Shared equity is also known as shared ownership and 'part buy, part rent'. It is a scheme that allows you to buy a share of a property and pay rent on the rest.
This scheme helps people with small deposits and lower incomes get a foot on the property ladder by buying into this type of affordable housing. For some people, it can be a stepping stone to future buying options.
You can buy a stake of between 25% and 75% of a property from a housing association, and pay rent of up to 3% on the remaining share. Housing associations are non-profit making organisations which provide affordable housing.
Typically, you will need to put down a minimum 5% deposit of the value of just your share, rather than the total property price. You pay for the rest of your share with a mortgage.
To understand how the amount of rent you pay is calculated, let’s look at an example:
Imagine you have just bought a 40% share of a £150,000 property, which equates to a value of £60,000.
The housing association charges rent of 2.75% (a typical average amount) on the remaining £90,000 share that it owns. This will amount to about £2,475 over the year, resulting in £206.25 a month rent.
This sound very cheap, but don’t forget that you would have to make mortgage repayments on top of this if you have taken out a mortgage to fund your share of the property. If, for example, you have put down a 5% deposit, you will be expected to make repayments on a £54,000 mortgage.
The Shared Ownership Scheme is only available to:
- First-time buyers
- Buyers who have previously owned a home now can't afford to buy one through traditional methods
- Existing shared ownership homeowners who want to buy a different house.
Your household income must be less than £80,000 if you live outside London or £90,000 if you're living in London, where average salaries are naturally higher due to the cost of living expenses being higher.
Previously, key workers like teachers and nurses were prioritised over other sector employees for this kind of scheme, due to the lower incomes of people starting out in these professions. However, now it only applies to military personnel.
Your local Help to Buy agent's website will have all the details of how to apply for shared ownership and what kind of documentation you will be asked to provide.
In order to find some properties which meet your requirements, you will need to answer questions about where you want to live, what your income is and how much you have in savings, and crucially, your credit and debt history. An application is normally assessed within an average of four days.
If you are accepted on the scheme, you will then be able to start looking for a suitable property. A Help to Buy agent will be able to show you available properties in the specified area, but you can also look on the Share to Buy website for your region.
Once you have viewed and found a shared ownership property you want to live in, you'll need to put down a reservation fee, which is normally around £200.
Even though you are in the scheme, at this point you will need to go through a full financial assessment with the housing association. This will be carried out by an independent financial adviser who, if successful, may also offer to arrange a mortgage for you.
A full financial assessment will normally require:
- Three months of payslips
- Three months of bank statements
- Proof of ID
- Proof of savings
- Information about existing debts and other credit arrangements
- Information about any benefits you receive.
You may also have to agree to a credit check, which will impact your credit score. Following this assessment, you will be told what share you can afford, and what rent you will need to pay.
After the housing association initial assessment, you will need to undergo a similar one with the mortgage lender you have decided to approach.
You’ll go through a thorough assessment of your finances, which helps the mortgage provider decide if you are eligible for a mortgage and how much to lend to you.
However, when you're buying a shared ownership property, you will also have to include other costs to the rent you'll pay on the portion of the property that you don’t own: ground rent and service charges. As shared ownership homes are sold on a leasehold basis, you will be responsible for meeting your share of these costs, so it’s very important you can afford to pay them.
These costs are compulsory and could, unfortunately, reduce the amount you could borrow. If the costs and your mortgage combined exceed 45% of your overall income, you may seriously struggle to pass affordability checks.
Shared ownership can be a great way of getting onto the property ladder, but it's not the ideal solution for everyone. Here are some of the pros and cons:
- Shared ownership can help get onto the property ladder a lot quicker than if you were to buy with a full mortgage
- Your share is not fixed forever - as time goes on, you could buy more shares and you save more or pay off more of your mortgage
- It may work out cheaper than renting
- You can, of course, sell a shared ownership property, benefiting from any increase in value it may have achieved since you have bought it.
- You can only buy a shared ownership property where it is located, which may not suit your needs
- It can be difficult to build up the share you own (called ‘staircasing’) if the value of the property increases, as the shares will become more expensive
- You'll usually have to pay service charges and possibly ground rent, as with all these types of properties, whether they're a shared ownership property or not.
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