The pros and cons of a shared ownership mortgage

Dreaming of owning your own home but finding yourself priced out of the property market? Shared ownership might be the stepping stone you need.

This government-backed scheme helps thousands of people get on the property ladder each year, but it's not right for everyone. Let's look at how it works, who it's for, and the important pros and cons you need to know before making your decision.

What is a shared ownership mortgage?

If you're struggling to afford to buy a property outright, then a shared ownership mortgage may be an option for you.

With a shared ownership mortgage, you buy a share of a housing association property. The share you own could range from 10% to 75%, and then you pay rent on the remaining portion to your landlord - the housing association.

A shared ownership mortgage is specifically designed for this arrangement - you only borrow against the portion of the property you're buying, making it more affordable than a traditional mortgage.

The scheme is backed by the government and aimed at:

• first-time buyers
• those who used to own a home, but can't afford to buy one now
• those who already have shared ownership, but are looking to move
• people who earn less than £80,000 per year (or £90,000 if you live in London).

Under current shared ownership rules, you benefit from several consumer-friendly features:

• You can buy an initial share as small as 10%
• You can increase your ownership in 1% increments during the first 15 years, with reduced fees
• The landlord covers the cost of certain repairs for the first 10 years
• When selling, housing associations have 4 weeks to find a buyer before you can sell on the open market

There's also a shared ownership scheme for people aged 55 and over (sometimes called 'Older People's Shared Ownership'). With this scheme, you can own a maximum of 75% of the property, at which point no rent is payable on the remaining 25%.

Pros of shared ownership

✅Reduced deposit

Shared ownership mortgages typically require a deposit between 5% and 10% of the purchase price. Because you're only getting a mortgage on a portion of the property, the deposit required by mortgage lenders will usually be far less than with standard mortgages.

For example, if you buy 50% of a property worth £150,000, then a 5% deposit on your share (£75,000) would be £3,750.

✅ You can increase the amount you own

You're able to gradually increase your share by buying additional portions of the property - based on the current market value - known as 'staircasing'. Most housing associations allow you to purchase additional shares in minimum increments of 5-10% at a time, though some now offer smaller 1% increments.

In theory, you could end up owning 100% of the property and no longer have to pay rent. However, you'd still have to pay the service charge.

Each time you staircase, you'll need to pay for a property valuation, legal fees, and possibly mortgage arrangement fees, which can add up to several thousand pounds.

If you're a current shared ownership tenant looking to increase your share, you might find an online staircasing calculator helpful.

✅ Chance to build equity

Unlike renting, where you get don’t receive any financial returns, a shared ownership could see your investment increase if the property becomes worth more than what you paid for it.

For example, if you paid £75,000 for a 50% share of property worth £150,000, and it's valued later at £180,000, your 50% share is now worth £90,000.

But remember that if the property value goes down, you could find yourself in negative equity as well.

Cons of shared ownership

❌ High fees

Shared ownership schemes require you to pay a service charge to the housing association. Service charges cover the maintenance of communal areas, buildings insurance, ground rent, and management fees.

Typical service charges range from £50 to £300+ per month depending on the property type, location, and facilities. The charges are typically reviewed annually and can increase based on planned maintenance or unexpected repairs.

This charge can go up as well as down.

❌ Leasehold restrictions

All shared ownership properties are leasehold, meaning that if you want to make significant changes to the property, you'll need to get authorisation from the landlord first. You'll also need permission to rent out any of the bedrooms, and you're not allowed to sublet either.

Since 2022, there have been important changes to leasehold regulations that benefit shared owners, including reduced costs for lease extensions and greater transparency around service charges. New shared ownership properties typically come with a 990-year lease.

If you buy a property with a short lease, it could become difficult to sell without costly lease extensions.

❌ You're a tenant subject to a contract

Unless you own 100% of the property, you're always going to be a tenant depending on your contract. This means you could face eviction for missing any rent payments or any other breach of the contract like sub-letting. You should make sure this doesn't happen because you could lose your share of the property.

You may even need to get permission to have a pet, so make sure you check the terms of the contract very carefully.

❌ You might need a larger deposit if you have poor credit history

Shared ownership mortgages can help people on lower incomes get a property. However, if you've got a County Court Judgment (CCJ) on your credit file, it could mean you'd need to put down a larger deposit to get approved.

This depends on the lender and your personal situation, so it's best to discuss with your mortgage adviser to see how a CCJ will affect your application.

If your credit score needs some work, consider checking your credit report for errors, registering on the electoral roll, and paying bills on time. Many lenders now offer specific shared ownership mortgage products for people with less-than-perfect credit histories.

❌ Availability

Finding a shared ownership property can be challenging as they're typically in limited supply. The main ways to search for shared ownership homes now include:

• Local housing association websites
• Property portals like Share to Buy or Property Bookmark
• Your local Help to Buy agent

Priority is often given to people who live or work in the local area, key workers, and those from the Armed Forces.

Selling a shared ownership property

When you decide to sell your shared ownership home, you'll need to inform your housing association first. They usually have the right to find a buyer for your share (known as 'nomination rights') for a set period (typically 4-8 weeks).

If they can't find a buyer, you can then sell your share on the open market through an estate agent, but buyers will need to meet the shared ownership eligibility criteria.

The selling process involves getting a valuation from a RICS surveyor, paying legal fees, and potentially estate agent fees if your housing association doesn't find a buyer.

If you're thinking about buying your first home, it's worth looking at all your options including shared ownership and other first-time buyer schemes.