How Does a Shared Ownership Mortgage Work?
Estimated reading time 8 minutes
Getting your foot on the property ladder can always be a bit of a struggle. With such high levels of deposit required, and mortgages difficult to obtain, many are finding that the first move into home ownership eludes them for longer than they had hoped.
That is why lots of people now look to shared ownership. Shared ownership helps make the process of owning a home a little more affordable and gives many who may have thought their chances of ownership were gone, to see a new opportunity arise.
A shared ownership mortgage works by having the applicant only borrow funds to cover a percentage of the house rather than the full property value. As a result, this means less deposit is required too. With a smaller level of deposit to pay and fewer mortgage expenses, it becomes easier for non-homeowners to find an affordable route into property ownership.
In this blog, we look at how shared ownership mortgages work, and highlight all you need to know about them should you be looking at new property opportunities.
A shared ownership mortgage is a form of loan offered to those registered on the shared ownership scheme for their region. It allows successful applicants to buy a percentage of the house whilst paying rent to a housing association for the remaining share. This could mean you have 35% ownership that you pay your mortgage for and a 65% tenancy that you pay rent on. It isn’t quite as straightforward as that though. A shared ownership mortgage won’t just be given to everyone who registers for the scheme. Just like any other mortgage, there are criteria you must meet and rules you have to follow.
You can buy anything from 10-75% of the home with a shared ownership mortgage but this will all depend on affordability and how much deposit you have managed to save.
You can purchase any property that is part of the shared ownership scheme with a shared ownership mortgage. This would normally be a new build or an existing property from the housing association.
Just like with a typical mortgage, you can opt for different types depending on what suits your affordability, needs and preferences. You can opt for a fixed-rate shared ownership mortgage. This is where your interest rate remains the same for the fixed period. Beneficial if you need to know the exact amount you are paying each month. Not so beneficial if interest rates drop significantly and you are stuck with a premium-priced product.
The other common alternative is the variable rate shared ownership mortgage. This is where your lender determines a rate, and it changes as the Bank of England or the lender’s rates fluctuate. This is good if the market is settling down after some turmoil but not so good if they rise above the rates available on fixed term deals.
Before registering yourself on the shared ownership scheme, it would pay to assess your current circumstances and see if you meet the eligibility criteria for a shared ownership mortgage. If you don’t you may have to look to the open market and apply for a regular mortgage or continue saving until that becomes affordable.
To be eligible for a shared ownership mortgage you must:
- Be over 18
- Have a household income of £80,000 or less per year, or £90,000 or less if in London
- Not have any mortgage or rent arrears elsewhere
- Have a good credit score with no bankruptcy or CCJs against you
- Not own another home unless you are in the process of selling it
In addition to the above, you will also need to see that one of the below also applies to you:
- You are a first-time buyer
- You live in a shared ownership home but want to move
- You are creating a new household after a relationship breakdown, a death or other such issue
- Have previously owned a home but can no longer afford to buy one
Once you are satisfied you meet these requirements, you should look at registering for the shared ownership scheme.
You won’t be able to get a shared ownership mortgage without being on the shared ownership scheme so it is important you check there is one you can get on. You can do this by speaking to your local housing association. This will allow them to check your eligibility to be on the scheme. You can then find all the providers of shared ownership properties for your area on the government website and begin looking at your property options. Your housing association will help assess your affordability via a financial assessment and be able to let you know how much rent would be due. This then allows you to see what kind of mortgage you’d be needing.
With the details of your financial assessment from the housing association, you’ll have a good indication of what your expected rental share is and what size share you may be able to buy. This means you can now approach mortgage lenders to see if they are willing to help. Not all lenders will assist with shared ownership mortgages, so it can often be best to use a specialist mortgage broker who can help you find a suitable loan.
Your broker and lender will need to see proof of affordability as well as your identity, this means that when applying for a shared ownership mortgage, you will need:
- Proof of name and address (passport and a utility bill will normally be sufficient)
- Employment information such as whether you are part-time or full-time, on fixed or hourly pay, whether it’s a short term or permanent contract etc.
- Proof of any benefits you may be receiving
- Proof of income
- Bank statements. It may be required to supply as much as three months’ worth or more
- Proof of the deposit funds
Armed with this information, a lender will be able to conduct a detailed assessment to see whether lending to you is too risky or not. They will check your incomings and outgoings, looking to see if you keep up to date with scheduled payments and don’t allow your credit rating to drop significantly. Should the information provided give them confidence in lending to you, they will then look at the rental agreement to see how much is being paid on rent, service charges and ground rent. If these costs keep you within their lending criteria, you should be offered the mortgage.
A deposit of just 5-10% of the share you buy is usually suitable. This means if you are looking at a home worth £300,000 and you are buying 40% of it, you’ll pay a deposit of between £6,000-£12,000. Just don’t forget that even though you may have sufficient funds to cover the deposit and the rent, you’ll also need to factor in moving costs, solicitors’ fees, stamp duty and any other fees set out by the housing association.
Once you have been living in the home for a year or more, you’ll be able to do what is known as staircasing. This is where you buy a little more of your house from the housing association to increase your share and reduce theirs. In some cases, you’ll need to remortgage to staircase but in others, you will just increase the borrowing a little on your existing deal. You will have to staircase in 10% increments and once you reach 100% you own the house outright. Just be aware that some associations limit the staircasing to 80% though.
If you need to move house but are finding the open market unaffordable, you could look into shared ownership. As long as you match the criteria, it can be relatively simple. To get the ball rolling, you could look at selling your existing home to a cash house buyer, that way you have funds ready to clear an existing mortgage or use for a deposit on a new home. At Bettermove, we work to sell your house fast so you never miss out on the opportunities shared ownership may be able to bring you. With a business model that allows a sale to be completed in just 30 days, you can be organising a move to a new home today, not in six months. Contact our team to find out more.
