Whether you’re a first time buyer struggling to raise a deposit or a previous home owner unable to afford an outright purchase, you may want to consider applying for the shared ownership lease scheme. This scheme can be a great way to get a foot on the property ladder and invest in your future with a smaller deposit than you would need for an outright purchase.
But what exactly is a shared ownership lease?
A shared ownership lease offers prospective buyers the opportunity to purchase part of a property, rather than the entire home. Ownership is shared with a ‘landlord’ – usually a housing association – meaning you require a mortgage only on the percentage of the property you own. You’ll then pay rent on the remaining portion.
You can opt to purchase more shares in the property over time, with most schemes allowing leaseholders to purchase up to 100% in total, giving you full ownership in the future. Increasing your shares means you’ll pay less rent with each new chunk of the property you acquire. Your mortgage payments will increase as your percentage owned rises. However, there is no legal obligation to purchase more shares if you don’t wish to do so.
Shared Ownership vs. Help to Buy
Help to buy is a term often used in the media and by developers advertising properties for sale. It is an umbrella term for various initiatives including shared ownership, help to buy ISAs and equity loan schemes. The specific terms of each initiative vary as they are all different things, though they share the common aim of helping someone who can’t afford to buy a property in full to obtain ownership.
With a shared ownership lease, ownership of the property is split between the leaseholder and the housing association. With a help to buy equity loan, the purchaser buys 100% of a new build property with assistance from a government loan, which is given for a fixed percentage of the purchase price. That loan is interest free for 5 years and after that attracts interest. A loan of up to 40% is available in London and 20% elsewhere in the country. Those buying a property with this scheme will only need a 5% deposit, though that does still mean the buyer will need access to savings and / or a mortgage to finance the purchase, with the government loan secured as a second mortgage.
Obtaining a Mortgage for Shared Ownership
An increasing number of lenders are beginning to make loans available for a property purchase made under shared ownership terms. To be eligible for a shared ownership scheme, your household earnings must not exceed £90,000 in London or £80,000 elsewhere and you’ll need to show proof of earnings during the shared ownership mortgage application process to demonstrate that you qualify for the scheme and can afford to purchase in this manner.
What’s Different in Shared Ownership?
The truth is that, in terms of day-to-day living, there are not many differences at all between purchasing a property outright, and buying under the shared ownership scheme. You will still be required to raise a deposit and have a good credit history, and you will still have the right to live in the property as you normally would, providing mortgage and rent payments remain up-to-date. A shared ownership lease can be a great way for first time buyers or those with limited financial means to purchase a home that they otherwise would not be able to afford, although there are a few things that are important to understand before applying.
What to Watch Out For in a Shared Ownership Lease
As with any lease agreement, there are a few aspects to take into consideration when deciding if a shared ownership arrangement is the right solution for you. These include:
- Ownership Percentages: Under the scheme, you must be able to commit to purchasing a minimum of 25% of the property initially. The maximum initial amount is 75%.
- Fees: The landlord will determine the fee for the property, up to a maximum of 3% of its overall value. The combination of fees and mortgage payments can result in significant monthly outgoings.
- Maintenance Costs: Even if you own just 25% of the property, you are still eligible for some maintenance costs. For a house, you’re responsible for 100% of those costs, while if you’ve purchased a flat, you’ll be responsible for a percentage of the building maintenance costs.
- Valuation Changes: If you choose to purchase more shares in the property in the future (a process known as ‘staircasing’), remember that the market rate at that time will dictate how much you’ll pay. If property prices rise, you may need to pay more. On the flip side, the share of equity you already own will be worth more as well.
- Legal Expenses: Each time you purchase more shares, you’ll need to pay legal expenses to amend ownership details.
- Selling: If you decide to sell your home without owning 100%, you’ll need to find a buyer that meets the criteria for the shared ownership scheme (such as having the required deposit, having good credit history to obtain a mortgage and with a household income that doesn’t exceed £90,000 per annum in London and £80,000 per annum elsewhere). In most cases, the association may offer to buy back your shares or nominate a buyer.
Do Shared Ownership Leases Cover New Builds?
Yes. Shared ownership leases can be secured for both resale properties and new builds.
Is a Shared Ownership Lease Right For Me?
Only you can decide whether a part-buy, part-rent scheme is a suitable solution for you. There are many different things to think about that you typically wouldn’t need to consider when purchasing a home outright. Even if shared ownership is a little less straight forward than a traditional purchase, it can be a very worthwhile way of getting your own home. Shared ownership leases can be a significant help for those who are keen to own a property but are not yet able to afford a property outright.