Shared ownership allows low cost entry to the housing ladder. Only a share of the property is purchased and owned, whilst rent is paid to the house association for the remainder. Rest of the equity can be purchased in the future in steps at the market value at the time.
Almost all shared ownership property will be flats/ apartments and so will be leasehold property. Conditions that you need to specially pay attention when buying leasehold property are below.
Shared ownership criteria.
- Part buy / part rent from a housing association (HA). An organisation designated to build social housing on not-for-profit basis.
- Minimum deposit is 5% of share purchased. So less funds compared to a standard mortgage where the deposit is based on the full property value. So the mortgage is 95% of the share purchased.
- Only available to first time buyers, those that don’t own another property and existing shared ownership owners.
- Buy anything from 25% – 75% of house value. Once share rises above 75% all of the property needs to be purchased.
- Maximum income rules: your income single or joint needs to be less £80,000 outside London and less than £90,000 within London to qualify.
- If you rent a council or housing association property, then you will receive priority. Military personnel also get priority. No longer priority for Nurses and Teachers.
- Housing Association will charge rent for their share. Standard can be 3% of the share. This could be higher than the interest rate paid on the lender’s mortgage. See table below.
- Lender will apply standard lending criteria e.g. credit score, income and outgoings, including the cost of rent to the HA. Therefore, the maximum loan available will be reduced.
- Staircasing : the option to buy further shares of the property in time. The purchase price of the share will be based on the market value at the time.
Rent calculation for Shared Ownership
Example: You earn £40,000 a year borrow £150,000 mortgage to purchase a share of a new build property. As the mortgage is same (based on income) share you can purchase will vary based on the full market value of the property.
Lender’s interest = 2.79%. Housing Association rent charge = 3%
Term of the mortgage = 25 years.
Rent costs for different values of property
|Property Value||Mortgage from lender||Monthly Mortgage||% Share purchased||Housing Association share||HA rent cost||Total Monthly Payment|
Rent costs for different values of property
Pros and Cons of Shared ownership
- Minimum deposit. Low cost entry to property market.
- Allows purchasing larger properties (e.g. family needs) as only a share needs to be purchased.
- No maximum property value.
- Pay rent to Housing Association for their share. Can be a higher interest rate than a normal mortgage.
- No sub-letting allowed or conversion to a Let property. The owner needs to occupy property. However, a lodger may be taken with permission from HA.
- Require permission from Housing Association for any alteration in the property.
- Mainly leasehold flats only. Several drawback to new build leasehold ownership – Ground Rent Doubling clause, Restrictive Covenants & Snagging issues.
- Majority of new purchases are new builds, which are not a preference for some.
- Loose share of future property price gains.
Shared ownership Application process
STEP 1: to find out how much you can borrow.
- It will depend on your income, your fixed outgoings and credit score.
- You can do this directly with a bank or ask a mortgage broker to find out. Not all lenders provide H2B mortgages. A broker would also have the knowledge of how different lenders calculate maximum loan levels, which income is considered for lending and how are fixed credit and loans are treated.
- A broker can also assess various deals from lenders based on rate and fees to find the best value for money and provide you several options to choose from.
- Once you have decided on the type of mortgage deal, e.g. loan amount, rate type (fixed, discounted) and rate period, you can obtain a Decision / Agreement in Principle from the lender. The broker can arrange this for you. It will provide evidence to Help to Buy agent of your eligibility to a loan.
- NOW you have two options: You can research for available property (STEP 3) to find out if any suitable are there or register with the H2B agent (STEP 2).
STEP 2: Register with your local Help to Buy Agent.
- You need to be approved by a H2B agent to be accepted for a shared ownership property. They will carry out a financial assessment of you. This is similar to applying for a mortgage. In fact it is to identify how much you can borrow and the level of property value.
- You need to register with your local H2B agent. There are only three now, acting for the whole of England. They will also help you with the application process and answer any questions. You can find their details on the government’s H2B website.
- As a rough guide H2B agents look for property related outgoings to be less than 45% of your monthly income. These will be mortgage, rent to HA and any service charges on the property. Therefore it is very important to know the service charge fee for each property.
STEP 3: Find a property.
- There are two sites to search for shared ownership property. Sometimes it is better to search for available property before meeting the H2B agent. These websites will allow you identify availability of any property in the areas you want. The sites are : Property Booking and Share to Buy.
- You may also find some property that are not completed. You may be able to reserve and complete a mortgage once the build is finish. In this instance the lender will carry out 2 surveys. One pre-completion and one post.
- You can make an appointment with the relevant housing association to view the property. Once you find the property you prefer a small deposit of £200 will reserve the property for you.
Golden share caveat on the property?
Many SO houses outside London but still leasehold (HMRC)