Shared ownership mortgages – what should you know about them?


Are you looking to get on the property ladder? You will need to apply for a first-time buyer mortgage that, contrary to other mortgages, is available at easier terms and conditions to make your dream of owning a house a reality. Nonetheless, it is not easy at all. You will still need at least 10% of the deposit and meet the bare minimum income criteria.

What if you do not have enough household income or cannot afford the whole deposit and payments to own a house? Here comes in shared ownership mortgages. A shared ownership mortgage is a part ownership mortgage that lets you get a foot on the property ladder when your finances are not enough to secure a mortgage for the full market price of a property.

Under this scheme, you buy a portion of a property rather than the whole of it, while your housing society will own the rest portion, and you will continue to pay rent for that portion only. You can qualify for these mortgages with a smaller deposit and smaller income, usually less than £80,000 or £90,000 if you are residing in London.

Shared ownership mortgage – things you may not be aware of

Shared ownership mortgages certainly have some benefits, and one of them is they allow you to own up to 75% share of property by paying down a deposit of up to 5%, but these mortgages are subject to some risks as well. Before you take the plunge, you should consider the following risks as well:

  • A lack of ownership

You will not get ownership until you pay for the entire portion of a house. Under a shared ownership scheme, you buy a stake in a property, generally up to 75%, and rent out the rest of the portion.

A few years later, when you intend to buy a further stake, the amount you pay per share depends on the current market price of the house at that time. You would be paying a higher sum per share if the prices rose. This entire process is called staircasing. You will not own the property. You are still a tenant for a portion of the property. If you breach the contract, you will lose the entire property.

  • Additional costs can blow up your budget

Your expense of staircasing a property is not just limited to the value of mortgage instalment plus rent but also service charges. You cannot refuse to pay communal charges, building maintenance fees, charges for shared staircases and gardens and the like. If you are serious about using a part ownership scheme, you should take these costs under advisement to assure yourself your budget will not blow up.

Valuation fees, general mortgage fees, and stamp duty ought not to be ignored. However, it is not always necessary to pay stamp duty if you meet any of these conditions:

  • If you make a single one-off payment for the whole cost of your house even if you intend to staircase it and increase your share beyond 80%.
  • You can keep the stamp duty to a minimum if you only pay it for a share you are buying. This is the best choice if you do not intend to or are not sure to buy beyond 80%. However, if you opt for the “payment in stages” option and increase your share beyond 80%, you will likely have to pay higher stamp duty in case the property prices go up.
  • If you qualify for the first-time buyer stamp duty relief, you do not have to pay stamp duty at all.

Before you take out a shared ownership mortgage, you should consider these expenses.

  • Restrictions

There are certain limitations to the usage of property in which you have bought a stake. You cannot act freely like an owner because you do not own the entire property. For instance, you are not permitted to sublet your share. In fact, if you want to remodel the structure of your house, you will be entirely restricted.

If you have bought an old building, chances are it frequently faces structural-related issues. You will be responsible for paying for the cost of maintenance of your property. Note that the owner of the property to whom you are paying rent is not responsible for contributing to these expenses.

Another restriction pops up when you decide to sell your stake. The housing association may not give you complete control or freedom to sell your house even if you have bought 100% of the property through staircasing. The preference will be given to people on their waiting list who are unable to buy on the open market.

In case you do not find a suitable buyer, you can contact a real estate agent or use traditional selling methods.

How to find out if it is good for you to take out a shared ownership mortgage

A shared ownership mortgage can be either a good or a bad idea. It is clear that these mortgages are aimed at those whose annual income is not handsome. Although you think these loans are beneficial if you do not have enough money to buy a traditional first-time mortgage, you should carefully evaluate their impact on your overall finances and your future plans. You will have to do a lot of research before arriving at a decision.

It is advisable to consider a mortgage broker in the UK for better advice. They will help you make the right decision for you so you do not end up ruining the day.

The bottom line

A shared ownership mortgage can be effective for those who do not have enough money for the full value of the house to get onto the property ladder. However, there are certain risks that you must be aware of. You should consult a mortgage broker before using these mortgages.

If possible, you should try to improve your income, credit score, and deposit size so you can take out a first-time buyer mortgage at a lower interest rate. Under no circumstances are shared ownership mortgages recommended without doing the math and analysing your options.

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