Shared Ownership Mortgage

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Shared Ownership Mortgage (Part 1)

Sam Hubbard explains how a shared ownership mortgage works.

What is shared ownership, and how does it work?

Shared ownership is a middle ground between renting and buying. You effectively buy a percentage of a property, generally between 25% and 75%. On the remainder of the property that you don’t own, you pay a subsidised rent. The rent is typically around about 2.75% per year of the unsold share value. As an example, you might buy a property which has a total value of £100,000. You buy a 50% share on a mortgage. The other £50,000 is rented back to you at 2.75% per annum. One of the benefits of shared ownership is that you can increase the ownership percentage through ‘staircasing’, where you buy additional shares over time.

Who is eligible for shared ownership? Who can get a shared ownership mortgage?

These are obviously aimed at individuals who may struggle to buy a property in their local area, as it’s just so unaffordable. Buying a share of a property can help them get onto the housing ladder. Eligibility is pretty straightforward. You need to be over 18 years of age and earning under £80,000 a year, or £90,000 in London. You can’t own another property, so you can’t buy a shared ownership property as a second home or as an investment. The unwritten rule is that you should be unable to afford a suitable home on the open market within your area. So the general eligibility isn’t too restrictive. Other things to factor in are having a decent credit score, plus proof that you can afford the mortgage, plus the rent and service charges.

Which lenders offer shared ownership mortgages? Are there many?

It used to be quite a small panel of lenders within this marketplace, but it’s grown in recent years. We’ve now got major names like NatWest, Nationwide, Virgin Money, Halifax, Barclays, Santander and several big building societies like Leeds, Skipton and Cumberland. There’s plenty of choice now.

Which properties are available for shared ownership? Are we restricted here?

There are three major options. Typically, new build sites will have some shared ownership properties. You also get resale shared ownership properties, which somebody has bought as a shared ownership and is now selling it on. Thirdly, there can be adapted homes for buyers with disabilities. It’s important to note that all shared ownership homes are leasehold – even houses – because they’re part-owned by the housing association.

How much deposit do I need for a shared ownership mortgage?

This is one of the biggest perks of shared ownership – deposits are based on the percentage share you buy, not the full property value. To put that into perspective, let’s go back to our £100,000 example property. Typically, if you buy a home on the open market without shared ownership, a lender would typically want you to put down 5% or 10%, which is a minimum of £5,000. If it’s the same £100,000 property but we’re buying a 50% share, we only put down 5% of £50,000 – which is £2,500. That’s what helps people get onto the market – that deposit is a lot lower.

Will my shared ownership property be freehold or leasehold?

All shared ownership properties are leasehold, whether they’re houses or flats. The lease covers aspects such as rent reviews and the staircasing rules – that is, the percentages you’re allowed to buy over time. It also covers whether you can sublet and how you sell, so all shared ownership properties will be leasehold.

Can I buy a bigger share of my home at a later date? Can I ever fully own a shared ownership home?

You can buy a larger share through staircasing – and it’s typically done in 10% chunks, although in new leasehold models introduced back in 2021, you could go up in chunks of 1%. I wouldn’t necessarily recommend that, because every time you buy extra shares, you need the house to be revalued, which costs money. It’s best to buy substantial chunks. You can absolutely own the property in full. Most leases will let you staircase all the way up to 100% ownership. Once you own it all, you’ve got the benefit of owning 100% of the equity in the property, and you stop paying rent on the share you didn’t previously own.

What happens if the value of my house changes?

Property can go up and down in value, and your share will follow the market. So if there is a rise, staircasing will cost you a little bit more because the property value has gone up. But the positive side of that is you’re building equity and value if it’s increasing. If the value falls, obviously staircasing gets cheaper, but your equity will shrink slightly. When you staircase or when you sell, an independent RICS surveyor will always value the property to keep things fair for both you and the housing association. It’s not the housing association making up the pricing; it’s an independent valuer.

What if I have bad credit? Can I still get a shared ownership mortgage?

Yes. It just depends on how bad the credit issues are. If you’re borrowing a high percentage, most lenders will want your credit record and profile to be squeaky clean. If you have a larger deposit, your credit score could be less than perfect. It’s very much about the individual situation – how recent any issues were and whether they’ve been paid off or not. If you’re trying to buy via shared ownership and you’ve got rent arrears from the last few months, it’s probably not going to happen. But everybody’s situation is different. If you’re considering this, talk to a broker and find out whether it’s achievable or not.

You’ve demonstrated how a mortgage broker can help. Have you got anything else to add?

Shared ownership is often cheaper than renting long-term, especially when you factor in equity growth. But remember that there are three costs involved – the mortgage, the rent on the element that you don’t own, and service charges because the property is leasehold. Use a shared ownership calculator to see the true monthly costs and work it all out. You also can’t usually sublet without permission, which could be important to you. Selling can also take a little bit longer because often the housing association will want to look for a buyer first. But it’s a great way to get onto the housing ladder, especially if you feel outpriced in your local area.

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Shared Ownership Mortgage (Part 2)

We continue the conversation on shared ownership with Sam Hubbard.

How do I sell my shared ownership home?

Selling a shared ownership property usually starts with checking the terms of your lease. Many housing associations have a nomination period giving them the right to find a buyer first. During that time, housing associations try to sell your share to an eligible purchaser. If they don’t find a buyer within that period, you can usually put the property on the open market, subject to the lease conditions. The bottom line is to check the lease – see if the housing association has rights or if you can sell it on the open market straight away. Importantly, the new buyer will need to meet the shared ownership eligibility rules. The sale price is generally dictated by an independent valuation, paid for by the seller. You would need to instruct a RICS-qualified surveyor, and their assessment of the price will be accepted by the Housing Association as the sale price. One thing that surprises shared ownership clients is how long it takes. With housing associations involved, the process can be slower than selling a standard residential property. That needs to be factored in.

Can I make home improvements to my shared ownership home?

Yes, but it’s an area you need to consider carefully. You need to revert back to your lease. Do you need permission from the housing association before carrying out certain works? Generally, simple decorating is allowed, but for structural alterations such as extensions, replacing kitchens or bathrooms, or anything that could affect the value of the property, you may need the housing association’s consent first. Because shared ownership properties are generally leasehold, restrictions can be tighter than with freehold property. Not all improvements will automatically increase the value of the property, both from a staircasing point of view and a resale point of view.

How does the remortgaging process work with shared ownership?

Broadly speaking, remortgaging a shared ownership property follows the same principles as a standard remortgage, but there are potentially extra checks along the way. The lender needs to be comfortable with the shared ownership lease and the housing association’s terms. If you’re just switching rates from one deal to another on an existing share, lenders will be fairly comfortable with that. They will look at the affordability, your credit profile and the property details – it should be fairly straightforward. But if you’re staircasing up to buy a larger percentage of the property, the process becomes more involved. It usually requires a valuation of the property and the housing association’s approval. There will also be conveyancing legal work behind the scenes, and the lender must accept the shared ownership terms. Lender choice is slightly narrower than with standard mortgages, and if you have bad credit, it can narrow even further.

How does stamp duty work for shared ownership properties?

Stamp duty on shared ownership property in England and Northern Ireland can be more complex than on a standard purchase. It depends on whether stamp duty is paid on the full market value at the outset, or potentially paid in stages if allowed. The exact position will depend on the purchase price, your status as a buyer and the rules in force at that point in time, because stamp duty rules do change. We would recommend getting legal and tax advice before exchanging on any shared ownership purchase, and confirming exactly what the stamp duty would be for your individual circumstances. It’s important to note, too, that in Scotland and Wales, the types of tax are different from those in England and Northern Ireland. Depending on where you’re buying, do seek independent tax advice for absolute confirmation.

Are there any other fees with shared ownership mortgages?

It’s a really important point, because whilst you’re buying a share in a property and taking a mortgage on that particular share, there are property costs to take into account. You generally have rent to pay on the share you’re not purchasing to the housing association. There may well be service charges and buildings insurance arrangements, depending on how they’re structured with the housing association. Whilst you’re buying, there are also valuation fees, lender fees, legal costs and sometimes housing association admin fees to take into account, especially if you’re reselling or staircasing. While shared ownership is seen as an entry point to the housing market, it’s important to consider all those potential costs. Good advice in this area is important.

What are the alternatives to shared ownership mortgages?

The main alternative is buying on the open market – just buying a standard residential home, perhaps a cheaper property in a different area. You could also use a larger deposit if that’s available, or explore guarantor or family-assisted mortgages. In previous episodes, for example, we’ve looked at Joint Borrower Sole Proprietor mortgages, which effectively assist with the affordability you need to buy. There may be other affordable housing schemes available locally for some buyers, and these can differ widely. Check online, too, because government schemes and incentives change on a fairly regular basis. There are other means of buying a property, that’s for sure.

What are the advantages and disadvantages of shared ownership?

The main advantage is that it can reduce the deposit needed, therefore lowering the size of the mortgage compared to buying outright. It provides a route onto the housing ladder for people who may not be able to buy a full property straight away. It’s that stepping stone. Also, once you’ve bought a shared ownership property, you can look at the option to staircase. This is where you buy additional shares in the property – and it’s generally feasible to borrow up to 100% of the value and own that property outright. Shared ownership is a means onto the market with a lower entry point, but it doesn’t limit you from buying the whole property.

How do I apply for shared ownership? What is the process?

The process usually starts with checking that you meet the scheme rules and affordability requirements. If you fit those criteria, you need to register your interest and find suitable properties through a housing association in the area where you want to buy. After that, you typically complete an affordability assessment with the housing association. There are two affordability steps for shared ownership. The main thing is whether you can afford the mortgage, so speak with a mortgage broker to find out how much you can borrow. Then, the housing association double-checks – you can afford your mortgage, but can you afford the rent on top of it? Sometimes there’s a bit of jiggery-pokery in getting the two to meet. Having worked with many shared ownership housing associations, they all have different approaches to that. A broker can offer positive assistance in this situation because getting everything together can be tricky. Getting advice in this area is very sensible, as it’s one of the more complex areas of borrowing.

Key Takeaways:

Shared ownership is a method for buying a property share, typically 25% to 75%, while paying a subsidised rent (around 2.75% annually of the unsold share value) on the remainder.
It is aimed at individuals unable to afford a suitable home on the open market and requires applicants to be over 18, earning under £80,000 a year (or £90,000 in London), and not owning any other property.
A major benefit is that the required deposit is based only on the percentage share you buy, not the full property value, making it easier to get onto the housing ladder.
You can increase your percentage ownership over time through a process called ‘staircasing,’ which is often done in 10% chunks, and most leases allow you to eventually buy up to 100% ownership.
All shared ownership properties are leasehold (even houses). Three costs are involved: the mortgage, the rent on the element you don’t own, and service charges. Additionally, selling may take longer as the housing association often seeks the initial buyer.
Selling typically begins with checking the lease, as many housing associations have a ‘nomination period’ during which they try to sell your share to an eligible purchaser. The final sale price is based on an independent valuation from a RICS-qualified surveyor, which the seller must pay for.
Simple decorating is generally allowed, but structural alterations (such as extensions, or replacing kitchens or bathrooms) may require the housing association’s consent first. Because these are leasehold properties, restrictions can be tighter than with a freehold property.
While switching rates on an existing share is fairly straightforward, buying a larger percentage of the property (staircasing) is more involved. Staircasing usually requires a property valuation, the housing association’s approval, and conveyancing legal work, and it is important to note that the choice of lenders is narrower than with standard mortgages.
In addition to the mortgage, property costs include paying rent to the housing association on the share you do not own, as well as service charges and building insurance. Other fees may include valuation fees, lender fees, legal costs, and housing association admin fees when reselling or staircasing.
The main benefit of shared ownership is that it provides a stepping stone onto the housing ladder for people who cannot buy a full property straight away, as it reduces the necessary deposit and lowers the initial mortgage size. This option also allows owners to ‘staircase,’ or buy additional shares, with the eventual goal of owning the entire property outright.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.

For specialist tax advice, please refer to an accountant or tax specialist.