What Are the Costs of Shared Ownership?
Shared Ownership scheme makes it possible for people with limited means to get their foot on the first step of the housing ladder by purchasing a share (normally between 30% and 75%) of their home and then buying more shares at a later date when they can afford it. This process is called 'staircasing' and once you've staircased to 100%, you own your home outright.
This article aims to explain the various costs associated with purchasing and living in a Shared Ownership property.
Costs of purchase
Family Mosaic offers a wide selection of Shared Ownership homes - both new and resale - across a number of London boroughs. Our properties are initially valued by RICS-qualified independent valuers and their prices are in line with other similar properties in that same area.
When you plan to purchase a Shared Ownership property you will be looking at the following costs:
The biggest up-front cost will be your deposit, which usually is calculated as a percentage of the value of your property. The amount of the deposit you can fork out will influence the mortgage you will be able to apply for. The general rule is: the higher the deposit, the better deal you are likely to get on your mortgage. And while there are lenders who will lend you 95% loan-to-value (LTV) - meaning that you will need to put down only 5% of the total value of your home - a 2015 Which? survey revealed that the average first-time buyer deposit was 17%.
The attraction of Shared Ownership for many first-time buyers is that they can opt to buy a small share of their home (say 30%) which means that they will have to come up with minimum 5% of the 30% value of their new home. If their home is valued at £600,000 and they are buying 30% share in it (valued £180,000), they will need to provide minimum deposit of £9,000 - as opposed to a whopping £30,000 deposit if there were buying outright.
Once you've put down the deposit, your mortgage will cover the rest of the price of your share of the property. You will have to make monthly repayments on your mortgage and therefore we discuss mortgage in the section about ongoing costs below.
Stamp duty is a type of a tax that anybody buying land or property in the UK has to pay. Stamp duty is levied on purchases over £125,000 and Shared Ownership buyers have an option to either pay it on the full value of the property when they first buy a share in their home or to pay it only on the initial share.
If they opt for the latter, they will be exempt from paying stamp duty on all intermediate staircasing transactions until they reach 80% share of the property. Staircasing past 80% share will again incur stamp duty.
The process of calculating stamp duty on shared ownership is rather complicated and we've written a separate article on this subject:
Buying a property is a complicated process and it pays to have the right people on board. For example, you may wish to hire the services of a mortgage adviser. Mortgage advisers have an in-depth knowledge of the mortgage market and are able to advise you on the best kind of mortgage tailored to your individual circumstances.
The cost of mortgage adviser's services vary. For example, Hillcrest Property Solutions - one of Family Mosaic's panel of mortgage advisers - charge new client £375. The clients only pay the fee once the application is submitted and accepted by the lender. Returning clients are charged £99 every time they require additional assistance during consecutive staircasings.
Hiring a mortgage adviser is optional but there are other costs that you will have to pay. According to the Share to Buy website, you will need approximately £4,000 for the cost of solicitor fees and other mortgage arrangement fees.
Also, if you are buying a resale property you may wish to do a Homebuyer's Report, with or without valuation. Costs of the report start at £400 on average. The report will help you find out if there are any structural problems, such as subsidence or damp, as well as any other unwelcome hidden issues inside and outside.
If you are buying an older property and want to have it thoroughly checked you may opt for a detailed full structural survey, which is far more extensive and costs £600 and upwards.
Each time you wish to purchase another chunk of your Shared Ownership home, you are likely to incur the following costs:
Staircasing process will trigger the need for a new valuation by a RICS-qualified and Family-Mosaic-approved valuer, who will then produce a valuation report. The valuation is valid for three months, so if your staircasing does not complete within this time-frame, you will be asked to pay for a valuation again.
Secondly, if you need to remortgage to purchase another share in your home, you will be required to pay the lender's valuation fee and a mortgage arrangement fees. You also will be expected to appoint a solicitor, which will generate additional legal costs.
If you haven't opted to pay your stamp duty upfront, and your current staircasing takes you above 80% share, you will also be expected to pay stamp duty. You can learn more about how this tax is calculated in this article.
While Shared Ownership enables you to escape the rental market, it does come with certain costs that you have to budget for.
Your mortgage repayments will most likely be your biggest monthly cost. It is very important to keep up your mortgage repayments because if you fail to do so, you home may be repossessed.
If you find that your mortgage repayments are difficult to manage, you may wish to re-mortgage and, perhaps, extend your loan over a longer period of time. Nowadays, there are lenders who offer mortgages that can last up to 35 years. A longer mortgage may mean smaller monthly repayments.
Also, if you are an older homeowner, you may wish to look at interest-only or interest roll-up mortgages whereby you only pay interest on your loan, or not pay anything, and the loan gets repaid when they property is sold once you pass away or move to a residential care facility.
For as long as you are a shared owner - i.e. you don't own 100% of your home - you will have to pay rent on the share that you don't own. In other words, if you own 25% of your property, you will have to pay your landlord (usually the housing association you bought your property from) rent on the remaining 75%.
Rents on shared ownership properties vary, although in general your rent together with your mortgage repayments should still make Shared Ownership a better value than renting in the open market.
Your rent will be specified in your lease and it is important that you plan for this expense in your monthly budget. Also, you can expect the rent to increase year-on-year typically at a rate of the Retail Price Index plus 0.5%. You'll find details of the annual increase in the terms of your lease agreement.
Your service charge
Your service charge is another monthly expense that you need to budget for. Service charge is levied by your landlord (the housing association you bought you home from) or an external managing agent (usually the developer who built your home) and it's there to cover their expenses in managing the development.
As with rent, service charge is expected to increase year-on-year.
The items that are paid by the service charge vary from one development to another and you should always consult your leasehold agreement for details. In general, however, service charge covers the costs of the following:
•maintenance of the communal areas and the exterior of the building,
•cleaning of the communal areas,
•bulk refuse clearance,
•maintenance of communal boilers,
•maintenance of communal lighting,
•maintenance of door entry systems,
•dry risers (water access for the fire brigade in the event of fire),
•emergency lighting (in the event of a power cut),
•lift phone-line costs (if you get stuck in a lift an emergency button will call help; this service requires a telephone line with its own number, as well as a number of test calls each month),
Shared Ownership allows you to enjoy the benefits of home ownership for a fraction of the price you would pay in the open market. This also means, however, that you will be wholly responsible for all of the bills on your property. This includes utility bills, TV licence, and council tax.
Remember: even if you own only 30% of your property, you will be responsible for 100% of your bills, council tax and service charge.
Apart from the above-listed monthly expenses there are also other costs that you should budget for. These are:
The reserve fund
The reserve fund - also called 'the sinking fund' - is there to prevent the residents from being hit by large costs when major works need to be carried out.
Apart from regular maintenance - funded by the service charge - every development will from time to time need works to be carried out which cost a considerable sum of money. The examples of such works would include:
•fixing the roof,
•putting in new windows,
•any type of works which require scaffolding,
As these will cost quite a lot of money, responsible landlords will budget for it by putting money away into the sinking fund. A small contribution from each of the resident's service charge will go towards this fund so that when large expenses occur (and it's not possible to foresee every expense), they will be covered by this sinking fund. Reserve (or 'sinking') fund is cumulated in a trust account for leaseholders and will be used as the building or equipment gets older and may need redecorating, renewing or replacing.
There will be situations, however, when an unexpected expense occurs which exceeds the amount put away in the reserve fund. If the reserve fund is not sufficient to cover the cost then it would be demanded as an extra cost to the leaseholder and this is something you may wish to budget for as well.
You can find out more about major works and the reserve fund here.
Your property is covered by building insurance that you contribute to via your service charge. This means that should anything happen to the fabric of the building the insurance company will cover the costs of the required repairs. There will, however, be an excess that you will be expected to pay. This is the amount that you will have to pay towards the cost of any claim before the insurer covers the rest.
You will find the details of your building insurance in your sales and conveyancing pack at the time of purchase. If you have any queries, please ask your solicitor.
Leaseholders are also strongly advised to take out contents insurance. This is because building insurance only covers the damage to the fabric of the building and not any damage to the contents of your home.
For example, if there is a leak in the roof and your property gets flooded, the building insurance will cover the repairs to the roof, walls, floors, etc. but will not pay for the damage done to your carpets, furniture, electrical equipment and the like. You need to take out contents insurance to cover any damage done to your property inside your home.
Depending on your circumstances, you may wish to also take out other types of insurance, such as: