How do shared ownership mortgages work?

Shared ownership is a government-backed scheme designed to help UK buyers who cannot afford to purchase a property outright. It involves buying a share of a property and paying subsidised rent on the remaining portion, which is owned by a housing association. A shared ownership mortgage differs from a traditional mortgage because it only covers the percentage of the property you purchase, leading to lower deposit requirements and smaller initial borrowing amounts.

Understanding How Do Shared Ownership Mortgages Work?

Shared ownership has become a crucial pathway onto the property ladder for many individuals and families across the UK. It is sometimes referred to as ‘part-buy, part-rent.’ While the concept of owning only a portion of your home may seem complex, the mortgage process itself is designed to make property ownership more accessible.

What is the Shared Ownership Scheme?

The shared ownership scheme allows you to buy a percentage of a new-build or existing leasehold property from a housing association. The share you buy is typically between 10% and 75% of the property’s full market value. The housing association retains ownership of the remaining share.

Key elements of the scheme:

• Part Buy: You obtain a mortgage and pay a deposit only on the share you are purchasing.
• Part Rent: You pay rent to the housing association on the part they still own. This rent is usually set at a subsidised rate, significantly lower than typical market rent.
• Leasehold Tenure: Shared ownership properties are typically sold as leasehold, meaning you own the property for a fixed number of years, usually 99 or 125 years.
• Staircasing: You have the option to buy further shares in the future, a process known as ‘staircasing’, until you potentially own 100% of the property.

The scheme is regulated and managed by government standards. For detailed information on eligibility and scheme rules, you can consult the official guidance provided by the UK government on buying a home through shared ownership.

Eligibility Criteria for Shared Ownership

Not everyone qualifies for shared ownership. The scheme targets specific groups who demonstrate a need for housing assistance. To be eligible to apply for shared ownership in England, you must generally meet the following criteria:

• Your household earned £80,000 a year or less (£90,000 or less in London).
• You are a first-time buyer, or you used to own a home but cannot afford to buy one now.
• You are an existing shared owner looking to move.
• You are over 55 (specific schemes exist for this group).

You must also show that you cannot afford to buy a suitable home for your needs on the open market, and you must prove that you can afford the monthly payments (covering both the mortgage and the rent).

Affordability and Credit Checks

When applying for a shared ownership mortgage, lenders and housing associations will conduct thorough affordability assessments and credit checks. They need to confirm that your income is stable enough to manage both the debt repayments and the rent charges.

Lenders will review your credit history to assess your financial reliability. It is always wise to check your credit profile before applying to address any inaccuracies or unexpected issues. Get your free credit search here. It’s free for 30 days and costs £14.99 per month thereafter if you don’t cancel it. You can cancel at anytime. (Ad)

How Does the Shared Ownership Mortgage Work in Practice?

Understanding how shared ownership mortgages work requires focusing solely on the financial share you intend to own.

1. Determining the Required Loan Amount

Unlike a traditional mortgage where you borrow based on the full property price, a shared ownership mortgage only finances the percentage you are buying. If a property is valued at £250,000 and you decide to purchase a 40% share, the value of your share is £100,000. Your mortgage will be based on this £100,000 figure.

2. Deposit Requirements

The deposit required is also calculated based on your owned share, not the full property value. If the lender requires a 5% deposit, you would need 5% of £100,000, which is £5,000. This significantly lowers the initial capital needed compared to a full purchase deposit of £12,500 (5% of £250,000).

3. Monthly Payments: Mortgage Plus Rent

Your total monthly housing cost under shared ownership is split into two components:

• Mortgage Repayment: Payments made to the lender based on the loan amount for your purchased share.
• Rent Payment: Payments made to the housing association for the unowned share. This rent is typically capped at 3% of the value of the unowned share, though rates vary.

For example, using the £250,000 example above (40% owned, 60% unowned), if the annual rent charge is 2.75% of the unowned share (£150,000), the annual rent would be £4,125, equating to £343.75 per month, plus your mortgage payment.

4. Specialist Lending

Because shared ownership mortgages involve unusual security arrangements (financing only a portion of the collateral), not all high-street lenders offer them. You will typically need to approach lenders who specialise in this sector or work with a mortgage broker experienced in shared ownership products.

The Risks Associated with Shared Ownership Mortgages

While shared ownership offers an affordable route to homeownership, it is vital to understand the potential drawbacks and risks involved:

• Dual Payment Obligation: You are obligated to pay both the mortgage and the rent. Missing either payment can lead to serious consequences.
• Leasehold Obligations: As a leaseholder, you are usually responsible for 100% of the service charges, maintenance, and ground rent (if applicable), even if you only own a minority share.
• Staircasing Costs: While buying more shares (staircasing) is beneficial, each step requires legal fees, administrative fees, and often a property valuation, which can be costly.

If you secure a shared ownership mortgage, your property may be at risk if repayments are not made. Consequences of default can include legal action, repossession, increased interest rates, and additional charges. Always ensure you have adequate contingency funds to cover both the mortgage and rent components.

Staircasing: Increasing Your Share

Staircasing is the mechanism that allows shared owners to increase their equity in the property. Most schemes permit owners to buy additional shares, usually in increments of 10% or more, until they reach 100% ownership.

How the Staircasing Process Works

1. Valuation: When you decide to buy a larger share, the housing association requires an independent, RICS-approved valuation of the property at that time. You pay for this valuation.
2. Price Calculation: The cost of the new share is based on the current market value, not the original purchase price. If the property value has risen, the share will be more expensive.
3. Financing: You must secure the funds for the new share. This may involve increasing your existing shared ownership mortgage, securing a new mortgage, or using savings.
4. Legal Completion: Solicitors handle the transfer of equity, incurring further legal fees.

If you staircase to 100%, you typically acquire the freehold (if it is a house) or the full leasehold ownership, meaning you no longer pay rent to the housing association, though you would still be liable for any associated service charges.

Selling a Shared Ownership Property

Selling a shared ownership property is different from selling a conventionally owned home, especially if you own less than 100%.

• Nominating the Buyer: If you own less than 100%, the housing association usually has the right of first refusal. They typically have a nomination period (often 8 weeks) during which they try to find a suitable buyer from their waiting list of eligible shared ownership applicants.
• Market Sale: If the housing association cannot find a buyer during the nomination period, you are generally free to sell the property on the open market.
• Valuation at Sale: The sale price must be based on a current market valuation provided by an independent surveyor.

Your solicitor ensures that the proceeds of the sale are split correctly: the mortgage lender receives their repayment, and the housing association receives the value equivalent to the share they still own.

People also asked

Can I get a normal mortgage for shared ownership?

No, you cannot typically use a standard mortgage product. Shared ownership mortgages are specialist products because the loan is secured against a percentage of the property value, requiring specific terms and conditions designed for leasehold and part-ownership structures.

How much deposit do I need for shared ownership?

The required deposit is calculated based on the price of the share you are buying, not the full property value. Lenders typically require a minimum of 5% or 10% of the price of your purchased share, making the deposit substantially smaller than for a full market purchase.

Is shared ownership cheaper than renting?

Shared ownership can often be cheaper than renting, particularly in high-value areas, because the combined mortgage payment (for your share) and the subsidised rent (on the housing association’s share) may be lower than market-rate rent. However, you must also factor in service charges, maintenance costs, and potential legal fees associated with home ownership.

Do shared ownership properties increase in value?

Yes, shared ownership properties generally track the wider property market. If the property’s value increases, the value of your owned share increases proportionally. However, this also means that the cost of staircasing future shares increases because the price is based on the current market value at the time of purchase.

Do I pay Stamp Duty Land Tax (SDLT) on shared ownership?

Yes, but there are specific rules. As a shared owner, you can elect to pay SDLT either in stages as you staircase, or you can make a one-off payment based on the full market value of the property when you first purchase your share. First-time buyers may also be eligible for SDLT relief.

Can I renovate a shared ownership property?

Significant structural renovations usually require permission from the housing association, as they own a portion of the property. Minor cosmetic changes generally do not require consent, but always check the terms of your lease agreement before undertaking major works.