My wife and I are in the process of finding a permanent home for ourselves, after four years of renting together, and have been keen to look into the many forms of Government assistance available when it comes to a first time home purchase.
There are multiple schemes available, such as the Equity Loan, and Help to Buy, but one such scheme that I haven’t paid much attention to, is Shared Ownership (or ‘Part Rent Part Buy’).
The reason we have not been as interested in Shared Ownership, is that it has carried a negative stigma from purists who say that it is not ‘true homeownership’.
Despite this, I believe it is worthwhile to take a balanced look into each of the opinions that are held on forums and discussion boards online to work out whether there is any merit in the scheme.
How does Shared Ownership Work?
If someone is considering Shared Ownership, that typically means that they are purchasing a share of the total cost of the property from the existing owner.
The percentage is something that can be discussed during the sale, but is typically in increments of 25%.
If someone purchases a 50% share of a £200,000 home, that means they will own £100,000, which will need to be financed through the typical deposit + mortgage combination.
The buyer of the 50% share will need to pay their mortgage costs as usual, but then will need to pay rent on the remaining portion, in addition to service charges, and ground rent as stipulated in the contract.
In most cases, the contract will also allow the buyer to increase their share in their home until they own outright by 10% at a time, in a process known as ‘laddering’.
Until you have full ownership, it is effectively a ‘house share’, but without a tenant making a mess in your kitchen.
Am I Eligible for Shared Ownership?
It depends on your personal circumstances.
The general rule is that Shared Ownership is available for first time buyers that have a household income of £80,000 or less outside of London (and £90,000 inside).
This eligibility also extends to those who may have owned a home in the past, but no longer can afford a home of their own (e.g. if they went through a divorce).
In addition to this, there can be additional rules placed by the seller to limit the potential buyers to those who have a local affiliation with the area; rules such as having an active job in the area or having family or friends that have lived in the borough for a minimum amount of time.
It is a fantastic sounding scheme for allowing first time buyers to ‘buy’ a larger home than they would be able to afford outright, but with the news that the vast majority of those who have taken advantage of the scheme are unhappy, is it all as positive as it seems?
Is Shared Ownership a Misnomer?
The primary reason for Shared Ownership having a bad name is that you are not in possession of the freehold on the property.
By purchasing a share in a property, you will have a leasehold, and not a share of the freehold (which makes it a very uneven ‘sharing’ of the home).
By not owning the freehold outright, or partly, this causes the following issues:
- Ground rents and service charges are paid on the full value of the property, irrespective of the share of the property that you own. Furthermore, this can be increased without discussion, and there are multiple stories of shared homeowners having these charges doubled every ten years by the freeholder,
- Rent charges can be increased each year based on inflation, CPI, RPI or any other index. When the larger of any index is selected, this means the increase monthly costs is liable to outpace increases in your income,
- Leasehold extensions can be costly, and this is a real cost to take into consideration if the lease has less than 80 years left. An extreme example is that the cost to add 90 years to a lease with 60 years left would typically cost around £25,000 for a £200,000 flat (including the legal fees),
- You typically need to get permission to do any work to the exterior of the house, and getting permission usually comes in the form of a cost. Even changing your front door can cost you several hundreds of pounds paid to the freeholder,
- If you ‘ladder’ your ownership up to 100%, there is no guarantee that the ownership will be converted to a freehold. It is common for the freehold to be sold to investment companies who then have a claim of the rental income, and who decide to quote ridiculous amounts to transfer ownership of the freehold (£10,000+).
Is the Lack of Freehold the Only Consideration?
If you are considering getting a shared ownership, you may find it difficult to get a mortgage, as not all lenders are keen to offer loans on these types of product.
This is possibly because if you are late in paying the rent portion of the home you do not own, then there can be eviction proceedings to get you removed from the property in the same way that you would be if you were renting.
This can cause complications when you still are liable for the mortgage payments on a share that you own.
Finally, because there can be rules defined by the holder of the freehold to only make the home available to those with a local affiliation, it can be more difficult to sell your share further down the road when you decide to move.
Do I Pay Stamp Duty for Shared Ownership?
In the 2018 Budget, those who have purchased a share of less than 80% in a home worth up to £500,000 through the Shared Ownership scheme will not pay Stamp Duty.
This is also backdated, meaning that if you purchased your property after the 22nd November 2017, you could apply for a refund.
This is a large benefit for those who have barely scraped together a deposit, but then find themselves needing to save thousands more for the stamp duty cost.
Other than this stamp duty tax shield, are there any other significant positives to Shared Ownership that can counteract this long list of negatives?
What are the Positives of Shared Ownership?
For those considering Shared Ownership, there is typically a decision between owning a share of a house/flat, and renting.
In both cases, you will have to pay rent, but with Shared Ownership, you can start to build some equity that can help in future home purchases (so that you do not feel like you are just throwing your money away).
Additionally, by getting yourself into a home, you are giving yourself the ability to remain in the property indefinitely considering the length of lease.
By ensuring that a landlord can’t terminate the rental agreement due to them wishing to sell the property, this gives a valuable peace of mind that renters do not have.
Also, because you will not need to pay stamp duty, and you only need to find a deposit for the share you purchase, this means that you can potentially find a family home that is larger than you could currently afford in the market.
Whether you are looking for shared ownership in London, or shared ownership in Milton Keynes; the principles are the same.
To Buy or Not to Buy, That is the Question
There are many shared ownership pros and cons, but you will need to look at your own situation, and work out whether Shared Ownership is worthwhile for you.
This will usually be a decision based on stability, income, and future plans, and will be unique to you.
While the majority of people were not happy with their Shared Ownership purchase, there are still many that have praised the scheme for allowing them to get on the property ladder in a market that is regarded as being broken, and that can only be seen as a positive.