Online property experts Tepilo look at why a knowledge gap could be preventing first-time buyers from making use of the government-backed Shared Ownership scheme.
Shared Ownership is one of the government’s flagship housing policies – introduced by former Chancellor George Osborne in 2013 and carried on by Theresa May’s administration – but new research has revealed that some 75% of millennials don’t understand the scheme.
The findings, from a survey carried out by TotallyMoney, showed that confusion surrounding the initiative is high, especially among 18-24-year olds.
A knowledge gap
Only 28% of 18-24 year olds know what Shared Ownership is, despite being one of the demographics this scheme – which is effectively a halfway house between renting and buying – is most aimed at. Perhaps more worryingly, only 6% of those surveyed had used Shared Ownership to secure their first home.
Overall, just 19% of property buyers have used a government buying scheme to purchase a home in the last decade, despite the big investment in various first-time buyer schemes and the publicity surrounding them.
Plenty could be missing out by not understanding the possible benefits of the Shared Ownership scheme, which aims to help buyers get on the property ladder for the first time. Even though 40% of first-time buyers said they needed financial assistance from friends and family to afford a home, a limited number have used a government-backed scheme and an even smaller number have turned to Shared Ownership.
What’s more, even once presented with the correct definition of the Shared Ownership scheme, 38% of buyers said they would not consider purchasing through it, with 35% stating that fears over hidden additional fees would deter them.
Even those who have purchased through the Shared Ownership scheme were still confused about what it involved, with 80% not knowing what leasehold meant, despite all shared ownership properties falling under this category.
What is Shared Ownership?
Part of the government’s wider Help to Buy initiative, Shared Ownership aims to assist first-time buyers when it comes to purchasing a home. Approximately 200,000 people currently live in a shared ownership property.
As a buyer, you purchase a share between 25% and 75% of a property (either outright or via a mortgage) and then pay rent on the remainder. Homes are purchased from not-for-profit housing associations – who exist to provide low-cost housing – and all are leasehold, which means people are liable to pay additional costs such as ground rents and service charges.
Buyers can then, over time, ‘staircase up’ to increase their share to 100% and own the lease of the property (meaning they no longer have any rent to pay) if this is desirable.
By only buying a 25%-75% share of a property, it helps those who can’t afford to buy a whole property and means a lower mortgage can be secured.
As an example of how the scheme works, let’s take a home worth £200,000, of which a buyer purchases a 25% share at £50,000 with a mortgage and a deposit of 5% on that share. The buyer then pays off the mortgage to the bank each month – as happens in normal circumstances – but they would also pay annual rent of around 2.75% (£4,125) on the remaining £150,000. In other words, rather than just mortgage repayments, a buyer also has to pay rent on the share they don’t own – but the combined costs of rent and mortgage are often cheaper than the mortgage repayments on a more conventional first-time buyer home.
The main home of Shared Ownership is Share to Buy, where guides, FAQs, property searches and top tips are on hand. The government also provides more detailed information on its part-rent, part-buy scheme here.
There are certain stipulations when it comes to eligibility, with Shared Ownership only available to households who earn £80,000 a year or less outside the capital or £90,000 a year or less in London. Buyers must be first-time, people who used to own a home but can’t afford to buy one now or existing shared owners looking to move to a fresh property.
Shared ownership homes are mostly newly built, but can also be existing ones purchased through resale programmes.
What are the pros and cons?
Shared Ownership makes buying a home more affordable, with buyers allowed to purchase as little as 25% of a property. What’s more, the deposit required is only 5% of that share (rather than being 5% of the whole property).
Rents paid on the remaining share, too, are typically lower than the open market. Rent is usually 2.75% of the value of the share of the property not owned, each year. In the above example, where annual rent would be £4,125 a year on a 25% share of a £200,000 property, that amounts to only £343.75 a month.
On the downside, though, a buyer does not officially own a share of the property until they own 100%. The way the contract is written means that buyers are on an assured tenancy for the term of the lease, with right to payment if the property is sold. In other words, they can’t be asked to leave early if they stay in the terms of the lease and they have legal protection on the tenancy. However, the freeholder still very much owns the property.
What’s more, despite not owning the whole property, shareowners still have to pay 100% of the costs when it comes to service and maintenance. Purchasing costs might be lower to begin with, but housing costs (water, electricity, gas, internet, etc) and additional service and maintenance costs can soon add up in a big way.
It’s certainly a scheme that offers buyers certain advantages (none more so than lower upfront costs), but it also has potential downsides and limitations. It won’t be for everyone, but it could certainly aid first-time buyers struggling to get on the property ladder.
The government talks plenty about its various first-time buyer schemes, but with only a very low take-up and awareness of Shared Ownership, it is clear more needs to be done to publicise it in a clearer, more efficient way.