Shared ownership versus shared equity

In the current financial climate first time buyers are finding it increasingly difficult to get on the property ladder.

Shared ownership versus shared equity

Affordable housing schemes are therefore a great way to enable buyers who would not otherwise be able to afford a home purchase a property through government-funded and privately-operated schemes.

Shared ownership and shared equity arrangements are available to first time buyers with an income of less than £60,000 who are unable to obtain a mortgage on the open market. The UK Government’s shared ownership scheme is called Homebuy and their scheme for First Time Buyers is Firstbuy.

Although you may be aware of such schemes, it is understandable if you require a more detailed background on the pros and cons of shared ownership and shared equity agreements.

What is shared equity?

Shared equity schemes in the UK form the basis of the Government’s FirstBuy scheme that is set to launch in September 2011. The premise of shared equity is that the buyer can pay a small deposit – usually 5 per cent – and top up to 20 per cent of the purchase price with a low or no cost ‘equity loan’, with the remainder paid by your mortgage.

In the short term a shared equity agreement can be a very welcome deal as it enables first time buyers to acquire a home without paying a big deposit.

Nevertheless, you should always bear in mind the long-term consequences of shared equity. After 25 years of the loan period you will be required to pay it off in full. As an equity loan, the loan will be proportionate to the value of the property at the time 25 years on rather than a fixed figure, which means you could be paying back significantly more than you first borrowed if the housing market recovers.

What is shared ownership?

There are similar benefits to shared ownership schemes as shared equity arrangements. First time buyers usually enter into a shared ownership arrangement with a housing association or similar organisation, paying rent to them for the part of the property they own but you are allowed to live in.

For example, you may purchase a stake of 40 per cent of the market value of a property and pay rent on the remaining 60 per cent of the property that’s owned by your local housing association.

The rent you pay must be set at an ‘affordable rent’, usually around 3 per cent of the other party’s share of the property value. The most welcoming aspect of a shared ownership scheme is that you can increase your percentage stake in the equity of the building over time, as and when you can afford to do so.

In order to increase your stake in the property you will require a shared ownership mortgage. By part-owning your property you will therefore require a smaller mortgage and a smaller deposit – 10 per cent of the share you are buying.




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Help to Buy

An additional affordable home ownership scheme aimed at helping buyers get onto the property ladder is the Help to Buy scheme. Help to Buy allows buyers with a small deposit to purchase a home.

There are two parts to this scheme: equity loans and mortgage guarantees. To be eligible for either aspect you must have at least 5% of the purchase price for the deposit and the property you are buying must be for your main place of residence and worth £600,000 or less.

For the full information about the scheme, take a look at our Help to Buy article.
 

Over the last three years the Homes and Communities Agency has invested around £8.4 billion in affordable housing programmes, with a further £500 million secured in January 2014 to fund the building of new affordable homes for rent across the UK. The scheme has already enabled many first time buyers with over 39,000 property sales through low-cost home ownership initiatives.

When going through the buying process, be careful to choose a property lawyer to represent you that has your best interests at heart, who will ensure guarantees are in place regarding planning permission, building regulations, structure and more. At reallymoving.com we can provide instant conveyancing quotes from a leading selection of property lawyers from top quality legal firms across the country that will be aware of the complexities involved in the conveyancing process for these schemes.

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