The pros and cons of Shared Ownership
The UK government came up with the Shared Ownership scheme to allow more and more people to climb onto the property ladder. The Shared Ownership scheme lies somewhere between renting and buying, but it does act as the first step towards owning your own home. Also known as the part-buy part-rent scheme, it allows first-time buyers to own a home without paying a hefty deposit or worrying about high mortgage repayments. If you are a first-time buyer who has been thinking about using this scheme to your advantage, here are some pros and cons of the Shared Ownership scheme.
Easy mortgage approvals:
A first-time buyer or a low-income individual might find it hard to get approval or pre-approval for a mortgage as the loan amount can be rather high. However, when a buyer is only purchasing a small portion of the property, it becomes much easier to get a mortgage as the mortgage amount reduces drastically. As long as you get accurate house valuations, plan your finances correctly and follow a budget, it should be a rather easy process.
Under the Shared Ownership scheme, buyers can purchase a 25 per cent to 75 per cent share of a property. So, for instance, if a buyer purchases a 25 per cent share of a house he or she only has to pay a deposit on that 25 per cent. As for the remaining 75 per cent, the buyer will have to pay rent which is usually below the market rate. So, instead of paying 15 or 20 per cent of the total value of the property, a first-time buyer will only have to pay 15 to 20 per cent of the share he or she has purchased as the deposit amount.
A buyer has the right to buy up to 100 per cent shares of the property, which means he or she can become the owner of the property as a whole, through the process of staircasing. Essentially, the buyer can purchase more shares in the property. For instance, a first-time buyer who has bought 25 per cent of the property can use the process of staircasing and own 50 per cent of the property by buying 25 per cent more. Now, the buyer will have to pay the rent for only the remaining 50 per cent of the property while repaying the mortgage on the 50 per cent that he or she owns.
You are a homeowner:
The biggest and best advantage of the Shared Ownership scheme is that you can finally become a homeowner. Whether you have bought 25 per cent of the property or 75 per cent, you are the rightful homeowner of that property! And in this day and age where property prices in the UK are reaching the sky, being able to call yourself a homeowner is a pretty big deal. Plus, buying your first share is just the first step onto the property ladder. As the value of your property increases, you can staircase and sell your property to move into an even bigger and better home!
While you do own a certain share of the house, you are still paying rent on the part of the house that you do not own. While this rent is lower than the market rate, the accumulation of the rent as well as the mortgage repayments could work out a little steep. Also, you could get evicted if you do not pay your rent which would mean you can lose the share of the property that you have already bought.
Properties under the Shared Ownership scheme are usually leasehold properties, with a lease of 88 years, 99 years or even 125 years. In the UK, it becomes very hard to resell a leasehold property that has a short lease, for instance, an 80-year lease. In that case, you would have to apply for a lease extension.
Price of new shares:
When you decide to buy an additional share in the property, you have to pay the current market value of the property and not the value that you bought the original shares. And, you can only use the process of staircasing three times. So, if you got the first 25 per cent or the first 50 per cent at a good deal, the next 25 per cent could cost you an arm and a leg if the value of the property has gone up drastically.