Despite common belief, shared ownership does not concern the ownership of a property with multiple borrowers. Instead, it relates to a split in property ownership between a purchaser and housing association.
Shared ownership provides an opportunity for those that cannot afford the whole value of a home to instead purchase a share. Often, the purchaser buys a minimum 25% share of a property. With this arrangement, the purchaser pays a monthly rental sum to the housing association.
If a mortgage is required on the borrower’s share, monthly mortgage repayments will also occur. Shared ownership is currently only available for first-time buyers and those that do not own a home.
Benefits of Shared Ownership
Shared Ownership has many benefits. Firstly, it provides consumers with an opportunity to build equity without the need to purchase the entire property. Over time, at the purchaser’s discretion, you are allowed to purchase a greater share of the property’s valuation. This is known as ‘Staircasing’. Purchasers’ tend to purchase equity in 10% chunks until the total valuation is solely owned by the homeowner.
In addition, the rental sum charged by the housing association is often less than the outgoing for equivalent properties in the private sector. When the purchaser staircases, the rental monthly outgoing typically reduces accordingly. However, this will depend on the purchaser’s agreement with the housing association.
Another benefit, in the short-term, of purchasing on a Shared Ownership basis relates to Stamp Duty Land Tax (SDLT). SDLT is a taxation, paid only on property purchases, based on purchase price. With Shared Ownership, SDLT is usually deferred until the purchaser owns at least 80% of the property.
If you are a first-time buyer, at the time of writing this article, SDLT is not payable for properties with a purchase price ceiling of £300,000.
Costs of Shared Ownership
However, Shared Ownership is not always a cheap option for consumers. The extent to which shared ownership is more cost-effective than owning a property, with a mortgage, is dependent on the rental outgoing charged by the housing association.
In the United Kingdom, particularly in the south of England, rental outgoings are increasingly exceeding mortgage costs for properties of equal value. In addition, many borrowers suffer from a misconception that shared ownership will result in lower mortgage interest rates than other ownership options.
They believe this because of the thought that their mortgage loan will be a small percentage of the property’s valuation. As Loan-To-Value (LTV) is the primary driver of interest rates (the lower LTV, the lower the interest rate), this misconception is understandable.
However, for Shared Ownership cases, the value element of LTV is based on the purchaser’s share price as opposed to the entire property value. Therefore, the interest rates available to a shared ownership purchaser may be higher than initially expected.
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