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20 Sept 2018

Is shared ownership a good idea for first-time buyers?

Schemes allow buyers to purchase a share of a property and pay rent on the rest

Stephen Maunder

Broadcaster Reggie Yates is fronting a shared ownership initiative for first-time buyers. But are properties available under these schemes affordable for people with small deposits?

'Shared Ownership Week', which begins today, aims to equip prospective buyers with information about shared ownership schemes, which involve purchasing a share of a property and renting the rest.

Here, we explain how shared ownership works and its pros and cons, then explore alternatives for first-time buyers with 5% deposits.

Shared Ownership Week

Shared Ownership Week runs from 20-26 September and aims to raise awareness of shared ownership as an 'affordable, smart way to buy a new or resale home'.

Reggie Yates, this year's Shared Ownership Week ambassador, said: 'To be a young person and own your own home should be a dream that everyone has the right to fulfil.'

Shared ownership schemes are popular with buyers, with data published earlier this year from the English Housing Survey (2016-17) showing there are 136,000 shared ownership households in England.

How does shared ownership work?

Shared ownership schemes allow buyers with a deposit of 5-10%to purchase a stake of up to 75% in a property from a housing association and pay rent on the remainder.

Shares can start from as little as 25% of the property - though many schemes require a much larger minimum stake - and buyers can increase their share over time using a process called staircasing.

If you staircase, you'll usually need to buy at least another 10% in one go, will have to pay for a market valuation, and may be subject to further stamp duty payments (more on this later).

Find out more:watch our video and learn more about affordability and tax implications in our full guide toshared ownership.

Shared ownership rules

To use shared ownership, you'll need to have a household income of less than £80,000 (or £90,000 in London).

You'll also need to be a first-time buyer, existing shared ownership homeowner, or someone who has previously owned a home but can't afford to buy one now.

Shared ownership homes are leasehold, meaning you'll need to pay a service charge for the maintenance of any communal areas.

Is shared ownership too expensive?

While the prospect of buying a share of a property with a 5% deposit might sound appealing, the cumulative costs can be very expensive.

Research we published last year found that, forthree quarters (76%) of shared ownership homes within 25 miles of London, buying even a minimum share was unaffordable for buyers aged under 30.

We also discovered that the average minimum share of a studio or one-bedroom shared ownership home in London cost £145,146.

While a 5% deposit on this property would cost a little over £7,250, the cumulative mortgage, rent payments and service charges would leave you with a bill of £1,189 a month - a sum way beyond the means of many buyers.

Will you have problems selling your home?

Shared ownership properties are generally available in places where people can't afford to buy outright, which means you're likely to be purchasing in an expensive market.

This has resulted in some homeowners finding themselves stuck in their shared ownership properties - unable to afford the costs of staircasing to full ownership and lacking the required equity to buy a home outside of the scheme.

This leaves owners in a difficult situation, as if they decide to stay for the long term and make improvements to the property, the housing association will profit from a large slice of the increased value when they do come to sell their home.

Shared ownership pros and cons

Shared ownership schemes are complicated, so we've summarised the pros and cons below to help you weigh up whether it's the right move for you.

Advantages	Disadvantages
Initial affordability:you can buy a share of a home with a 5% deposit and a small mortgage.	Service charges:you'll need to pay service charges for upkeep of common areas and, while you might only own 25% of the home, that won't be reflected in how much you have to pay in charges.
Additional costs:you can either pay stamp duty on the full property value up front (useful if you plan to reach 100% ownership and are worried about the value increasing) or choose to pay it just for your share. This means if you're spending less than £125,000 initially you won't need to pay a lump sum up front - though you may have to pay a small amount on the rented part of the home.	Leasehold issues:unlike other leasehold properties, you won't be able to invoke your Right to Manage, which enables homeowners to take over the management of the block if they're unhappy with how it's being maintained. You also won't be able to buy the freehold until you own 100% of the property.
New homes in good locations:while there are plenty of resale shared ownership properties about, many are new-builds in sought-after locations. New-build homes come with warranties against build defects, and you should benefit from lower energy bills.	Letting:if your circumstances change and you want to let the property out, you won't be able to without the permission of the housing association.
Flexibility:if your circumstances change and you come into some money, you can 'staircase' up to full ownership. Remember that you'll need to get a valuation and buy additional shares at the current market rate.	Cost of increasing share:you'll need a significant lump sum if you wish to staircase, as the minimum share you can usually buy through this process is 10%. You'll also need to pay stamp duty on any additional shares.
Can sometimes be sold on your behalf:when selling a shared ownership home you have to start by informing the housing association, who will attempt to find a buyer before it's put on the open market.	Rent costs:the costs of rent on the housing association's share can be steep. You can be charged rent of up to 3% of the association's share each year.
Good for local buyers:many shared ownership schemes offer preferential treatment to buyers who already live in the borough where the homes are located - potentially giving you a chance of beating the competition.	Borrowing: not all mortgages allow shared ownership purchases, so you'll need to shop around - and you could end up paying a higher interest rate than if you were borrowing on an existing property.

Alternatives to shared ownership

If you're considering shared ownership, take a look at the following alternatives before rushing in.

Help to Buy	Help to Buy enables you to put in a 5% deposit, borrow a share of the property price from the government (the loan size will differ depending on whether you live in London, the rest of England, Wales or Scotland), and take out a smaller mortgage on the remaining sum.
95% mortgage	95% mortgagesalso allow you to buy a home with a 5% deposit. Rates this year have been very competitive as more deals come to the market.
Guarantor mortgages	Guarantor mortgages enable a family member to take on some of the risk of lending to you, meaning your mortgage application may be more likely to be accepted and you might be offered better rates.
Joint purchase	Manyfirst-time buyers are now clubbing together with friends or a partner to buy their first home. Check out our guide on joint mortgagesfor more information.
Save more for a better deal	If you're able to save a little more, you could get a much better mortgage deal. Save into a Help to Buy Isa or lifetime Isaand you'll get a government bonus on your cash when you buy your first home.