The difference between Shared Ownership and shared equity schemes
Posted 22 February 2016 by Keith Osborne
Shared Ownership and shared equity may sound alike but are actually very different schemes. Both schemes are aimed at people who cannot afford to buy a home on the open market. Which scheme is most suitable for you depends on your circumstances, where you hope to buy, and your income. With both schemes, you should do your calculations carefully before committing to a purchase.
Shared Ownership, or part-buy/part-rent, is a scheme where you purchase part of a property using a mortgage and deposit, and pay rent on the rest. The idea is that you increase your share of the property over time, in a process known as staircasing, until eventually you own the full 100% of the home. You can begin by purchasing as little as 25% of the home, and will pay rent on the remaining 75% to a housing association. This rent is subsidised at around 80% of market rates.
In order to buy a property under the shared ownership scheme, you will have to meet certain criteria. You should be:
- A first-time buyer, or if you have owned a home in the past must now be unable to afford to buy on the open market.
- A UK or EU citizen
- Have a maximum household income of £80,000 outside London, or £90,000 in London.
- Able to meet affordability criteria.
The actual process of buying a home under shared ownership works much the same as any other purchase. However, there are certain extra costs involved. You will have to pay a service charge and ground rent for a Shared Ownership apartment, and whenever you buy an extra share you will have to pay legal costs.
Shared equity works differently from Shared Ownership. You are offered a loan (by the government, in the case of the Help to Buy scheme, though some housebuilders offer their own equity loans too) to help you put down a deposit, and allow you to be the 100% owner of the property once you complete the purchase, rather than having to wait until you buy the final share as is the case with Shared Ownership.
With the Help to Buy shared equity scheme, you must contribute a 5% deposit, and the government will offer a loan of up to 20%, or 40% in London. You will then take out a mortgage for the remaining funds.
A Help to Buy shared equity loan is interest-free for the first five years, and repayable at 1.75% per annum after that. The loan will have to be paid off when the property is sold, or after 25 years.
Another significant difference from Shared Ownership is that with shared equity, you don't have to be a first-time buyer, but you must be buying the home to live in, rather than to let out to tenants.
Because it's not limited to first-time buyers, shared equity may appeal to people needing to buy a larger home, or move to a more expensive area. You can buy a home worth up to £600,000 with Help to Buy in England (£300,000 in Wales and £250,000 in Scotland), and there is no maximum limit on household income. However, shared equity schemes are limited to purchases of new build homes, and the interest rates for this type of loan may be higher.