Shared Ownership Schemes Explained: Buy A Share, Pay Rent On The Rest

The dream of owning a home is becoming more and more unattainable to millions of would-be homeowners. Soaring housing prices, flat wages and the need to save a substantial deposit has left behind a generation of renters who wish to enjoy the security and pride of owning their own houses but they are shut out of the old housing market. To this end, governments and the housing associations have come up with new programs that are meant to fill the gap that exists between renting and ownership. Shared Ownership has become one of the most common and popular of these.

Shared Ownership is sometimes known as a stair casing model, which is why it is sometimes referred to as this model. It enables buyers to own a portion of a property, usually between 25 and 75 percent, and rent the rest to a housing association.

This hybrid approach provides a stepping stone into the property ladder that otherwise would not have existed, combining the ability to own a property with the ability to be more flexible due to lower initial expenditure. This blog discusses the concept of Shared Ownership, its advantages and disadvantages, stair casing process, and what types of people this scheme fits best giving a full guide to anyone who is interested in this way of becoming a homeowner.

What Is Shared Ownership and How Does It Work?

Shared Ownership is a state-supported affordable homeownership program to assist first time buyers and people who could not afford a home on the open market. In this model, a buyer buys a part of the property, typically between 10 and 75 percent of the entire market value of the house, of a housing association or other specified provider. The buyer puts a mortgage on the share that he/she owns and deposits a deposit of that share and then pays a subsidized rent to the housing association on the rest.

The buyer must also bear all other expenses connected with home ownership such as service charges, repairs, utilities and property taxes (council tax in the UK or property taxes in other countries). Such a structure enables buyers to enter the property market with a much lower deposit and smaller mortgage than they would have with an outright purchase of a home.

The scheme is generally offered on new homes built but there are also a few resale properties that are offered under the scheme. The eligibility rules also depend on the region, but generally, the first-time buyer, a household income not exceeding some level (usually 80,000 not in London or 90,000 in London) and inability to afford an appropriate house on the open market are all required. Buyers have to show also that they are able to afford the aggregate mortgage, rent, and service charges.

Upon purchase, the buyer becomes the owner of his or her portion of the property in form of a leasehold interest and the housing association will remain a proprietor of the other portion. The lease has a long period of time- normally 99-125 years- and specifies the rights and obligations of both parties. Notably, Shared Ownership offers an avenue to complete ownership in a system called stair casing, whereby a buyer can buy more shares as time goes by.

The Stair casing Process: To Full Ownership

Shared Ownership is one of the most appealing features whereby the individual can gradually increase their share in the ownership as time goes by a process known as stair casing. When the financial status of a buyer is raised, whether by career progression, accumulating savings or inheritance, the buyer can buy more shares in his/her home, usually at 10 or 25 percent increments.

Whenever they climb the ladder, their mortgage goes up (or they pay with savings) and their payment of rent to the housing association goes down accordingly. The eventual aim of many is to either have 100% ownership of the property, at which point, they no longer pay rent to the property owner and can actually change the leasehold to freehold, depending on the terms of the lease and the nature of the property.

Stair casing cost is calculated by using the current market value of the property on date of the additional shares purchase and not the cost at which it was initially purchased. This implies that in case the property has increased in value then the price of purchasing more shares will be based on that increase. Although this may be a disadvantage when property values have increased at an alarming rate, it also implies that the buyers gain any equity increase in the shares they already have.

 Others have schemes with preserved or restricted stair casing, in which rent is dropped but the buyer is not allowed to staircase past some percentage, usually 80 percent, so that the property is affordable to subsequent purchasers in case of resale. Buyers should know the stair casing conditions of their particular lease including the costs that may be entailed such as valuation charges, legal charges and administration charges by the housing association. Stair casing should be a viable and rewarding long-term housing plan, which must be carefully planned financially.

The Advantages: Shared Ownership and Why it is Desirable With First Time Buyers

Shared Ownership has been found attractive mostly because of its accessibility. Deposit needed to purchase property in cash is usually the greatest obstacle to homeownership among first-time buyers. Under Shared Ownership, the deposit is based on the portion of property, which is being bought and not the entire value of the property. For example, if a buyer purchases a 25% share in a £300,000 home, they need a deposit based on the £75,000 share—typically 5% to 10% of that amount, or £3,750 to £7,500—rather than a 10% deposit on the full £300,000, which would be £30,000.

This is a drastic decrease in initial expenditure making homeownership affordable to people and families that would otherwise be languishing in the rental sector. Also, monthly payments may become cheaper than paying rent on a similar property, because the rent on the portion of the property that is not sold is frequently offered at a low rate.

Stability and autonomy is another great advantage that ownership allows. Shared Ownership buyers are also entitled to make the home their own unlike in renting where tenants are not assured of their ability to renew their leases, rent hikes, and limitations to customizing their living space. They are able to paint, renovate and take pride in having a share in their property. Moreover, the increase in property value gives a Shared Owner equity growth on their share. This enables them to accumulate wealth in the long run and they are in a position to staircase to complete ownership or even sell their portion and upgrade the property ladder.

The scheme also provides an easy, laid out route to ownership which is usually backed by housing associations which offer advice and help to buyers in getting their way around the process. Shared Ownership is to many a viable and practical point of entry to a housing market that would otherwise be out of reach.

The Finances and Economic Implications

Shared Ownership provides a less significant barrier to entry, however, potential purchasers need to know the entire financial picture. The expenses are multidimensional and do not limit to the mortgage payment. Buyers have to pay a rent on the non-owned part of the home, which is usually estimated at a percentage of the market value of the non-sold part- this is usually about 2.75 to 3.5 percent per annum.

Although this rent is subsidized, it remains an on-going monthly expenditure that has to be factored as it does the mortgage, utilities and property tax. Also, Shared Ownership properties are most often leasehold or the buyer pays service charges which cover the preservation of common areas, buildings insurance and in some cases the sinking fund to be used to repair the buildings in case of major repairs in the future. These service fees may keep rising with time and must be assessed before buying.

The other important financial aspect is the stair casing cost. Although the right to buy more shares is an advantage, every stair casing transaction has its costs: a valuation fee to find out the current market price, legal costs to both the buyer and the housing association, and most frequently an administrative cost imposed by the housing association. These expenses may accumulate especially when a buyer steps up in small steps.

Moreover, customers should think about the resale. The housing association usually has a nomination period when they may find a buyer when selling a Shared Ownership property, which is usually a period of 8 to 12 weeks. In case they get an eligible buyer, they have to sell the property at a price specified by an independent valuation. Failure to do so, the owner may sell in the open market, but the buyer must qualify in the scheme. It is important to understand these resale restrictions to those persons who might be exploring Shared Ownership as a long term or a short term housing option.

Eligibility and Application

Shared Ownership can be offered only in certain countries and regions, but there are some general requirements that are found in most schemes. Generally, the applicant must be a first-time buyer although some schemes permit those people who already own a home but cannot afford to buy the right home on the open market to apply. Income limits are often in place: in England, household income is required to be on average less than £80,000 a year (or £90,000 in London).

The applicants should also indicate that they are unable to purchase an appropriate home in the open market using a regular mortgage. Also, in certain locations, there can be local connection requirements, giving preference to those that reside or work in the local community or are related to it. Shared Ownership can be offered to individuals, couples and families and also certain schemes are offered to key workers like nurses, teachers and emergency services staff.

The first step in applying for the scheme is to register with a local Help to buy agent or the housing associations in the intended area. The applicant is assessed for affordability to establish how much loan they are able to afford given their income, savings and credit. If successful, they are issued with a property finder or certificate of eligibility allowing them to start searching for the properties.

Housing associations and developers commonly advertise new-build Shared Ownership homes, whereas resale properties are available through specialist estate agents. Once the buyer finds a property, an offer is made, a mortgage is taken to purchase his or her share, legal conveyancing is done and the lease agreement is signed. Since the whole process is complicated and the collaboration of several parties, including housing associations, lenders, and solicitors, is required, it is strongly suggested to cooperate with the professionals that have dealt with Shared Ownership.

The possible Disadvantages and risks to be considered

In spite of the many benefits, Shared Ownership does not have it without its shortcomings and intending customers must weigh heavily before they commit. The complexity of the leasehold arrangement is one of the most important issues. The property of Shared Ownership is almost always in the form of leasehold i.e. the buyers do not have ownership on the land and they are liable to the terms and conditions established by the housing association.

These conditions may consist of prohibition of subletting, prohibition of making structural changes, and payment of service charges that might grow without notice. Also the rent is usually subsidized; it is normally raised annually tied to the Retail Price Index (RPI) of some other index and so overtime costs may increase monthly although the mortgage is on a fixed-rate basis. This may complicate the long-term financial planning.

The other risk is associated with resale and marketability. Since the Shared Ownership properties are associated with some eligibility requirements, the number of prospective customers is reduced to those who are eligible to join the scheme. This may complicate and take more time to sell it compared to the sale of a traditional property. In case the housing association exercises its right to nomination, the seller might be required to accept a price which is arrived at after independent valuation and not the open market price which might be lower.

 Also when the buyer has stair cased to a greater share than 80, it could be more difficult to sell as a result, and other buyers would need enough income to pay the greater share and the rent on the remaining share. Lastly, is the opportunity cost of leveraging on first-time buyer status on a Shared Ownership property. In most jurisdictions first time buyer stamp duty relief or other incentives may only be availed once and using them on a Shared ownership purchase could result in the loss of the ability to use them on a future, possibly more costly, property purchase.

Conclusion

The niche that Shared Ownership has in the affordable housing market is special and rich. It provides a practical, systematic entry point to homeownership to those who have been locked out of the open market, but who are keen to leave the vagaries of renting. It democratizes property ladder by enabling buyers to buy a share of the property with only a fraction of the deposit needed to buy a property in the traditional way. The ability to build ownership by stair casing offers an easy path to ultimate complete ownership which is in line with the dream of buyers who are determined to accumulate equity and stability in the long run.

To governments and housing associations, Shared Ownership is an effective utilization of the public resources, as it allows more families to enjoy subsidized housing at the expense of overall supply of affordable housing.

Shared Ownership is however not a universal solution. It involves a well-thought financial planning, sound idea of leasehold commitments and realistic expectations of the costs and intricacies. Potential customers should also consider their existing financial status and future objectives taking into account whether the limitations on resale and the permanent payments of rent are corresponding to their intentions.

Shared Ownership can be a revolutionary instrument when approached with the due diligence and professional advice, and the dream of owning a home becomes a reality. Since the affordability of housing is still among the most significant issues of our era, the new programs such as Shared Ownership will keep on being crucial in providing more individuals with the comfort, pride, and the opportunity that owning a house brings them.

Also read: Youth Home-Ownership Aspirations In Africa: What It Will Take