Shared Ownership or Help to Buy Scheme: Which is right for me?
7 August 2020
Getting a step onto the property ladder is one of the biggest financial steps in your life. Increasing house prices and high deposits are seen as a major road block to first time buyers owning their own home. There are however other ways to buy a home in the form of using Shared Ownership or the Help to Buy scheme.
Residential conveyancing specialists TRUE Solicitors investigates how Shared Ownership and Help to Buy schemes work, what they involve, how they differ from each other and which is the best option for you.
Shared Ownership Scheme
First time buyers can purchase a share of a new build property, or re-sale property, from a housing association through a Shared Ownership scheme.
Buyers can typically purchase between a share of the property between 25-75 per cent. The buyer pays a mortgage on this share amount, and also pays rent to the housing association at a level below market value.
It is possible to for the homeowner to increase the share that they own in their property through purchasing more shares of the property in a process known as ‘staircasing’. Through staircasing it is possible to purchase enough shares to own the property outright.
The benefits of purchasing a home through Shared Ownership
Buying a home through a Shared Ownership scheme has the following benefits:
- Allows you to be able to afford to buy a property that you otherwise could not on the open market, through a lower deposit required and below market rent.
- You can often buy with a deposit as low as 5 per cent of the price of the share, i.e. 5 per cent of 25 per cent of the value of the property, not the value of the entire property.
- Stamp duty is generally avoided until you own an 80 per cent share of the property.
Who is eligible to purchase a home through a Shared Ownership scheme?
There are certain eligibility requirements that buyers must meet in order to purchase a property through a shared ownership scheme, including:
- You must be a first time buyer, who either doesn’t currently own their own home, or is in the process of selling their present home.
- Your annual household income must be less than £80,000, or less than £90,000 if you live in London.
- You must be able to prove a good credit history and be able to afford the monthly mortgage/rent repayments and all other associated costs of owning a home.
- You must not be in arrears with your mortgage or rent payments.
- You wouldn’t be able to afford to purchase a home suitable to your needs on the open market.
- You must be between 18-54 years of age.
It is also the requirement to have enough money upfront to put down five to ten per cent of the equity share that you are buying as a deposit. For example if you are purchasing a 25 per cent share of a property which is worth £50,000 you would need to be able put down £2500-£5000.
How to buy a Shared Ownership property
If you meet the above eligibility criteria you can purchase a shared ownership property by contacting Housing Associations to arrange viewings of their properties available, or through searching for property on the Share to Buy website.
Disadvantages of purchasing a Shared Ownership home
There are some restrictions to consider when purchasing a home through a Shared Ownership scheme, including:
No-subletting: Shared Ownership schemes were brought in to help people, who could otherwise not afford to, get on the property ladder. It is therefore prohibited to sublet your home purchased through shared ownership.
Permission to make property alterations: You will need obtain the landlords permission if you want to make any alterations to the property.
Age Limit: Shared Ownership schemes are only in place for home buyers aged between 18-54. The ‘Older People’s Shared Ownership’ scheme is in place to assist those aged 55+ in buying a home. This scheme does however only allows buyers to purchase up to a 75 per cent share of the property. Homeowners cannot ‘staircase’ up to owning 100 per cent of the property.
Help to Buy Scheme
The Help to Buy: equity loan scheme was brought in by the government as a means of allowing home buyers to purchase a new build property with only a 5 per cent deposit. The government then tops up your deposit by loaning you up to 20 per cent of the value of the property. The 20 per cent loan is interest-free for five years. Homebuyers purchasing a home though the Help to Buy scheme means that you can obtain a 75 per cent mortgage.
You can purchase a new build property using the Help to Buy scheme with a value of:
- Up to £600,000 in England
- Up to £300,000 in Wales
- Up to £200,000 in Scotland
Who can purchase a home using the Help to Buy scheme?
First time buyers and existing home owners can purchase a new build home through the Help to Buy scheme, as long as:
- You are buying the property with the purpose of it being your only residence.
- You are not buying the property with intention of letting it out.
- You will not own any other property after completion.
- Have a minimum 5 per cent deposit.
- You must not rent out your existing home and purchase a second home using the Help to Buy scheme.
- You cannot borrow any more than 4.5 times your annual gross income – minus any outstanding debts.
- Your monthly mortgage, equity loan interest and service charges (if applicable) cannot equate to more than 45 per cent of your monthly net household income – minus any debts.
How to apply for a Help to Buy: Equity Loan?
Help to Buy agents are appointed by Homes England to govern the Help to Buy: Equity Loan scheme. The Help to Buy agents give advice to home buyers and authorise the go-ahead for the equity loan scheme. You can visit the Government’s Help to Buy website to search for Help to Buy agents in your local area.
Disadvantages to purchasing a home using the Help to Buy scheme
If you decide to use the Help to Buy scheme to purchase a property, there are some restrictions in place which may make the scheme not right for you. Terms and conditions include:
No subletting: You cannot sublet your property until you have repaid the 20 per cent equity loan.
Can’t own any other property: If you are a current home owner looking to purchase using the scheme, you will be expected to sell your home before being able to exchange contracts.
Permission to make property alternations: You will need permission to make significant property alterations from the Post Sales Agent.
Loan costs: Loan amounts are not fixed and your repayments can become increasingly expensive.
Negative Equity: It has been suggested by some property experts that the Help to Buy scheme has begun to inflate house prices. Many are worried that this is leading to a housing bubble that is likely to burst when the scheme ends, leading to many homeowners in negative equity.
Limited amount of mortgage lenders: Only certain mortgage providers will act for buyers who choose to purchase using the scheme. This is due to the third party involvement from Home England who provide the equity loan.
Shared Ownership or Help to Buy Scheme?
There is no right or wrong answer when it comes to whether it is better to purchase a property through: Shared Ownership or Help to Buy scheme. It depends on your individual circumstances, i.e. how much deposit you have available, the cost of the property, if you already own a property and your annual household income.
When purchasing a property it is important to instruct the right experts to guide you through the process, from mortgage advisors and conveyancers who are experienced in dealing with the legalities of purchasing under the Shared Ownership or Help to Buy scheme.