House prices are so high in London, it’s enough to make first-time buyers weep. Despite the difficulties when it comes to purchasing properties, getting your foot on the ladder in some way is STILL a better option than renting. After all, even if you don’t make much of a profit on your home over a period of time, you could treat your mortgage like a long-term savings plan. That money won’t simply be wasted; it’ll be there for you to access at some stage if you sell and decide to downsize.
One scheme available for those without access to a lot of capital is to take up a shared ownership programme. As we’ve focused on landlords a lot in the past, we decided to write something for first-time buyers among you. However, it’s not all clear cut; there are pros and cons if you were to decide to take up this option. We hope to lay these out sufficiently in this article so you can gauge whether you want to invest your money in this way.
So what exactly IS shared ownership?
The scheme allows people to buy a stake of the property with a mortgage and pay rent on the rest, which is owned by the local housing association. Shared ownership has actually been around since the eighties, and currently represents just 1.7 percent of London’s stock. With shared ownership, average deposits cost around £12,000, while on the open market it’s £60,000. Buyers therefore tend to be younger and have lower household income. Many shared ownership properties tend to be new builds. The idea behind it was to ensure those individuals and families on low and middling incomes could afford their own homes – something they couldn’t otherwise afford to do.
You will qualify for a shared ownership scheme if:
- Your household income is £60,000 a year or less.
- You’re a first-time buyer (also if you owned a home once but are now priced out you can apply).
- You currently rent a council or housing association property.
The great thing about shared ownership is that you can:
- Purchase a property with a much smaller deposit (as outlined above).
- Avoid stamp duty – as long as the proportion of the house you’re buying is less than the lowest threshold: currently £125,000.
- Shared ownership is a cheaper option than renting, which is good news for cash-strapped first-time buyers!
- You can “staircase”, where you buy more shares until you’re able to buy the property outright. This is good news as it means that you can upgrade as your income increases.
As with everything, there are downsides to shared ownership and you should be well aware of these before you take the plunge:
- The amount you pay in rent to the housing association could go up as could the service charges you’ll be obliged to pay (as all leaseholders do).
- If you decide to sell the property, those wanting to purchase it will have to fit in with the shared ownership criteria.
- It can be difficult to rent out the property – or even sublet a room! This is because there are often strict rules when it comes to housing association properties.
- If you do eventually buy the home outright and decide to sell, the housing association is allowed first refusal for 21 years.
What’s the future for shared ownership homes?
Now we’ve outlined the details, we thought we’d take a look at recent developments related to this scheme. Expansion has been pushed and eligibility has been widened – as there are many key workers priced out of the market who don’t work in the public sector. Plus, the aim is to discourage restrictive income caps by local planning authorities and to reduce bureaucracy. The idea is that by 2025 some £250,000 Londoners will benefit.
There are also plans for institutional investment, with London Mayor Boris Johnson having asked the Greater London Authority (GLA) to arrange for a new equity fund for 4,000 homes for shared ownership, in order to attract long-term capital (like pension funds). Shared ownership would more closely reflect commercial property, with longer leases and index-linked rents.
So now you have an idea as to how shared ownership works, you can have a think about whether it’s for you. It’s important to evaluate how such a purchase could fit in with your long-term plans and make a balanced decisions.
Image credit: Alex Pepperhill (flickr.com)