With the cost of living rising and mortgage lenders imposing strict constraints on who can borrow, getting that first foot on the property ladder may seem impossible. But more and more buyers in the UK are taking that first step thanks to shared ownership schemes.
So if you are desperate to move into your first home, take a look at the pros and cons of these part-buy, part-rent opportunities to see whether shared ownership is for you.
What is shared ownership?
Simply put, shared ownership schemes allow buyers to buy a percentage, usually between 25 and 75 per cent, of a property, while paying rent on the remainder to the housing association that owns the building. The amount of rent buyers pay can be up to three per cent of the share owned by the housing association, and since they are usually leasehold properties, a service charge is commonly added to monthly payments.
These schemes are designed to help low-income families or professionals who are unable to buy their own property outright to get a foot on the ladder.
What are the benefits?
As well as the obvious advantage of taking that all-important first step into the property market, shared ownership usually means you can buy a home that is bigger than you would otherwise be able to afford.
Just as the mortgage on your share will be smaller than if you were buying a home outright, so too is the deposit amount needed, giving first-time buyers a better chance of saving the sum. And since your share of the property often falls below the stamp duty threshold, you'll also avoid that extra expense.
These schemes also allow buyers to increase their ownership by buying further shares as income increases or circumstances change. This is known as staircasing. For example, you may start with a 50 per cent share of the property, but if your income picks up in two years' time, you may decide to buy a further 25 per cent. The amount of rent paid decreases accordingly. Therefore shared ownership is still an investment, as your growing share coupled with any improvement in the housing market may allow you upgrade when it comes to selling.
Furthermore, by proving that you can make regular mortgage payments, lenders may look more favourable on you when it comes to borrowing in the future.
What are the downsides?
It is essential to do your maths before you get involved in a shared ownership scheme. Though your deposit and mortgage repayments will almost certainly be smaller than if you were to buy outright, add the rent on top and you could be paying a sizeable monthly sum, so do be absolutely sure that you can afford the total amount before jumping in.
It is also worth remembering that should you wish to increase your stake, you will have to pay a valuation fee and the cost will depend on the current value of the property, which may have increased since you took on the mortgage.
Buyers also need to fit the housing association's criteria for shared ownership, and some may find they are not eligible, and it's possible you won't find a property in your preferred area. Similarly, those wishing to move up the property ladder quickly may find things tough, as future buyers will need also need to qualify for the scheme, and the housing association has the right to 'first refusal' on buying back the property for 21 years after you fully own the home, or if they retain a share in the house.
You should also be prepared for possible increases in rent or service charges, and shared owners will often need to seek permission if they wish to redecorate or alter the property. There are also likely to be restrictions on whether you can rent out your property should you need to for any reason.
Lastly, just as if you buy a home outright, the value of your home depends on the property market and if prices take a dip, you could still end up in negative equity.
How do I get started?
If you're comfortable with the idea of shared ownership and the potential pitfalls that go with it, then your first port of call should be the local housing association, who can advise on your eligibility and what properties are available in the area.
Once you've found a potential property, finding a mortgage is the next step. Not all banks offer shared ownership mortgages, but Santander, Halifax and Nationwide do, along with a number of building societies. Lenders typically require a deposit of 10 to 25 per cent of your stake, and buyers should also budget for the usual arrangement fees (which are often included in the mortgage repayments) and legal costs associated with buying a home.
Shared ownership isn't for everyone, but if you are struggling to get onto the property ladder it could give you that initial boost you need.
Have you bought a property via a shared ownership scheme? Would you recommend it to other first-time buyers? Leave your comments below...