Top 5 Common Pitfalls When Purchasing a Shared Ownership Home
Shared Ownership can be an absolute blessing for cash-strapped Londoners wishing to buy a home near the place they work or a borough they have ties to. However, it needs to be said that the scheme does have it's peculiarities that anybody wishing to buy into Shared Ownership should be aware of. This article aims to present the pros and the cons of becoming a Shared Owner.
What is Shared Ownership?
Shared Ownership is a government scheme which allows buyers with limited means to get their foot on the property ladder. Under Shared Ownership rules, you can purchase a share of the property (usually 25% and upwards) and pay rent on the part you don't own.
In time, you can then buy the rest of your home in chunks or in one go in a process called 'staircasing'. The more of your property you own, the less rent you need to pay the housing association you bought your property from. Once you've staircased to 100%, you own your home outright and you no longer need to pay any rent. You may, however, have to start paying ground rent.
Who qualifies for Shared Ownership?
In order to qualify for Shared Ownership you need to meet all of the below-listed conditions:
- have an annual household income below £90,000 in London and below £80,000 outside London,
- be a first-time buyer or not own any other property within the UK and internationally,
- be a British or EU/EEA citizen, or have indefinite leave to remain,
Who has priority for Shared Ownership?
In some instances priority for Shared Ownership properties can be given to applicants who:
- work for the Ministry of Defence,
- are council and housing association tenants,
- live or work in the borough in which the property is located over those who currently live or work outside it.
Also, on some developments, secondary priority is given to applicants who live or work in the neighbouring boroughs.
The difference between Shared Ownership and joint ownership
Under Shared Ownership scheme you buy a part of your property, staircasing in time to own your home outright. Depending on what you decide you can be the sole owner of the property or own it with another person such as your spouse or partner.
All 'joint ownership' means is that you share the ownership of the property with other people like your spouse, partner, family member or friend. You can purchase Shared Ownership jointly if you wish or you may choose to buy in the open market.
The benefits of Shared Ownership
The main benefit of Shared Ownership is that it allows you to become a home owner at a fraction of the cost of purchasing a property on the open market. In order to obtain a mortgage, buyers will have to produce a deposit that is at least 5% of the total value. With the average home in London costing around £470,000 (according to the Evening Standard) that would be £23,500 - still a very large amount of money for most people.
By opting to buy Shared Ownership, buyers are able to purchase an initial share in the property (say 30%), meaning that they will need to come up with 5% of 30% of the total value of the property as deposit. Looking again at the standard London property price of £470,000, the initial 30% share of that property would cost £141,000. Five percent deposit on a £141,000 mortgage would be £7,050 - a much more manageable amount to put aside.
Shared Ownership vs. renting
While Shared Owners still have to pay rent on the chunk of their property they don't own, they benefit from security that is lacking in the renting market.
- provided that you keep up with your mortgage, rent and bills, you will not be asked to move (as it often happens when you landlord decides to sell or re-purpose the property),
- it is your home so you can decorate it according to your taste (you will need to get permission for major alterations, though),
- your mortgage is being repaid monthly so at the end of a 10-year period you will be closer to being mortgage-free; by contrast 10 years-worth of paying rent brings you no closer to owning your home.
Things to look out for
While Shared Ownership is a great way for first-time home buyers and low-income earners to get a foot in the door, there are some things that you need to be aware of before you dive in.
It can be rather expensive
The down payment needed to secure your Shared Ownership property is considerably lower than when buying in the open market. The ongoing costs, however, can mount up so it's very important that you go into Shared Ownership with eyes wide open. The main monthly costs include;
- your mortgage repayments,
- rent paid on the part of your home you don't own,
- service charge (paid to your landlord to cover the costs of managing the development),
It is important to understand that as a Shared Owner, you will be responsible for 100% of all bills, including council tax, even if you only own 30% of your property. There are also other ongoing costs you may need to budget for, we have outlined them in greater detail in this article:
Your home can be repossessed
Just as with a property bought in the open market, if you fail to keep up with your mortgage, rent and bill payments, your Shared Ownership home may be repossessed.
It can be difficult to staircase
Staircasing allows you to buy your entire property in manageable chunks of 10% or over. What you need to understand, however, is that each time you wish to staircase, your property gets valued and the price of the part you wish to buy will be set based on that valuation. It means that if your property has considerably increased in value since you first moved in, staircasing can be more expensive that you initially bargained for.
There are also other costs, such as legal and valuation fees and, potentially, stamp duty (if you staircase over 80%) associated with staircasing.
Restrictions on what you can do
Alterations to your property
Your Shared Ownership property is your rightful home which means that you can decorate it however you wish, which you wouldn't be able to do in a rented property, but there are restrictions on major, structural, alterations. You will need to get a permission from your landlord (usually the housing association you bought your home from) to do the following:
- any structural changes to your home (examples include: adding an extension to the house or removing any walls inside your property),
- putting in a laminate floor,
- mounting a satellite aerial.
If you are found to have carried out such alterations without permission, you will be required to bring your property to its initial state at your own expense.
In most cases you will need a written permission to keep a pet such as a dog or a cat. This permission can be withdrawn at any time if your pet causes any nuisance to your neighbours. No permission will be given for any pets that are considered dangerous.
Many developments have a no-pets policy, so be sure to check for that before you purchase.
You cannot sublet your Shared Ownership home
Shared Ownership scheme was designed to help first-time buyers purchase a home in an area they work in, or to which they have a connection, where they normally would not be able to buy due to high prices. It was never designed to be used in a buy-to-let capacity. This is why your leasehold agreement prohibits you from subletting your Shared Ownership home.
This may become problematic if for some reason you need to move to a different area or city. As a Shared Owner, you can either attempt to staircase to 100% whereby subletting restrictions are removed, or - if you cannot afford to buy your property outright - try to sell your home, giving the housing association eight weeks to sell it first, as described below.
There are people who will find these options limiting. Shared Owners can apply to the housing association to remove the subletting restrictions in exceptional circumstances but these decisions are always at the housing association's discretion and decided on a case-by-case basis.
Shared Ownership works best if you are planning to stay put in your home for a considerable number of years (or until you staircase to 100%).
You cover the cost of repairs
As a home owner, you are solely responsible for any repairs within your property, including pest control. If in doubt, check your leasehold agreement to see what is within the 'demise' of your property. The upkeep and repair of whatever is within your property's demise (such as a balcony, for example) is your sole responsibility as a leaseholder.
Areas outside the demise of your property - such as communal areas of your building - are the responsibility of the managing agent of your development (usually the housing association you purchased your home from).
Shared owners cannot exercise the “right to manage” their building
If you are not satisfied with the quality of service you're getting from your landlord - for example if the communal areas are not kept clean and tidy and things like entry systems get broken and not repaired - there isn't much you can do apart from lodging a complaint.
In some cases, homeowners can exercise something called the 'right to manage' their building. You can read more about right to manage here.
This option, however, is not available to Shared Owners so it is important that you purchase your property from a landlord with good track record in managing their developments. According to the 2017 Residents' Annual Review, 90% of Family Mosaic's estates are rated 'good' or 'excellent'.
There are restrictions on selling your Shared Ownership home
If you are ready to sell your home but you don't own 100% of it, you will have to contact the housing association you bought your property from and give them eight weeks to try to sell your home before you try to do it yourself. This is because there may be people waiting for Shared Ownership homes in your area and by giving them priority the housing association ensures that Shared Ownership properties remain in the hands of people they were originally built for.
If, after eight weeks, your property remains unsold, you are then able to attempt to sell it yourself or via a high-street estate agent.
Purchasing a property is always a very big decision so it's important to have a clear picture of what commitments you are taking on. Shared Ownership is a great opportunity for people with limited means to purchase a home in an area they wouldn't have otherwise been able to afford. This allows people to live close to the place they work in and to which they are connected through friends and family ties. In this respect, Shared Ownership stems the exodus of London workers forced by increasing property prices to move further and further out into the suburbs.
Having said that, the scheme comes with its own costs and restrictions. It is every buyer's individual decision whether Shared Ownership is something that would suit their circumstances and their needs.