Shared Ownership Mortgages Explained: How They Work

For many buyers, especially those already renting, getting onto the property ladder isn’t easy. Saving for a deposit while paying rent and covering the everyday living costs can take years, and even then, you still need to be able to borrow enough to buy the property you want.

Shared ownership offers another way to buy when purchasing a property outright isn’t an option right now. Instead of taking out a mortgage for the whole purchase, you buy a share of the property and pay rent on the part you don’t own. This can reduce both the amount you need to borrow and the deposit you need upfront.

In this article, we explain exactly how the shared ownership scheme works in practice, including who can apply, the deposit you may need and what happens if you decide to buy a larger share or sell your property. Let’s begin.

How Does Shared Ownership Work?

With shared ownership, you purchase an initial share of an eligible property and the housing association or other provider retains the remaining share. You can fund your portion with a combination of a deposit and mortgage, which will generally require borrowing considerably less than if you were to buy the same property outright.

To see how shared ownership works in practice, let’s take a look at an example of a 50% share of a property valued at £300,000:

The figures above are for illustrative purposes. Actual mortgage repayments and rent charges will depend on your mortgage rate, term, deposit, share you purchase and the terms of your shared ownership lease.

Crucially, the combination of your mortgage repayments and rent will not increase the percentage of the property you own. Looking at our example of a 50% share, you would continue to own 50% unless you take steps to buy a larger share from the housing provider.

However, your mortgage repayments can increase the equity you hold within your 50% share. At the point of purchase, your initial equity will mainly come from your deposit. With a repayment mortgage, part of each monthly payment reduces the amount you owe your lender, gradually increasing your equity as the mortgage balance falls.

These are not necessarily the only costs involved. Shared ownership properties are typically leasehold and you will usually need to pay a service charge towards the maintenance and management of the building or development. Depending on the lease and when it was granted, other charges may also apply. For example, older shared ownership leases can include additional ground rent.

How Can I Increase My Ownership Share?

You may be able to increase the percentage of the property you own later through a process known as staircasing. This involves purchasing additional shares from the housing provider and will usually be based on the property’s market value at the time you decide to buy more.

The exact process to increase your ownership share will depend on your housing provider and shared ownership agreement. However, will usually involve the following steps:

1. Contact your housing provider: Tell them that you want to purchase a larger share of the property and exactly what percentage share you are considering buying.
2. Arrange a property valuation: The property will then need to be independently valued, as the cost of the additional share is based on its current market value rather than what you originally paid.
3. Decide and arrange how you will fund the additional share: This could involve increasing your existing mortgage, remortgaging or using your own funds.
4. Purchase the additional share: Once the necessary mortgage, legal and housing provider requirements have been completed, you can then purchase the agreed additional percentage.

Once you have purchased a larger share, the amount of rent you pay will usually reduce accordingly. Depending on your shared ownership arrangement, you may eventually be able to staircase to 100% ownership.

Let’s use our previous example of a 50% share in a £300,000 property to demonstrate how staircasing can work in practice and how increasing your share can affect your rent.

Figures shown in this table are for illustrative purposes only. Actual costs will depend on your property, mortgage and the terms of your shared ownership agreement.

As the table demonstrates, the more of the property you own, the smaller the share you will need to pay rent on.

In our example, increasing your ownership from 50% to 75% reduces the housing provider’s share from £150,000 to £75,000. At the illustrative 2.75% rent rate, this would reduce the monthly rent from £343.75 to around £171.88. If you were able to reach 100% ownership, there would no longer be an unsold share on which to pay rent.

However, it’s important to note that these figures assume the property remains valued at £300,000 and the same 2.75% rent calculation applies. In practice, the cost of purchasing additional shares will usually be based on the property’s value at the time, while your rent can also change in line with the terms of your lease.

In addition, you may not always be able to purchase 100% of the property. While our example illustrates increasing your ownership all the way to 100%, some shared ownership properties place restrictions on the maximum percentage you can own.

Ultimately, before deciding to purchase a larger share, it is important to check the terms and conditions of your specific shared ownership agreement.

Am I Eligible?

Shared ownership is available to first-time buyers, previous homeowners who cannot currently afford to buy, existing shared owners looking to move and people who need to establish a new household following a change in circumstances.

In England, your total household income must be £80,000 a year or less (£90,000 or less if you live in London). These limits apply to the household as a whole. As such, should you want to purchase a property using the shared ownership scheme with another person, your combined income must remain within the limit.

Following the Government guidelines for the shared ownership criteria, you will also need to meet at least one of the following:

• You are a first-time buyer.
• You previously owned a home but cannot afford to buy one now.
• You are forming a new household, for example following a relationship breakdown.
• You already own a shared ownership property and want to move to another.
• You currently own a home but cannot afford to buy a new property that meets your needs.

There is no minimum income for shared ownership. How much you need to earn will depend on factors such as the property, the share you want to purchase and whether the mortgage, rent and other housing costs are affordable.

Most importantly, being eligible for the scheme does not guarantee that you will qualify for a shared ownership mortgage.

A mortgage lender will still need to complete its own affordability and eligibility checks, taking into account your income, regular expenditure, existing debts and credit history. In addition, the housing provider may also carry out an affordability assessment before you can proceed.

What Are the Pros and Cons of Shared Ownership?

Like any route into homeownership, shared ownership has both advantages and disadvantages. While buying a share of a property can help overcome some of the mortgage affordability barriers and deposit requirements of a traditional mortgage, it is also important to consider the ongoing costs and how a shared ownership arrangement could affect your plans in the future.

After weighing the pros against the cons, whether shared ownership is worth it will depend on your personal circumstances and what you’re looking to achieve from homeownership.

As highlighted in our table, a big advantage of shared ownership is that buying a smaller initial share can reduce the mortgage and deposit you need. This can make homeownership more accessible in higher-cost areas where buying a property outright or qualifying for a large enough mortgage may not be possible.

With that said, a smaller mortgage does not necessarily result in lower overall housing costs. You will also pay rent on the remaining share, alongside service charges and any other costs that apply under the lease. Additionally, there can be longer-term considerations, particularly if you plan to increase your ownership or eventually sell the property.

Ultimately, shared ownership can be a useful route into homeownership, but it is important to look beyond the lower initial deposit and consider whether the mortgage, rent and ongoing costs remain affordable over the longer term. Speaking with a mortgage broker can help you understand how shared ownership compares with other mortgage options available to you.

How Much Deposit Do I Need?

One of the big reasons shared ownership can be an attractive mortgage scheme is that the initial deposit can be considerably less compared to a traditional mortgage.

To show this in practice, let’s return to our £300,000 property. If you purchased a 50% share worth £150,000 and your chosen lender required a 5% deposit, you would only need £7,500. A 10% deposit would instead be £15,000.

It’s important to note that the deposit requirements are usually based on the value of the share that you are purchasing. For example:

All figures are for illustrative purposes only. The deposit required will depend on the lender and mortgage requirements.

Ultimately, how much deposit you will need for shared ownership will depend on three key factors:

• The property’s market value.
• The percentage share you want to purchase.
• The lender’s deposit requirements.

While saving for a larger deposit will reduce the amount you need to borrow, it will not increase the percentage of the property you own. For example, if you are purchasing a 50% share, you will still own 50% whether you put down a 5%, 10% or larger deposit. A larger deposit simply means you need a smaller mortgage to fund that share.

How Are Rent and Mortgage Payments Calculated?

In terms of mortgage payments, a shared ownership mortgage works in much the same way as a standard residential mortgage.

The amount you pay each month will depend on how much you borrow, your mortgage term and the interest rate on your chosen deal. Each monthly payment will cover the interest charged as well as repaying part of the amount you borrowed.

Mortgage repayments can change when your interest rate changes. For example, if your fixed-rate period ends and you move onto your lender’s standard variable rate, your monthly repayments could increase or decrease.

When calculating the total rent, it’s important to understand that your initial rental payments could similarly increase or decrease over time. Your rent will usually be reviewed once a year, with increases typically linked to a measure of inflation and an additional percentage set out in your lease.

However, if you choose to purchase a larger share of the property through staircasing, the portion owned by the housing provider becomes smaller and your rent will usually reduce accordingly.

While the exact calculation will depend on the terms of your shared ownership agreement, the rent you pay when you first purchase the property should not be treated as a fixed monthly cost.

Can You Sell a Shared Ownership Property?

When selling a shared ownership property, your first step should be to contact your housing provider. They will explain the process you need to follow, which will depend on the terms of your specific shared ownership lease.

You will usually need to have the property independently valued to determine its current market value and, in turn, the value of the share you own. Your housing provider may then have a set period to find an eligible buyer for your share. If they cannot find one, you may be able to market the property elsewhere.

The value of your share can also change while you own the property. If the property’s market value has increased, your share may be worth more than when you purchased it. Equally, if the property’s value has fallen, the value of your share could be lower.

For example, if you own 50% of a property that has increased from £300,000 to £320,000, your 50% share would be valued at £160,000. Your outstanding mortgage would then need to be repaid from the proceeds when the sale completes, with the remaining proceeds belonging to you after any applicable selling costs are paid.

How Can a Shared Ownership Mortgage Broker Help You?

Not every mortgage lender offers shared ownership mortgages, and those that do can have different lending and affordability criteria. A qualified broker can help assess your circumstances against different shared ownership mortgage lenders, finding the most suitable options that match your needs.

A broker can also look beyond the mortgage itself when assessing what you can afford. Your rent, service charges, deposit and the share you plan to purchase can all affect how much you can realistically borrow. This assessment can give you a clearer idea of your mortgage options and likely monthly commitments.

At Boon Brokers, we provide completely fee-free mortgage advice, meaning you won’t pay us a broker fee for helping you find and arrange your shared ownership mortgage. Our dedicated mortgage advisers will take the time to understand your circumstances, mortgage aims and what you want to achieve from homeownership, both now and in the future.

With this understanding, we can compare suitable options from our whole-of-market panel of lenders and recommend a mortgage that fits your circumstances. From there, we can guide you through the application process, answer any questions along the way and help you understand your options before committing to a mortgage.