For first time buyers desperate to buy their first home, shared ownership or part buy/part rent could be the answer to getting a foot on the ladder. This simple guide explains how it works >>
What is shared ownership?
Shared ownership, also called part buy/part rent allows you to buy a share of a home which you may live in as if you owned it outright. The benefit being that the initial purchasing costs of a shared ownership property are generally lower than that of a property purchased on the open market, particularly when it comes to the deposit you will need.
Shared ownership properties are available through housing associations, or ‘registered providers’, as we call them. The registered provider who sells you your home will become your landlord, owning the part of the property you do not. With shared ownership, you initially buy between a 25% and 75% share of a home with a mortgage and a deposit, just like you would if you were buying a home on the open market – only both are likely to be less.
You then pay a subsidised rent to your landlord on the share that you have not yet bought. For example, if you buy 25% of a property, you will pay subsidised rent on 75%. As and when you can afford it, you can buy more shares. Read more about this in our ‘staircasing’ section later in this guide. As you purchase more shares, your rent reduces, and, when you own 100% of your home, you will not need to pay rent at all.
Am I eligible? And will I have priority for a shared ownership property?
Generally speaking you are eligible for shared ownership if:
- Your household income is less then £60,000 per year
- You do not already own a property
- You have good credit history
In addition to the above, different properties will have different eligibility criteria, so you should expect your eligible minimum earnings, for example, to differ depending on the value of the property you are looking at.
You may be able to buy a shared ownership property if you used to own a home, but can’t afford to buy one again now. Often, this situation arises when a relationship breaks down and ex partners can’t afford to buy new homes on the open market on their own.
If demand is high and a shared ownership property is oversubscribed, the registered provider will look to prioritise applicants. If you currently rent a housing association or council property, or you are serving military personnel, you will have higher priority than other applicants. Depending on the area you are buying in there may also be other priority groups; ask the registered provider selling the home you’re interested in for further details.
In order to find out whether you are definitely eligible for shared ownership you need to contact your local Help to Buy agent, these used to be called HomeBuy agents. The Help to Buy agent will work through your personal circumstances with you, which will include your income, savings, need for housing, a basic check on your expenditure, and any local connections you might have. This is a free service, so it’s well worth contacting them.
How do I find my local Help to Buy agent?
Findyour local Help to Buy agent by logging on to helptobuy.org.uk and clicking on your area on the map. Your local Help to Buy agent will have information on all of the shared ownership properties available in your area.
They’ll also pass your details on to registered providers who request information from people who are interested in purchasing shared ownership properties. Think of them as a matchmaker, linking those searching for properties and those selling them.
The subsidised rent I need to pay… is this increased regularly?
It is important to find out at an early stage what rent you will need to pay on the initial share of the part of tyhe property you won’t own, and how much this will increase by on an annual basis. Landlords calculate rents based on a percentage of the value of the share you don’t own, this generally ranges between 2-3%.
Every year your landlord will look at increasing the rent. Rents cannot be arbitrarily increased and are regulated, so don’t worry about extortionate rises. The calculation used for increasing rents is shown in your lease and will be linked to inflation. Make sure you have a good read of the lease before you buy,
You said earlier that I’d have to pay a service charge?
Yes, in nearly all cases you will need to pay a service charge. The service charge covers looking after and cleaning the communal areas, buildings insurance and often things like window cleaning and lift maintenance. It is important to check out what amount the service charge will be before committing to buying a home to ensure you can budget for it.
So what exactly do I need to budget for?
Before buying a property make sure you set two budgets, one for purchasing costs and one for ongoing costs.
To cover purchasing costs you’ll need to allow for:
- Mortgage valuation and possible arrangement fees
- Legal fees – use a specialist fixed-fee solicitor experienced in shared ownership
- Deposit – this is usually 5%-10% of the value of the share you are purchasing
To cover ongoing costs you’ll need to allow for:
- Mortgage payments
- Rent on the share you do not own
- Service charge
- Utility bills
- Council tax
- Contents insurance
The table below* gives you an example of how buying 50% of a property valued at £150,000 would initially cost you £7,250 and £630 per month as an ongoing cost:
|Open market price of new home||£150,000|
|Equity purchased @ 50%||£75,000|
|Value of the share you do not own at 50%||£75,000|
|Approximate costs of purchasing (legal, valuation fees, etc.)||£3,500|
|Total initial outlay||£7,250|
|ONGOING MONTLY COSTS||£|
|Mortgage per month @ 6% average interest rate ***||£460|
|Rent per month @ 2.75% of retained equity||£170|
|Total per month (rent + mortgage)||£630|
*Illustrative purposes only, your agreement will detail the exact rent and service charges
**Based on a 5% deposit
***Figures based on a repayment mortgage, over a 25-year term
What is staircasing?
One of the great things about shared ownership is that you can buy more shares at any time until you own the whole property: this is known as staircasing. A range of circumstances could lead to you staircasing, whether you have a partner move in with you, you inherit some money, or you receive a good pay rise, all could allow you to purchase more shares in your home.
When you’re ready to buy more shares, you just need to contact to your landlord, who will guide you through the process.
The cost of your new share will depend on how much your home is worth when you want to buy the share. If property prices in the area have gone up, you will pay more than you did for the initial shares you bought. But, if your home has dropped in value, your new share will be cheaper. Your landlord will arrange to have the property valued, although you will need to pay the valuers fee. Once the property has been valued, your landlord will contact you to confi rm the costs involved.
It’s worth talking to your mortgage lender at an early stage if you’re considering staircasing to see what mortgage options are available to you.
What happens if I want to sell my property?
You are able to sell your home at any time, but you must fi rst inform your landlord. Your landlord will have a period of time in which to fi nd a suitable buyer for your property, this is generally 8 weeks. If in that time a buyer is not found, you will be free to approach an estate agent and ask them to help you sell your home.
If you have staircased and own 100% of your home, you can sell it yourself, although you must still notify your landlord fi rst. Sometimes, registered providers like to buy properties back, hence why you need to let them know you wish to sell. This will be highlighted in your lease.
I’ve heard people talk about ‘resales’, what are they?
‘Resales’ is the term used by registered providers to describe properties that aren’t new i.e., properties being sold as above. Generally, you will need to buy at least the minimum share that the current shared owner owns. Buying a resale is just like buying a new build shared ownership property in that you’ll need to pay monthly rent and service charges.
Some people prefer to buy a property that has been previously lived in rather than one that’s brand new. You could ask the current owner questions such as what are their running costs and what is the landlord like? to give you a feel of what it’s like to live there.
You’ll find that each Help to Buy agent lists resale properties as well as new ones so you’ll be able to see all of the options available to you.