What's the difference between Help to Buy and Shared Ownership?
Posted 10 October 2016 by Ben Salisbury
When looking at the different government initiatives that could help you buy a new home, you'll often hear about Shared Ownership and Help to Buy: Equity Loan. Here's a quick guide as to what both schemes are and how they can help you.
What's Help to Buy?
The equity loan scheme and Shared Ownership are both part of the Help to Buy series of government initiatives aimed at helping home buyers get on to the property ladder. In addition to Help to Buy: Shared Ownership and Help to Buy: Equity Loan there is the Help to Buy ISA and Help to Buy: Mortgage Guarantee. Help to Buy: Mortgage Guarantee will no longer be available from the end of December 2016.
There are different strands of the Help to Buy scheme relating to different parts of the UK. There is Help to Buy London but there are also specific schemes for Help to Buy Scotland and Help to Buy Wales
How does Help to Buy: Equity Loan work?
- The buyer puts down an initial 5% of the property purchase price as a deposit.
- The government then adds a 20% equity loan to the deposit.
- With this 25% deposit in place, the buyer then applies to get a 75% mortgage from a commercial lender.
The equity loan is interest free for the first five years. In the sixth year, the interest is set at 1.75% of the loan's value. From the seventh year the fee increases by 1% plus the current Retail Price Index. The loan must be repaid within 25 years or when the new home is sold, whichever comes first.
The property bought must cost £600,000 or less. You cannot own another property except the one you're buying. It's only available on new build homes.
Advantages of Help to Buy: Equity Loan
If you have trouble getting enough money together for a deposit then the equity loan scheme means you only need to save for a 5% deposit with the government lending the rest of the deposit. You should also get a better mortgage interest rate as you only have a 75% mortgage to pay.
Disadvantages of Help to Buy: Equity Loan
After five years you have to pay interest on the loan you have taken out. This amount isn't fixed so could rise if the price of your home rises.
You should also be aware that for Help to Buy: Equity Loan there are variations for Scotland, Wales and London. However, they work along the same principles as the original scheme.
How does Shared Ownership work?
Shared Ownership is a part-buy, part-rent scheme which allows you to buy a percentage of a property and then buy the rest of the new home if and when you want to. It works as follows:
- You buy a percentage of a property usually between 25% and 75%.
- You only pay for a mortgage on the percentage you buy. For the rest you pay a subsidised rent.
- In time, you can increase the share of the property you own by a process known as staircasing, until you own 100%.
The maximum annual income for the household needs to be £80,000 or less (£90,000 in London). You cannot own another home anywhere in the world. You must be able to pass a financial assessment and secure a mortgage as well as be able to buy the minimum share available. You need to be a first-time buyer or have other qualifying circumstances such as starting again after a relationship break-up. You need to be a British citizen or have indefinite leave to remain in the country.
The advantages of Shared Ownership
- You don't need a large deposit.
- You have a mortgage only for the share of the property you own which can often work out cheaper than renting.
- You don't have to buy the rest of the property if you can't or don't want to.
The disadvantages of Shared Ownership
- There will be legal costs when you want to staircase.
- You could pay maintenance charges if the property is part of a development with communal areas.
- You're not allowed to sublet.
Both schemes are opportunities for getting on the property ladder. Find out about what properties are available through Both Help to Buy: Equity Loan and Shared Ownership where you are today.