The pros and cons of a shared ownership mortgage

Shared ownership schemes may seem like an appealing way to get on the property ladder, but what are the downsides?

What is a shared ownership mortgage?

If you're struggling to afford to buy a property outright, then a shared ownership 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 25% to 75%, and then pay rent on the remaining portion to your landlord - the housing association.

The scheme is backed by the government and aimed at:

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

There’s also a shared ownership scheme for people aged 55 and over, although, 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 ‘stair casing’. In theory, you could end up owning 100% of the property and no longer having to pay rent. However, you'd still have to pay the service charge.

If you’re a current shared ownership tenant looking to increase your share, you might find this staircase calculator handy.

Chance to build some equity

Unlike renting, where you get nothing back for your money, 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 and any management fees. This charge could be over £100 each month and can go up as well as down. If you want to increase the portion you own, you’ll have to pay the valuation and remortgage fees each time which could get expensive.

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 have to need permission to rent out any of the bedrooms, and you're not allowed to sublet either.

As far as the lease goes, 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.

Keep reading to get advice on how to rent with bad credit and no guarantor.

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 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, find out how you can improve it.

Availability

There is less choice when it comes to finding a shared ownership property, and some may be subject to waiting lists with priority given to those from the Armed Forces. You have to go via a Help to Buy agent who will register your interest and provide you with further information - find an agent here.

Read on for advice about getting a first-time buyer mortgage.