How do shared ownership mortgages work?
What is a shared or part ownership mortgage?
The shared ownership scheme, which was introduced by the government, is designed to help families on lower incomes to become home owners.
However, in recent times more and more people from all backgrounds are taking up shared ownership or using the government’s Help to Buy scheme to get on the property ladder.
How shared or part ownership mortgages work
Shared ownership homes are provided through a housing association. They work by offering first-time buyers a share of the property ownership.
You can buy a share of between 25% and 75%, and then pay rent on the remaining share.
The shared ownership scheme is only open to first-time buyers, or those who used to own a home but can’t afford one anymore.
Further to this, the scheme is only open to those on salaries lower than £60,000 per year.
Though the government has announced that as of April 2016 the scheme will be open to any household with an annual income of less than £80,000 (£90,000 in London).
You’ll need a mortgage to help buy the share of the property, but much like the government’s Help to Buy scheme, you can get one with a smaller than average deposit.
Instead of forking out a 10-20% deposit, shared ownership mortgages will usually only require 5% of the property’s value.
Pros and cons of a shared ownership mortgage
Essentially, the shared ownership scheme can be one of the cheapest ways to get your first step on the property ladder.
The 5% deposit means you’ll only need £7,500 for a property valued at £150,000, and considering you’ll be buying a share, rather than the whole property you can get away with putting up less.
For example, for a 50% share in a property valued at £150,000, you’ll need a deposit of £3,750.
If you can afford to put up more and keep up with the monthly mortgage repayments then it might be worth going for a 75% share, but you’ll need to factor in the cost of rent for the remaining share.
To upgrade your share of the home, you’ll need to have the property valued again. If the price of properties in your area has gone up then it could mean that you’ll be paying more than what you did for the initial share. You’ll also have to pay the valuer’s fee each time you wish to upgrade.
If you have part ownership of the home, and depending on your local housing association’s rules, you may find difficulty renting out your property should you decide to move on. This could make the idea of moving home tricky, especially if you can’t afford to upgrade your share to 100%.
With prices in the housing market regularly rising a 100% share may be too difficult to attain, so it could leave you forced to stay in the same home for a long time.
However, if you’re confident that you’ll increase your earnings or savings enough to buy the whole of the property, then the shared ownership scheme can be particularly useful.
It’s also worth bearing in mind that the local housing association will have first refusal if you decide to sell the property, and their right to buy the property back first will last for a term of 21 years from the date of 100% ownership.