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House prices are, bluntly, eye-wateringly expensive today. In September 2021, the average UK house stood at £270,000; £28,000 higher than the previous year, and 2.5% higher than the prior month. The figures are even higher in London, of course. Yet average UK wage growth between January 2001 and October 2021 has been negligible.
Given this situation, it is hardly surprising that many people are considering buying a home with a sibling, friend or relative. Another option is to share ownership with a housing association or private developer. However, what are the pros and cons of doing this? What should you be mindful of, when considering this route?
Below, our financial planners share their thoughts. We hope you find this content useful. If you want to discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:
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How shared ownership works
Typically, buying a property in the UK involves using a mortgage – since few people can afford to buy outright. Here, you put down a deposit as a percentage of the purchase price (e.g. 20%) and gradually pay the rest back over, say, 30 years. Provided you keep up your payments each month, therefore, this gives you sole, legal ownership over the property. Over time, you can aim to build up your “equity”; reducing the debt you owe versus the property value you hold.
However, getting the funds together for that initial deposit can be daunting for one person – or couple. Properties can easily exceed £300,000 in many UK areas, possibly requiring as much as £30,000, up-front, to put down as a deposit (it is still difficult to find lenders who will offer less than a 10% mortgage). Even with enough lump sum for the property, the monthly mortgage payments can put a heavy burden on your finances – sometimes representing 60% or more of an individual’s monthly outgoings.
This is where shared ownership can provide a solution. With a trusted friend, relative or loved one, you can combine your finances for the deposit (e.g. 50% each) and share responsibility for the monthly mortgage payments, from both of your paycheques. The other, common route is to consider buying a stake in a property (e.g. 25-75%) with a housing association or with a private developer who owns the building – involving a discounted rental rate.
Let’s look at the benefits and drawbacks of each option, in turn.
Sharing with someone else
The main advantage of sharing property ownership with another person is, of course, the lower financial commitment involved. By combining finances, you may be able to gather a deposit more quickly and get on the housing ladder sooner. This means you can start building up your equity earlier in your life – potentially opening up more options for moving and buying another property (on your own?) in the future. In the meantime, the cost of repaying the mortgage and covering bills is shared. This can free up more of your income to save and invest towards other financial goals, such as building a retirement fund.
However, going down this road does come with its risks. First of all, if the person you share the property with ever gets into credit problems, then the ramifications could come towards you if they fail to take responsibility. You could find yourself in trouble if he/she stops paying their fair share of the mortgage for any reason. This risk can be mitigated by making a formal agreement between the two of you before buying together, but the risk is still there.
Finally, living with your friend or loved one may seem like a good idea at first, but may eventually prove untenable due to their mess, bad habits or personality clashes. To reduce this possibility, it may be worth renting together for, say, 6 months before considering shared ownership – to test the waters beforehand.
Shared ownership schemes
Perhaps you want to live alone and want to avoid the risks outlined above. Here, partnering with a housing association or with a private developer can be an option. Another benefit of doing this is that you often defer stamp duty until much later (e.g. after your ownership goes over 80%). It is also typically more affordable since you could begin by owning a 25% share in the property – using as little as 5% of the price of that share. Over time, you can also gradually increase your ownership of the home via “staircasing”; buying more in 10% increments and reducing the rent you pay on the remaining share.
However, the downsides of shared ownership schemes is that you still need to contribute towards maintenance charges. Since most properties are also leasehold, meaning you also need to pay a monthly service charge. These costs could increase in the future, so make sure these are not overlooked when considering the “cheaper” route of shared ownership. Also, buying each 10% increment via “staircasing” can be costly – involving multiple “hidden” fees such as valuation fees and legal costs. You may also find yourself much more restricted in what you can do with your property. Sub-letting is usually not allowed, and you will likely need your housing provider’s permission before adjusting anything in your home (including redecorating).
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