A few weeks ago, I explained why (in my opinion) most people should own their home. Today, I want to share (no pun intended) with you the story of how we got to own our own home. We did it through a scheme called shared ownership and this post will be about buying a shared ownership property. I will explain the scheme, the pros, the cons, and our own experience.
Before I dive into what shared ownership is, I must explain something. There are many good guides out there about shared ownership, I recommend reading the one on the progression playbook website. However, there aren’t many good guides that share (I did it again) the experience of going through the process, that’s why I decided to write this post.
As buying your own home is one of the biggest financial decisions of your life, I thought I might introduce a scheme you may have not heard of and that you may want to consider.
What is shared ownership?
Shared ownership (also known as share to buy) is a scheme in which you buy part (at least 25%) of a property and pay rent for the part you don’t own. I know that sounds a bit weird but let me clarify this.
Shared ownership is nothing like buying a property with someone else (like a family member). The part that you don’t own isn’t owned by another person, it’s owned by a housing association. The housing association can not sell the remaining percentage to anyone else. They have to keep it and you are the only one who can buy additional parts (%) of the property, that’s called staircasing. They also can’t kick you out as long as you pay rent.
It’s a scheme aimed at people who can’t afford to buy their own home but want to get on the property ladder. It allows them to become owners with a very low deposit.
I will go into a bit more detail in the pros and cons sections.
The criteria in quotation marks below are taken from the shared ownership eligibility page.
“You must be at least 18 years old”.
Not a lot to add here, pretty self-explanatory.
“Outside of London, your annual household income must be less than £80,000.
In London, your annual household income must be less than £90,000.”
This is the most interesting criterion in my opinion. On one hand, the scheme is not aimed at high earners, hence the cap. On the other hand, if you earn too little, you won’t get a mortgage. It’s a case of hitting the “sweet spot”.
Our flat is in London and we were living in London at the time. Luckily (or not, depends on how you look at it), our household income was below 90k a year but not too much below. That helped us be eligible for this scheme but also (quite) easily obtain a mortgage.
Ownership of another property
“You cannot own another home. Shared Ownership purchasers are often first-time buyers but if you do already own another property (either in the UK or abroad), you must be in the process of selling it.”
This one is the weirdest in my opinion. The whole point of this scheme is to help people buy part of their home when can’t buy 100% of it. In that case, how come you can own a property before entering the scheme?
The only explanation I can come up with is that maybe you own a home in an area that’s much cheaper but want/need to buy in a more expensive area, like London for example.
In any case, we did not own another property at the time so that wasn’t an issue for us.
“You should not be able to afford to buy a home suitable for your housing needs on the open market.”
I call this “the wealth test”. You might have a lot of money but still have a very low income (like a lot of people who have chosen to FIRE). This criterion was put in place to prevent this kind of people from joining the scheme.
However, I have no idea how you can prove that. Maybe they look at your total wealth and check if you can pay a deposit on a full property in the area.
When we applied, I just finished paying off my debts (as I shared with you in a separate post). That allowed us to “prove” we couldn’t afford our own home on the open market.
“You must show you are not in mortgage or rent arrears.
You must be able to demonstrate that you have a good credit history (no bad debts or County Court Judgements) and can afford the regular payments and costs involved in buying a home.”
This criterion makes sense as the housing association wants to ensure (as much as they can) that you can pay the rent and your mortgage.
The steps of buying a shared ownership property
The official steps might be a bit different than what I describe below. However, this is our own experience and I’d rather tell you what really happens rather than what’s supposed to happen.
1. Signing up to the website
First of all, sign up to the share to buy website. This will save you time when you find the property you want. As I’ll explain soon, being quick is key!
2. Finding a property
This can be the easiest or the hardest part, depends on how picky you are.
I was VERY picky, I wanted a shared ownership flat in our neighbourhood and nothing else. We also wanted at least 2 bedrooms (ideally 3) so we could have guests (we have a lot) and to have a room for our (then) future kids.
You can search for properties in a specific neighbourhood or even a specific postcode here. You can also sign up for email notifications whenever a property becomes available, that’s what I did.
I can’t remember exactly when I signed up but it took more than 6 months from that moment until the awaited email arrived. As soon as I read the email and saw the floorplan, I WhatsApped Lazy FI Mum this message: “I found our next home”.
It was (and still is) a flat in our desired neighbourhood, it has 3 bedrooms and we love it.
3. Talking to the advisor
Once you find a property you like, you can either register your interest online or call the housing association, I think we did both. The housing association referred us to their financial advisor (I think that was his title, something like that).
This step was horrible and almost cost us our flat!
When I called the advisor, he asked me which property I’m calling about. When I gave him the address, he checked on his system and said it wasn’t available. I could have given up at this stage but I called the housing association to confirm (you don’t ask, you don’t get), they told me to call him again in a few moments and they’ll update him. Imagine if I took his word for it and given up.
Anyway, I called again, he “found” the property and went on to ask me a few questions about our financials. It’s been a few years so I can’t remember exactly what he asked, apologies. I think it was mostly running through the criteria above.
4. Viewing the flat
After getting the green light from the advisor, it was time to book a viewing.
Now, this is crucial- be the first one! This was one of the key moves that made us get our home.
If you are brave enough, you can put in an offer without seeing the place.
We weren’t that brave but we were lucky enough to book the earliest viewing. We saw it first thing in the morning on the first day of the viewing. As soon as we walked in, we knew we loved it. We asked the housing association representative what the next steps were. She told us it’s a first-come-first-serve (how lucky were we?!) and that we need to fill in a form and send it to the housing association.
It is important to note that the viewings are one household at a time, or at least that was the case when we did it.
5. Putting in an offer
I’ll never forget me and Lazy FI Mum running to the nearest internet cafe to print out the forms, filling them in the street and emailing them to the housing association as quickly as humanly possible. I believe our offer was sent before the next people even entered the flat.
6. Talking to the advisor again
Happy days, our offer was accepted! now it’s negotiation time.
At this stage the advisor went a lot deeper into our financials, he wanted payslips, credit checks, passports and a few more documents.
The purpose of this is not only to ensure we can pay the rent. It is also to determine what % we can afford. After a few emails, he decided we could afford 75%, I thought that was too much so I asked “how many years did you assume for the mortgage?”. He said he used 30, I told him I don’t want to go over 15. After a few backs and forth emails and a meeting, we agreed to buy 35%.
I will explain in the “Pros to buying a shared ownership property” section why I wanted to buy the minimum percentage possible.
7. Getting a mortgage
Getting a mortgage for a shared ownership property is not as simple as getting a mortgage for a fully-owned property. Not all lenders even offer mortgages for shared ownership. Our housing association had a list of mortgage brokers (and solicitors) they usually work with so we picked someone from that list.
We were able to get a 15-year mortgage and we were happy.
Funny enough, our mortgage + the rent on the part we don’t own + the service charge is roughly the same amount as the rent we paid for our previous apartment. The difference is, that in 15 years from the day we completed, I won’t have a mortgage anymore. Plus all the other pros to buying a shared ownership property, which I’ll list later on.
Once you agreed on the percentage and you have a mortgage, it’s time to let the solicitors do their thing.
The one interesting thing I want to tell you is we were given a choice. We had the choice between paying stamp duty land tax (SDLT) on 35% or 100% of the flat. The benefit of paying SDLT on 100% is that if the property value goes up- when you staircase you won’t have to pay a higher SDLT. Also, it saves a bit of bureaucracy in future staircasing- one thing less to worry about.
You can already guess by now that we chose to pay SDLT on 100%.
Pros to buying a shared ownership property
1. Low deposit
Let’s take an example of a £400,000 London flat.
With shared ownership, you need to pay 5-10% of the part you buy. Let’s say you’re aiming for 10%. If you bought that flat on the open market, you would need £40,000. That’s not an easy amount to save. If you bought 25% of the flat, you would be buying £100,000 and would only need 10% of that, which is £10,000. Now, that’s much more manageable.
2. Very cheap rent
This is one of the biggest advantages of this scheme. The rent we pay is A LOT lower than open market rent. I know that because we used to rent in the neighbourhood. If I gross up the rent we pay to represent 100%, it is roughly 60-70% of what we paid for our 2 bedroom flat, where we lived before we moved our shared ownership flat.
On the share to buy website it states that “The rent is less than the rate charged on the open market and usually charged at 2.75% of the property value per annum.” So if we take the £400,000 flat example, that would represent £11,000 a year or £916 a month, that’s very low. That £916 represents the rent on the FULL flat. However, if you own 25% of the flat, you will only pay 916*75%= £687.
The very cheap rent is the main reason I wanted to buy the smallest portion possible. Think about it, buying additional portions of the flat will “save” me the very cheap rent. I’d much rather have that money invested in index funds than getting a guaranteed 2.75%. It’s like having a savings account that pays 2.75%. Yes, I know that sounds amazing compared to the current available savings rates, but would you put a lot of money there? I wouldn’t.
3. All the benefits of owning your own home
First, you get peace of mind from the fact you can’t be kicked out. This is not a financial thing but it is important nonetheless. It allows you to plan for the future and gives you some certainty in life.
Second, it (mentally) allows you to renovate your home and buy custom-fit furniture. I’m not sure I’d do that in a rented flat. Actually, I know I wouldn’t.
We did a few renovations. The first thing Lazy FI Mum said after a week of living here is that she didn’t like the shower, I agreed and we had it replaced. A few months after our daughter was born, we realised we hated wall-to-wall carpets so we had a wooden floor installed.
Yes, these things cost us a lot of money but they made our home better for us and I don’t regret doing them.
Third, you benefit from price increases. If you ever want to sell, your share will be worth more if prices went up. I know a lot of young people feel that prices go up so quickly. They feel like they’ll never get on the property ladder. Shared ownership not only gets you on the ladder but it also lets you benefit from the increase. Of course, if prices go down- you take a hit too in case you want to sell.
It is important to note that price increases might increase your net value but aren’t a good thing if you want to staircase, but I’ll go into that in the “Cons to buying a shared ownership property” section.
4. You can staircase whenever you want
With staircasing, you can buy additional portions of your home whenever you want. You have full control of your future and destiny, which is crucial. I’ve heard about some housing associations that won’t allow you to buy 100% of your property but ours does. That’s something you might want to check before you buy your property.
5. You can use your HTB ISA or your LISA
Just like any other property, you can use your Help to Buy (HTB) ISA and your Lifetime ISA (LISA) to pay part (or all) of the property. The only caveat is that HMRC looks at the full price of the property.
For example, if you’re buying 25% of a £600,000 flat, that’s £150,000. The limit for an HTB ISA and a LISA in London is £450,000. Although you are buying £150,000, HMRC will look at the full price which is £600,000 and will not let you use these ISAs. Technically, HMRC will allow it but you will have to pay a penalty.
It’s not anything illegal, don’t be scared. It’s just like using your LISA for any other purpose besides the allowed ones- you are free to do so but will have to pay HMRC 25% of the withdrawn amount. Do you need £3,000? You will have to withdraw £4,000 because £1,000 (25%*4,000) will be paid to HMRC.
Cons to buying a shared ownership property
1. You pay 100% of fixes and 100% of the service charge
One of the benefits of renting is not having to worry about fixing things. When I first heard of shared ownership, I thought that if I bought 25% of the flat, I’ll have to pay 25% of the fixes. I was wrong, it doesn’t matter what portion you own, you pay 100% of the fixes. The only exception is external walls (which includes windows). The boiler breaks down? pay up. I’m not sure I agree with it but I accept this part.
In addition, although we only own 35%, we pay the full service charge. This part actually makes sense to me as we live in (and occupy) 100% of the flat. You can look at it as a benefit as well in the sense that if you staircase, your service charge won’t go up.
2. Can’t rent
One of the conditions of the scheme is that you can’t rent out your property. Moving? going away on holiday? you can’t rent it out, which brings me to the next con- the exit plan.
3. Exit plan (selling/renting)
Before our viewing, I searched for the downsides of shared ownership. The benefits were very clear, I wanted to make sure I’m not missing anything. The number one downside people mentioned is the exit plan.
It is foolish to go into any big deal without thinking of the end (the exit plan).
What happens if you want to move? in a fully owned property, you have 2 main options- sell it or rent it out. In shared ownership, it’s a bit different.
3.1 Selling your property
When you sell a shared ownership property, you have to go through the housing association. They will find an eligible buyer and set the price.
Two huge red lights should’ve gone off in your head after reading this, along with some sirens.
First of all, there are much fewer eligible buyers for shared ownership (I listed the criteria earlier) than buyers in the open market. As anyone who did basic economics knows, lower demand means a lower price.
Second, the housing association sets the price. Say what?!
Yes, you heard me correctly, you don’t set the selling price and are not part of the negotiation.
This is enough to turn you off shared ownership but I have a solution, keep reading.
3.2 Renting your property
As I mentioned, you can’t rent out your property as long as it’s a shared ownership property. Do you want to move? Either sell it or keep it vacant (there is a third, much better option)
The solution: Buy your property outright (staircase to 100%).
Luckily, there is a solution. You can staircase and buy 100% of your property.
Once the property is yours, you can (almost) do whatever you like with it:
- Rent it out
- Sell it to whoever you want. You are not limited to people who meet the shared ownership criteria
- Set the price. As long as you can find someone that will pay that price- you can call the shots
I read online about people that couldn’t afford to buy 100% but still did it just so they could sell it on the open market. It works just like buying a new property conditional on you selling yours, which is quite common.
Let me assure you that without this solution, we would not have gone for a shared ownership property. The exit plan is one of the areas I did the most research on before buying.
Staircasing is like buying a new property
As I mentioned in the 4th pro to buying a shared ownership property, you can buy additional portions of your home whenever you want. However, it is important to notice you did not lock in the price when you bought your initial portion. Let’s say you bought 25% of a flat when it was worth £400,000 so you paid £100,000. Now you want to buy another 20% but it’s valued at £440,000. You will pay 20% of £440,000 which is £88,000.
On the other hand, if prices decrease, you can pay the additional portions for cheaper, it works both ways.
Also, each staircasing requires a surveyor and solicitor again, they don’t work for free. These additional costs are why it’s not worth it to buy additional small percentages. Do your own maths but in general, if you’re buying less than an additional 10%, these additional costs may make it too expensive.
Using your LISA to staircase
I had a cool idea (in my opinion of course). I thought I might be able to use my LISA to buy an additional portion. You can only do that as a first-time buyer. My thought was that on one hand, I’m not a first-time buyer, I already own 35% (together with Lazy FI Mum of course). On the other hand, it’s still my first home, I don’t own other properties. I did what I do every time I have a tax question- I called HMRC.
The answer surprised me, they said I should talk to my LISA provider. I thought that was weird but I did that anyway. My LISA provider (AJ Bell) got back to me the next day by email saying that I couldn’t and explained why. Essentially, I already own (part of) a property so I’m not a first-time buyer.
However, as it’s up to the provider, you may have better luck with another provider.
Why we decided to buy a shared ownership property
First of all, let me clarify that I did not want to buy a property in London. I didn’t want to take on a huge loan and the rental yields in our neighbourhood were sh*t. The calculation was simple as I knew what we paid for rent and how much similar flats were selling for. I wanted my money invested in index funds.
However, I’m married and this was not my decision to make on my own. Lazy FI Mum wanted to own her own home for peace of mind. She wanted to have a place where no one can kick her out, a place she can renovate and plan the future in.
There’s a joke that goes like this:
“My wife wanted a cat, I didn’t. We compromised and got a cat”.
So we bought (part of) a property in London.
I’ve seen the light
I’m super happy we did! Not only do I completely agree with her reasons (I listed them in the “pros to buying a shared ownership property” section), it really was a compromise.
The service charge + mortgage + rent we pay now is roughly the same as the rent we paid in our previous flat. However, here we buy part of it each month (increase our net worth). In addition, we didn’t have to take on a huge mortgage and pay a big deposit, leaving us money to invest in index funds.
In addition, we got a 3 bedroom flat, which allows us room to raise our daughter and have overseas (and overnight) guests, at least until we have more kids that will take over that room.
Going forward, I would like to own our future home/s too, even if we buy it/them in the open market. I learned to value the benefits of homeownership. I know there are benefits to renting but I have “seen the light”, which is homeownership and I don’t think there’s a way back for me.
Saying that, I do believe in renting first if you move to a new area but long term- homeownership is the way for us. The reasons are not financial, which means we can all have our opinions.
I think that buying a shared ownership property is a very attractive option for eligible people. I’m sure that doesn’t surprise you as we did our research and decided to go for it.
It is ideal for people who want the stability and peace of mind of owning their own home without owning too much real estate. Think about it, there’s no landlord to kick you out because their kid wants to move in or whatever but also, you don’t have to own 100% of the property.
There are cons, as I mentioned above. However, if you are aware of them (especially the exit plan), consider them, and decide you’re ok with them- go for it, that’s what we did.
For more information, please visit the Share to buy website.