Help to Buy and Shared Ownership compared
If you’re struggling to buy a home in today’s property market, there are some government schemes available that can help you. This video explains the two main schemes to help you purchase a home, including the main pros and cons of each one.
What is the scheme?
Shared Ownership
Under a Shared Ownership scheme you part-own and part-rent your home, making it possible for first-time buyers and families to get on the property ladder in the London area.
The minimum share bought in a property is usually 25% and in some developments it can be higher than 25%. The maximum initial share you can purchase is 75%.
Help to Buy Scheme (Equity Loan)
This scheme helps you by keeping your mortgage payments lower.
If you can offer a deposit of 5% of the home’s total value then you can borrow up to 20% (or 40% in London) of your home’s value from the government. This loan is fee free for the first 5 years.
Who is eligible?
Shared Ownership
First time buyers, or people who previously owned a home and have since sold but are unable to buy on the open market. You must have a combined household income of less than £90,000 within London and £80,000 outside of London.
As of April 2016 you are no longer required to live or work in the area that you intend to buy in.
Please note: there are some local exceptions to these rules that are stipulated by the local authority. For specific development eligibility criteria please see the property listing.
Help to Buy Scheme (Equity Loan)
First time buyers or people who have sold, or are in the process of selling, their other home.
What type of property can I buy?
Shared Ownership
A new build property or a re-sale property that was built and sold in the past and is now being sold by existing shared owners, or has previously been part of the Shared Ownership scheme.
Help to Buy Scheme (Equity Loan)
The home must be a new build and worth less than £600,000.
How much deposit do I need?
Shared Ownership
At least 5% of whatever share you’re buying. On a 25% share of a £400,000 home, this would be £5,000.
Help to Buy Scheme (Equity Loan)
At least 5% of the worth of your entire home. On a £400,000 home, this would be £20,000.
What about my monthly repayments?
Shared Ownership
You’ll pay the mortgage on your owned share. You also pay subsidised rent on the remaining share. The rent is increased annually in accordance with the lease. This is usually based upon Government inflation figures, called the consumer price index, plus a small percentage increase. This ensures that you will know how much your rent will increase every year.
You’ll need to have a repayment mortgage, not an interest only one.
You also pay a service charge to maintain the building.
Help to Buy Scheme (Equity Loan)
You will pay mortgage payments. You’ll need to have a repayment mortgage, not an interest only one.
After 5 years you will be charged monthly for the equity loan if you have not yet repaid it.
If the property is leasehold then you will also pay a service charge to maintain the property.
What about stamp duty?
There are two ways you can pay stamp duty.
You can pay either a one-off payment based on the full market value of the property as if it had been purchased outright from the beginning, or staged payments paying the amount due on the initial share, and then only paying further amounts when the shares purchased exceed 80% of the value of the property (source: Greater London Authority).
Your solicitor will be able to tell you the exact cost.
Help to Buy Scheme (Equity Loan)
You’ll pay stamp duty as normal on the value of the entire home.
Anything else to repay?
Shared Ownership
No.
Help to Buy Scheme (Equity Loan)
The loan is fee free for the first 5 years and after that you’ll pay a fee each month.
What about selling?
Shared Ownership
An independent valuation of your home will be carried out. L&Q are given first opportunity to sell your home themselves within the Shared Ownership scheme. If they are unable to find a buyer within an agreed timescale, you can sell it yourself on the open market.
Help to Buy Scheme (Equity Loan)
If you haven’t repaid the loan by the time you come to sell the property, the government will reclaim its percentage stake in your home at its current value.
So taking a loan of 40% means you may be paying back 40% of the sale price of your home to the government when you sell. You’ll need to obtain an independent valuation prior to sale to determine the amount to be repaid.
What are the pros?
Shared Ownership
- You own part of your home, rather than paying rent with no return.
- Shared Ownership enables you to get on the property ladder, and buy a more expensive home than you would have been able to afford without the scheme.
- You don’t need a huge deposit.
- You’ll have lower set up costs than if you’d purchased your home outright.
- Shared Ownership makes mortgages more easily accessible if you’re on a lower wage, because you only need to pay for a share of your home.
- Monthly repayments can work out cheaper than an outright mortgage, and sometimes are less than renting privately.
- You can buy more shares when you are able to afford it but you do not have to do so. There are no time limits as to when you can buy additional shares.
Help to Buy Scheme (Equity Loan)
- The fact you will need to borrow less overall to purchase your home means you may be more likely to qualify for lower mortgage interest rates.
- This scheme helps people who would otherwise have needed to take out a costly 95% mortgage.
- You do not pay any interest on your loan during the first 5 years.
- There’s no maximum earnings cap for this scheme.
What are the cons?
Shared Ownership
- Some people would prefer to own their entire home right from the start.
- Your choice of mortgage is restricted by those suitable for the scheme. However there are more and more independent mortgage advisors (IMAs) who specialise in advising on the Shared Ownership scheme. This means you can get the support you need to find a mortgage. You will also be offered advice during your initial financial interview with the IMA appointed by L&Q. This L&Q appointed financial advisor will be able to advise you on finding the right kind of mortgage for the scheme.
- Your lease may place restrictions on the home improvements you can do. If you intend to make any structural alterations to your home, you may need to get permission first.
- There’s a maximum earnings limit.
Help to Buy Scheme (Equity Loan)
- Only suitable for people whose household income is sufficient to repay a mortgage for the entire worth of the home.
- Not all mortgage providers offer Help to Buy mortgages.
- Your loan fees will become more expensive over time. You need to repay the loan in chunks of at least 10% of what you owe.
- The equity loan must be repaid after 25 years. The amount you will ultimately need to repay on your Help to Buy equity loan is not fixed. Instead it will fluctuate with the market value of your property because it is percentage-based. This means that if your house has risen in value you may be eligible to pay significantly more than you originally borrowed.
- Although the property is in your name, you may need to seek approval before starting any home improvements to the property.
- You can only buy a property to a maximum value of £600,000.