the entire property mortgage by increasing the amount you owe through staircasing, it can get complicated when trying to sell.  This means you cannot sell the property conventionally and the housing association will have the right to buy while the property is under first refusal.

First refusal means the housing provider will attempt to find a buyer on behalf of the property owner and after an agreed period of time, the buyer will then be able to sell the property themself if a buyer isn’t found. However, even if a buyer does find someone who makes an offer, they will still have to fulfil the needs of the housing association.

These needs include having the right credit report and income to ensure they can continue “staircasing” and increasing their ownership of the home. As you can tell, this process can be quite complicated. 

Who can apply to shared ownership?

The rules around shared ownership are quite broad as of 2022. The requirements to buy a shared ownership property are:

  •  Buyer must be at least 18 years old
  •  They must be earning less than £80,000 annually outside London or under £90,000 annually inside London
  •  They must be a first time buyer
  •  They must be able to prove a house on the open market is unaffordable
  •  They cannot Kombi be insignificant mortgage or rent debt
  •  Their credit report must be positive overall 

What should you do before applying for shared ownership?

The first thing you should do before applying to get into a shared ownership scheme is to make sure that you are eligible,  you can register and apply for a shared ownership application form to do thi. There are different forms based on where you live in the UK, so you will have to visit the government website here to download the right one for you.

Following the form submission, you can contact the landlord who has a shared ownership home to reserve it and then you will have to go through the legal process of buying the property through the shared ownership scheme which will involve the mortgage lender. You may have to involve a solicitor or legal adviser to guide you through this process.

What if I already own a home?

If you already own a home, then the shared ownership scheme isn’t available to you. Having said this, you can sell the home and then rebuy a property that is a shared ownership property to qualify. This is common for those who have started a mortgage and backed out of it due to a change in their financial situation and now seek a way of getting on to the housing ladder without a deposit

Shared ownership for elderly people

Despite the shared ownership scheme being available to young people, because of the benefits for first time buyers, there is also the older person’s shared ownership scheme (OPSO) this is available for those who are 55 years and over and is typically used for older people to buy a house that is better suited for their age, that is smaller or equipped with mobilisation equipment.

Older person shared ownership is different to shared ownership because the maximum share you can buy in a property is 75%. This means the housing association will always own 25% of the home even if you pay off all of the mortgage.

An elderly couple with a shared ownserhips property

Shared ownership for disabled people

Home ownership for people with long-term disabilities (HOLD) is another shared ownership scheme set up by the government which allows disabled people to own up to 75% of a home and at the lowest end 10%. In order to qualify, the financial requirements and the first time buyer status are the same as the standard shared ownership scheme however you will just need to have a long-term disability. 

To start the process of applying to HOLD click here.

Which home can you buy through shared ownership?

Contrary to popular belief,  you can buy any type of home through shared ownership. Not just new builds.  It would be difficult to qualify for a more expensive home nonetheless because you also have to prove you cannot afford a deposit for a standard residential mortgage in order to qualify.

Wrapping things up

To conclude, the shared ownership scheme brings its own set of challenges and risks, however it can be an excellent way for people to get on the housing ladder who struggle to save for a deposit. It is important that before you apply, you check over the eligibility requirements and make sure there isn’t a better option for you as the shared ownership scheme is certainly not the best for everyone.

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Donnell Bailey

Property expert

Donnell is a property expert focusing on the property market, he looks at a combination of legislation, information from property managers, letting agents and market trends to produce information to help landlords.