Shared Ownership: What to watch out for
Shared ownership is a great way to get a stake in a property when you can’t afford or can’t borrow enough to buy outright on the open market. There are however common complaints from people in shared ownership schemes. This guide points to the pitfalls you’ll want to avoid.
What is shared ownership?
Shared ownership schemes allow buyers who meet the eligibility criteria to secure a mortgage to buy a stake (usually between 25% and 75%) in a property, while paying rent on the remaining share to the housing association or private developer that own the building. The rent you pay on the remaining share is charged at a discounted rate.
With shared ownership, it is possible to buy more of the home by “staircasing” i.e. increasing your share. Shares can be bought in 10% increments, which will in turn reduce your rent.
Shared ownership schemes are provided by housing associations or private developers. The details, costs and restrictions involved vary by provider so research each one on its individual merits and read the small print of your lease.
Stamp Duty and shared ownership
In the 2018 Budget, the government announced that first-time buyers would be exempt from paying stamp duty if their shared ownership property is worth up to £500,000 – and this is back-dated to 22 November, 2017. This means that any first-time buyers that have paid stamp duty on an eligible shared ownership property after 22 November, 2017, can apply for a refund.
How to claim a stamp duty refund
If you’re eligible for a stamp duty refund, you need to contact HMRC in writing. Make sure you do this by the deadline of October 28, 2019. In your letter, you should provide details of your purchase and share the UTRN, which is the unique reference number on the original stamp duty return.
What are the downsides to shared ownership?
1. Maintenance charges
Hopefully the monthly mortgage repayments, plus rent will still make shared ownership far cheaper than buying a property outright. But don’t forget to add on maintenance charges and be prepared for possible increases in the future. As well as a general monthly service charge for caretaking and maintenance of communal areas, ask how you will be expected to pay for more significant works e.g. for roof maintenance.
Be aware that even though you own a share of the property, say 30%, you are responsible for paying the full maintenance and repair costs.
2. No renting allowed
There are also likely to be restrictions on whether you can rent the property out. In the great majority of cases, sub-letting is not allowed.
3. Buying up increased shares in your property can be expensive
When it comes to increasing the stake in your property – or “staircasing” – it’s not just buying the share you need to worry about. There are other costs involved:
- Valuation fee – your housing provider will instruct a surveyor to confirm the current market value of the property.
- Legal expenses – staircasing will involve changes to your existing lease which will require a solicitor
- Stamp duty – if you’re not eligible for first-time buyers relief, there are two ways to pay. The first involves one-off payment in advance based on market value of the property and the second is by paying in stages. You will need to calculate the best option for you.
- Mortgage fees – If you are applying to change lenders to buy your additional share or to access better interest rates you will need to pay the lenders valuation fee and a mortgage arrangement fee, plus any penalty your existing lender may charge for terminating your mortgage with them.
Check with your housing provider whether there are any restrictions when it comes to buying up a greater share in your property e.g. Will you be able to staircase to 100% outright ownership or is there an upper limit? Can you start staircasing immediately? What are the maximum number of times you can staircase? What’s the minimum share you can buy at any one time? You can find out more with our guide to staircasing your shared ownership home.
4. Restrictions on what you can do
Check for restrictions within your lease. You are likely to be required to ask the housing provider’s permission in writing before you make any structural alterations to your home. In some cases the lease will require you to ask permission for redecorating as well.
5. The risk of negative equity
Buying a new build property – whether through shared ownership or on the open market – is more likely to make sense if you expect to stay put for a number of years. This is because new-build properties include an extra premium on the sale price that, like a new car, depreciates as soon as you move in. If house prices fall, you may fall into negative equity and lose money if you try to move.
To avoid the risk of feeling trapped in the event of negative equity, be honest about the properties you are looking at. Is there enough storage? Are you expecting to start a family in the next few years? Does your furniture fit in the rooms?
6. Issues around selling your share when moving home
When you are ready to sell your home, the process is not straightforward and can stall your progress on to the next rung of the property ladder. First of all, the housing provider is likely to have the right to buy back the property before it is marketed to anyone else (this is called “right of first refusal”), even in some cases if you have purchased 100% of the property through staircasing. This is so your property can be put to other people on the waiting list who are unable to buy on the open market.
After a period of time, if your housing provider fails to find a buyer you are free to market your share of the property yourself or using an estate agent. But you will need to find a buyer who fulfils the housing providers eligibility criteria for shared ownership. As not all banks provide shared ownership friendly mortgages, your pool of potential buyers may be reduced.
7. You don’t have greater protection under shared ownership
Just because this is a government backed scheme doesn’t mean you get any more protection.
- Costs can spiral. Check you can afford increased maintenance charges
- While rents start low, expect these to increase
- It is your responsibility to keep up repayments on your mortgage loan
- Be aware that as rent is paid on the part of the property not owned by you, the housing provider can take action to repossess the property for rent arrears in the County Court. We know of one case where after falling behind on her rent, one homeowner was evicted from her part-owned property and a court ruled she had no right to the £30,000 she had already paid for her share
Found a property you like? Research the housing provider on-line. See what customers say on forums. Are they satisfied? How well are they maintaining the property and at what cost?
What should I do before I apply?
- Check the eligibility criteria of the housing provider for the property you like
- Read and understand your lease and what restrictions it sets out
- Price up the various costs, work out your monthly payments
- Think about your long term plans and when you could afford to start staircasing
- Check out our other unbiased guides on buying, selling and running your home, alongside money saving tips and join to access to our panel of housing experts ready to answer your questions, a legal advice line, fee-free mortgage advice and more