The government claims that an overhaul of shared ownership could help first-time buyers get on to the property ladder with a deposit of just £2,000.
Shared ownership schemes allow first-time buyers to purchase a share of as little as 25% of a home and pay rent on the remainder.
This undoubtedly offers an alternative option to cash-strapped buyers in expensive cities such as London, but the spiralling costs once they’ve bought via the scheme have left some shared ownership homeowners feeling the pinch.
Here, we explain how the government is seeking to overhaul shared ownership and offer advice on whether it really offers an affordable route on to the property ladder.
What is shared ownership and what’s changing?
Buyers can purchase a stake in a property (theoretically from 25%) with a 5% deposit. They then pay for a mortgage on the rest of their own share and rent on the housing association’s share, plus a monthly service charge.
Over time, homeowners can ‘staircase’ their way to full ownership by buying 10% chunks of the property at its market value.
Shared ownership set to be overhauled
Shared ownership isn’t universally popular, with concerns regularly raised over affordability. A Which? investigation in January 2017, found that young people in London were being priced out of the scheme.
One of the biggest bones of contention is the minimum stake. Many flats currently on the market require buyers to purchase at least 40% or 50% of the property, well in excess of the 25% stake that’s advertised on shared ownership marketing.
The government plans to introduce new rules allowing buyers in England to purchase a minimum stake of just 10%, which it says will allow them to get on to the ladder with deposits of as little as £2,000 in some areas.
The staircasing system also prompts debate. As it stands, homeowners can buy extra shares in their property in 10% chunks, although they need to pay for a valuation and buy the shares at the property’s current market value each time they want to staircase.
The government now plans to reduce the minimum amount a homeowner can staircase by to just 1%. It says it will also introduce a ‘streamlined valuation model’ to make the process more affordable.
- Find out more: check out our full guide on shared ownership
How much does shared ownership cost?
Shared ownership schemes are most commonly available in and around London, so let’s look at a couple of flats currently on the market.
£1,900 a month for 25% of an apartment
In Harringay, north London, buyers can purchase a 25% stake in a two-bedroom apartment for £146,250 – meaning the flat’s full price is a whopping £585,000.
The Share to Buy website estimates that the monthly repayments on this property would be £1,871 – comprising £914 in rent, £651 in mortgage repayments and a service charge of £306.
As well as a high monthly cost, this apartment requires a minimum deposit of 10% (rather than 5%) on the initial 25% stake – so you’ll need £14,625 as a down-payment.
Yours for just £7,000 upfront
In Clapham, south London, buyers can obtain a 25% stake in a two-bedroom apartment for £141,500.
This development allows a 5% deposit, so you’d only need £7,075 in savings to buy here.
Again, however, the monthly costs are high. Share to Buy estimates you’ll pay £1,786 a month: £973 in rent, £709 in mortgage payments, and a service charge of £104.
How much would a 10% stake cost?
Should the government introduce the 10% minimum stake, a property such as the Clapham flat could theoretically be available with a deposit of just £2,830.
This might sound incredibly enticing for first-time buyers – but in truth this barely classifies as home ownership at all.
In this example, you’d be taking out a 95% mortgage on just 10% of a property, while paying out rent of more than £1,000 a month on the remainder. Technically, this means that when you start out, you will own just 0.5% of the property.
Shared ownership: an analysis
There are many affordability issues facing first-time buyers in the current property market, but it’s highly debatable whether buying a tiny share in a property is better than none at all.
First, the benefits of any uplift in the property’s value will almost entirely end up with the housing association, who owns the lion’s share – and with shared ownership homes being touted at sky-high prices in a slow (and, in some areas, declining) market, there may not be any uplift at all.
Second, while the monthly repayments on the mortgage might be affordable, the addition of rent and a service charge make it very difficult for most people to save anything on top, let alone enough to eventually leave shared ownership and buy a home on the open market.
Alternatives to shared ownership schemes
If you’re determined to live in one of London’s inner zones and consider a small stake in a property to be better than all-out renting, shared ownership is worth considering.
If not, you’re better off looking elsewhere or continuing to save for longer.
95% mortgage rates are currently very attractive, and if you could buy a home on the open market you’re likely to get a cheaper deal and pay much lower monthly repayments.
The below examples are based on a 95% two-year fixed-rate mortgage with an introductory rate of 2.6% (the lowest rate currently available).
|Deposit size||Maximum property price (95% mortgage)||Estimated monthly repayments|
Before rushing to buy your first home, consider the range of finance options available to you.
Our full guides on 95% mortgages, guarantor mortgages and Help to Buy equity loans can help you make an informed decision on the best choice for you – and we’d always recommend talking to a mortgage broker before choosing a deal.
Changes to shared ownership for social housing tenants
As part of its suite of changes, the government also plans to introduce a new system for housing association tenants.
A new ‘shared ownership right to buy’ scheme will allow tenants to buy an initial 10% stake in a property, and pay subsidised rent on the remainder.
The move has already faced criticism. The National Housing Federation said the plans could ‘worsen the housing crisis’ by removing properties from the social rent sector.
- Find out more: affordable housing – can you buy below market value?