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How Shared Ownership Helps First-Time Buyers

How Shared Ownership Helps First-Time Buyers

How Shared Ownership Helps First-Time Buyers

Deposit

Getting a deposit is one of the biggest challenges that first-time buyers face. You have to save as much as you can while sometimes paying a monthly rent that is higher than a mortgage would be if you owned the property.

Without schemes like shared ownership, your options for saving enough money for a deposit are limited, particularly if you can't move to a cheaper area or if you don't have access to friends or family who can help you.

With shared ownership, the amount of deposit you need is much less than the deposit needed if you purchase the property outright. This is because the deposit calculation is based on the percentage of the property you are purchasing, not the full purchase price. Not only does this reduce the deposit, it also lets many first-time buyers purchase a property much sooner than they otherwise could.

To illustrate how this works, let's look at an example of a property with a purchase price of £250,000. To get a standard mortgage, you will probably need a deposit of at least 10 percent. That is £25,000.

With shared ownership, you can purchase as little as 25 percent of the property while renting the rest. This means you could potentially buy and live in this £250,000 house with a deposit of just £6,250. Here's the calculation explaining how this example works:

• Purchase price = £250,000
• Provider’s share of 75 percent (which you pay rent on) = £187,500
• Your share of 25 percent = £62,500
• Deposit (10 percent of your share of £62,500) = £6,250
• Mortgage value = £56,250

Although it is possible to increase the share of the property you own during your 25-year term, first-time buyers often try to purchase a larger share of the property at the outset. Even in this situation, the deposit you need is still kept to a minimum. Here is an example of the same house but where you purchase 40 percent and rent 60 percent.

• Purchase price = £250,000
• Provider’s share of 60 percent (which you pay rent on) = £150,000
• Your share of 40 percent = £100,000
• Deposit (10 percent of your share of £100,000) = £10,000
• Mortgage value = £90,000

A deposit of £10,000 is considerably smaller than the deposit required to purchase the house on your own.

Monthly Rent Payment

While having a lower deposit helps first-time buyers make the initial purchase, the way rent payments work in shared ownership agreements makes buying a home affordable on an ongoing basis.

This is because the rent you pay is based on the share of the property the provider owns. In addition, shared ownership providers must set this at an affordable rate. Most providers choose a figure of three percent or less per year of their share.

Let's go back to the example of a property worth £250,000 where you own 40 percent of the property, i.e. £100,000. The provider charges rent at a rate of three percent of its share, which is £150,000:

• 3% of £150,000 = £4,500 per year

The monthly rent element of your shared ownership agreement would, therefore, be £375.

Monthly Mortgage Payment

Another benefit of shared ownership for first-time buyers is low monthly mortgage costs. In the example above of a 40 percent share of a £250,000 house purchased with a 10 percent deposit, you only need a £90,000 mortgage.

The main benefit of this, however, is you can budget. As mentioned earlier, in a shared ownership scheme you can purchase between 25 percent and 75 percent of the property. This lets you find a deal that strikes the right balance between mortgage and rent costs to give you a monthly payment you can afford for the maximum possible ownership share of the house.

Bringing it All Together

Following on from the points above, the benefits of shared ownership for first-time buyers include:

• You need a smaller deposit
• The combined mortgage and rent payment is usually lower than a mortgage payment for the entire property
• The combined mortgage and rent payment can even be lower than the cost of renting

Let's do one final example to illustrate this. The figures in the example, including the mortgage interest rate, are illustrative only. Also, they don't take into account things like stamp duty, solicitor's fees, or services charges. They will, however, give you an indication of what is possible:

• Purchase price = £250,000
• Provider’s share of 60% = £150,000
• Your share of 40% = £100,000
• Deposit (10% of your share of £100,000) = £10,000
• Mortgage value = £90,000
• Monthly mortgage cost at a mortgage interest rate of 3.75% = £462.72
• Monthly rent payment at 3% of the provider's share = £375
• Total monthly cost = £837.72

Compare this to a 25-year mortgage when buying the house on your own with the same interest rate and deposit percentage:

• Deposit = £25,000
• Monthly payments = £1,157

In other words, shared ownership is considerably cheaper. For first-time buyers, it’s an option worth exploring further.

 

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