Are you dreaming of owning your own home but finding it challenging due to soaring property prices? Shared ownership might be the solution you’ve been searching for. In this quick guide, we’ll take you through what shared ownership is, the common eligibility criteria, how to apply, stamp duty considerations, selling a shared ownership property, and explore alternatives to shared ownership mortgages.
What is Shared Ownership?
Shared ownership, also known as “part buy, part rent”. It is a government-backed scheme that aims to assist people in overcoming financial challenges when they endeavor to step onto the property ladder by purchasing a home. It allows you to buy a share (typically between 25% and 75%) of a property, paying a mortgage on that share and a subsidised rent on the remainder. That rent is paid to a housing association or developer. Over time, you can increase your ownership by buying additional shares, a process known as “staircasing.”
Eligibility Criteria for Shared Ownership
To be eligible for a shared ownership mortgage, you need to meet certain criteria. Generally, you must:
- Have an annual household income of £80,000 or less (£90,000 or less in London).
- Be a first-time buyer or a previous homeowner who cannot afford to buy a home.
- Not being able to purchase a suitable property on the open market.
- Prove that you are not in significant debt or have a poor credit history.
Meeting these criteria is essential to qualify for a shared ownership mortgage.
Applying for a Property
Applying for shared ownership is a straightforward process.
- Registration and Pre-Approval: Begin by registering with a local housing association or developer offering shared ownership properties. Simultaneously, seek pre-approval for a shared ownership mortgage from a lender to understand your budget.
- Property Search and Reservation: Search for suitable shared ownership properties in your desired location. This can either be through housing association websites or shared ownership portals. When you find a property you like, arrange a viewing and, if satisfied, reserve it by paying a reservation fee. You can then arrange your shared ownership mortgage.
- Legal Procedures and Completion: Appoint a solicitor or conveyancer to handle the legal aspects of the purchase. They will assist with contract signing and property checks. Once all necessary legal processes and paperwork are complete, you’ll exchange contracts and receive the keys to your new home.
Remember to factor in additional expenses, such as solicitor’s fees, surveys, and potential stamp duty costs, into your budgeting considerations.
Rent Limits for Shared Ownership Properties
Understanding rent limits is a crucial aspect of shared ownership that can significantly impact your affordability. When you buy a shared ownership property, you’ll not only be responsible for the mortgage on your share but also for paying rent on the remaining share owned by the housing association or developer. These rent payments help cover the cost of the housing association’s investment and maintenance of the property.
Rent Limit Calculations
The exact rent limit you’ll face can vary depending on several factors, including the location of the property. Rent is calculated based on the share of the property you don’t own. So, if you own a 50% share, you’ll be paying rent on the remaining 50%.
There are upper rent caps in place to prevent rent payments from becoming unaffordable. These caps ensure that rent increases stay in line with inflation and don’t place an undue financial burden on shared ownership homeowners. The higher the percentage of the property you own, the lower your rent payments will be. These rent payments are capped at 3% of the hose value the landlord owns. However, rents are more typically 2.75%.
Rent limits are not fixed forever. They can change over time, typically in accordance with the terms outlined in your lease agreement. Rent reviews may occur annually or less frequently. When the do occur, they are usually based on the Retail Price Index (RPI) or a similar measure of inflation.
Ensure You Budget for Rent and Your Shared Ownership Mortgage
It’s essential to consider these rent limits when budgeting for a shared ownership property. They can have a significant impact on your monthly housing costs and overall affordability. Keep in mind that as you increase your ownership share through staircasing, your rent payments will decrease accordingly.
Before committing to a shared ownership mortgage, carefully review the rent terms and conditions in your lease agreement. This is to ensure you have a clear understanding of how they may change over time and how they fit into your budget. Furthermore, consult your housing association or developer for specific information on rent limits for the property that interests you.
Stamp Duty Considerations
Stamp duty, also known as Stamp Duty Land Tax (SDLT), is a tax you may need to pay when purchasing a property in the UK. For shared ownership properties, calculate stamp duty based on the portion of the property’s value that you are purchasing. It is not levied on the full market value. Here’s how it works:
- Zero Stamp Duty on Shares Below £300,000: If the share you’re buying is valued at less than £300,000, you won’t have to pay any stamp duty.
- Stamp Duty on Shares Over £300,000: If your share is valued at £300,000 or more, you’ll need to pay stamp duty at the applicable rate. It’s crucial to factor this into your budget when considering shared ownership.
Selling a Part Buy, Part Rent Property
Selling a shared ownership property involves several steps and considerations.
- Valuation: Start by getting your property professionally valued. A qualified surveyor or valuer will assess the market value of your share in the property. This valuation is crucial for determining the selling price and the amount you can expect to receive.
- Right of First Refusal: In most cases, the housing association or developer that initially sold you the property has the “right of first refusal.” This means you must offer your share of the property to them before attempting to sell it on the open market. They have a set period (usually 4 to 12 weeks depending on the lease) to decide whether they want to buy your share at the valuation price.
- Finding a Buyer: If the housing association declines to purchase your share, you can start searching for a buyer independently. Your buyer must meet the shared ownership eligibility criteria and satisfy any requirements specified by your housing association.
- Staircasing: An alternative option is to buy additional shares in your property before selling it. This increases your ownership percentage and may make the property more appealing to potential buyers.
- Legal Procedures: Similar to when you purchased the property, selling involves legal processes. You’ll need to engage a solicitor or conveyancer to handle the necessary paperwork, including the transfer of ownership to the new buyer.
- Completion: After all legal checks and paperwork are complete, you’ll exchange contracts and later complete with the buyer. At this point, you’ll receive your share of the sale proceeds.
It’s crucial to communicate and coordinate closely with your housing association or developer throughout the selling process to ensure a smooth transition for both you and the new buyer. Keep in mind that the specific details and requirements may vary depending on your housing association’s policies and your circumstances.
Alternatives to Shared Ownership
While shared ownership is a popular choice for many first-time buyers, it’s not the only option available. Here are some alternatives to consider:
- Rent to Buy: Rent to Buy schemes are a government-backed scheme to enable you to rent a property at a reduced rate for a set period, with the option to buy it afterwards. This can give you time to save for a larger deposit. You may also hear it referred to as Rent to Save, Rent to Own or Intermediate Rent.
- Shared Equity: Shared equity schemes involve purchasing a home with the help of a government loan or an equity loan from a developer. You own 100% of the property from day one but repay the loan when you sell.
- Traditional Mortgages: If you can afford it, consider taking out a traditional mortgage to buy a home on the open market. This gives you full ownership and flexibility over your property. See our guide on they types of mortgage available here.
Conclusion
Shared ownership in the UK is a fantastic opportunity for those who may not have the means to purchase a property through traditional means. It offers a step onto the property ladder with the potential to increase ownership over time. However, it’s essential to understand the eligibility criteria, application process, stamp duty implications, and the process of selling a shared ownership property. Exploring alternatives to shared ownership can also help you make the best decision for your unique circumstances.
If you’re considering shared ownership, consult with a mortgage advisor to determine if a Shared Ownership Mortgage is right for you and to explore your financial options in detail.