Buying a home can be challenging, particularly when property prices and deposit requirements are high. Shared ownership may provide a more affordable route onto the property ladder by allowing eligible buyers to purchase a share of a home and pay rent on the remaining share.
However, shared ownership arrangements combine leasehold ownership with rent payable on the provider’s retained share. It is therefore important to understand the costs, restrictions and responsibilities before proceeding.
What is shared ownership?
Shared ownership is usually structured as a leasehold arrangement. Instead of buying the whole property, the buyer purchases a percentage share and pays rent to a housing association, local authority or other registered provider on the share they do not own.
For example, if a property is valued at £300,000 and a buyer purchases a 25% share:
- the buyer pays £75,000 for their share;
- a mortgage may be used to fund that purchase, subject to the lender’s requirements; and
- rent is paid to the provider on the remaining 75%.
The buyer may also be responsible for a service charge and other costs under the lease.
Depending on the property and scheme, buyers may be able to purchase an initial share of between 10% and 75%. Different limits may apply, so the terms of the particular scheme should always be checked.
Who may qualify?
Shared ownership is generally intended for people who cannot afford to purchase a suitable home on the open market. Eligibility requirements vary between schemes and providers. Under the principal government-backed shared ownership scheme in England, applicants will usually need to:
- have a household income of no more than £80,000 a year, or £90,000 in London;
- be unable to afford the full deposit and mortgage payments for a suitable property;
- be a first-time buyer, a previous homeowner who can no longer afford to buy, or an existing shared owner wishing to move; and
- satisfy the provider’s affordability assessment and any requirements imposed by a mortgage lender.
Some schemes may have additional eligibility criteria, particularly where specific requirements apply to the development or local area. For example, certain properties may be subject to local connection requirements or priority arrangements for specific groups of applicants. Buyers should check the requirements of the particular scheme before proceeding.
What costs should be considered?
A smaller deposit is often one of the main attractions of shared ownership. The deposit is normally calculated by reference to the share being purchased rather than the property’s full market value.
Nevertheless, buyers should budget for all relevant costs, including:
- the deposit;
- mortgage repayments;
- rent on the provider’s share;
- service charges and estate charges;
- buildings insurance contributions;
- legal and conveyancing fees;
- mortgage and valuation fees;
- Stamp Duty Land Tax, where applicable, which may be calculated differently depending on the election made when the property is purchased; and
- repair and maintenance costs.
The Stamp Duty Land Tax treatment of a shared ownership purchase can be complex. Depending on the circumstances, a buyer may make a market value election at the outset or pay tax in stages.
Rent and service charges may increase over time. The lease should explain how and when these amounts can be reviewed.
Responsibility for repairs will depend on the property and the terms of the lease. Shared owners will usually be responsible for repairs and maintenance within their home. For flats, the provider will commonly arrange repairs to the structure and communal areas, with the costs potentially recovered through the service charge. Owners of shared ownership houses may have wider repairing responsibilities. Some newer leases may include an initial repair period or a limited contribution towards qualifying repairs, subject to the scheme’s terms.
Can a shared owner buy a larger share?
Most shared ownership leases allow the owner to purchase further shares in the property. This process is known as staircasing.
As the owner purchases a larger share, the rent payable on the provider’s remaining share will usually reduce. Many leases allow the owner eventually to purchase a 100% share, although some properties impose a maximum ownership percentage or other restrictions. This is particularly relevant to certain homes in designated protected areas.
The price of an additional share is normally based on the property’s market value at the time of staircasing, rather than its value when the original share was purchased. The owner will usually need to pay valuation, legal and mortgage costs each time.
How is a shared ownership property sold?
A shared owner can usually sell their share, but the lease and provider’s resale procedure must be followed.
If the owner does not own 100%, the provider will often have a nomination period during which it can find an eligible purchaser. The property may need to be valued by an independent surveyor who meets the provider’s requirements, and the sale price will generally be based on that valuation.
If the provider does not find a buyer within the nomination period, the owner may be able to market the property more widely, subject to the lease terms. The incoming buyer will still need to satisfy the relevant shared ownership eligibility and affordability requirements.
Where the property has been staircased to 100%, it may be sold on the open market, although the title and lease should be checked for any continuing restrictions.
What are the advantages and disadvantages?
Potential advantages include:
- a lower deposit than may be required for an outright purchase;
- access to properties that might otherwise be unaffordable;
- the ability to increase ownership over time; and
- the opportunity to benefit from any increase in the value of the share owned.
Points requiring careful consideration include:
- rent is payable in addition to mortgage repayments;
- service charges can increase and may include the cost of major works;
- the property is leasehold and subject to lease restrictions;
- staircasing and resale can involve valuation and legal costs; and
- the value of the property may fall as well as rise.
How can a conveyancer help?
Our specialist residential conveyancing team routinely assists clients throughout shared ownership purchases. They investigate the property’s legal title, review the shared ownership lease and explain the buyer’s rights and obligations. This includes checking rent-review provisions, service charges, repair responsibilities, staircasing rights, resale restrictions and any mortgage lender requirements.
Shared ownership can be a practical route to home ownership, but every scheme and lease is different. Understanding the legal and financial commitments at the outset can help buyers decide whether the arrangement is suitable for their circumstances.
For assistance with buying, staircasing or selling a shared ownership property, contact O’Donnell Solicitors on 01457 761 320 or email enquire@odonnellsolicitors.co.uk.
This article is intended to provide general information only and does not constitute legal advice. The law, government schemes and eligibility requirements may change, and the terms of each shared ownership lease will differ.