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By Hannah Connolly
he biggest factor that gets in the way of prospective first time buyers is often the cost of deposits. Comparatively, UK house prices are the 17th highest in the world and are a startling 71% higher than the global average. Meaning that the difficult process of buying your first home is only made worse when taking into account that the average yearly salary of around £31,500 is nearly £26,000 less than the national deposit average.
Halifax, one of the biggest UK mortgage providers, recently conducted a study and found that the 2019 deposit average had risen by a huge £10,000 in 2020 with the average deposit sitting at £57,278 in 2021.
This is leading more and more prospective buyers, especially single buyers, towards schemes that help alleviate the initial costs of deposits and offers alternative methods to getting the keys to their very own home.
One such scheme is the Share to Buy initiative, “Share to Buy doesn’t mean sharing with strangers” the official website clarifies, tapping into the sharing crisis with a projected 1 in two people aged 23-28 set to share with others well into their 40s.
In the fifth installment of Property Diaries, The Stack offers another buy scheme special, this time taking a deep dive into the Share to Buy initiative, breaking down the pros and cons to see if it could work for you.
What is Share to Buy?
First of all Share to Buy is not to be confused with the idea of sharing with friends or some sort of Benidorm style time-share property, Share to Buy is in actual fact a government endorsed scheme which acts as a two way agreement between a buyer and a housing association provider.
Share to Buy offers prospective homeowners the opportunity to purchase a share in their desired property. The purchaser will then pay a mortgage only on the share they own and will then pay a reduced rent fee to a housing association (effectively the landlord) on the remainder. In essence meaning you rent the amount you don't own at a reduced rate. This results in a deposit that is far lower than that of buying the property outright and significantly more affordable.
The process begins with an independent financial advisor assessing a prospective buyer's yearly income and savings, this will then affect the minimum share they are able to buy, though generally initial shares will start at 25% and can go up to around 75%, changes to the scheme made in 2020 allows for share purchases of as little as 10%.
This scheme of percentage ownership facilitates quicker and cheaper access to the property market as deposits usually place the biggest barrier to entry for first time homeowners and the saving period can often lead to years of waiting and saving. In The Stack's ongoing survey into buying your first property our community has revealed that on average they have saved for 5 years before purchasing their homes, although the national average sits at 13.5 years for single homeowners.
It is important to note Share to Buy, though aimed predominantly at first time buyers and lower income buyers, does facilitate the purchase of a second home as long as the previous residence has been sold or is in the process, an option that is not available with the popular alternative scheme, Help to Buy equity loans. Within this bracket the scheme is only offered to persons earning £80,000 (£90,000 in London) per year or less. The scheme is applicable to new build property or previously part-owned properties under the scheme defined as ‘Resale’ properties.
Moving forward through the process of staircasing you are then able increase your shares in the property working towards the goal of outright owning the property and as such no longer paying any further rent costs. In 2020 changes were made to the Share to Buy scheme which allows you to purchase, depending on your agreement, as little as 1% at a time. Or alternatively selling the property, subject to conditions, to continue up the property ladder with the goal of raising or matching the equity you first paid on your share to use towards your next home.
By purchasing a percentage you are able to secure a much lower mortgage than otherwise available. For example, for a £300,00 home a buyer is able to purchase a share of 25% at £75,000 with a mortgage and deposit rate typically of 5% rather than the usual 10% on that amount. Making mortgage payments to the bank, whilst paying an annual rent of around 2.75% of the remaining house price of £225,000 meaning an annual rent of around £6,190 or £515 a month for example.
Below we break down the process and shed light on the pros and cons of using a Share to Buy scheme.
Pros of Share to Buy:
The immediate and probably most important positive of Share to Buy is the ability to make moves onto the property ladder whilst paying a reduced deposit and therefore mortgage. This lower deposit based on your share is also flexible, in terms of the size of percentage you begin with, this means the process is tailored towards your needs and economic capabilities.
Equity Growth Potential
Even with a deposit on the smallest end of the scale there is still the potential to benefit from growing equity. If the home, for whatever reason, increases in value it could be extremely beneficial when it comes to selling the shares. For example if you bought a 25% share of a £250,000 flat at £62,500 and the value increases to £350,000 you can then sell your share at £87,500. This could be instrumental in terms of riasing the funds needed to purchase your next property. Quite literally laying the foundations for allowing you to move up the property ladder.
Reducing Monthly Outgoings
After the initial deposit payout, the average Share to Buy property works out cheaper per month than the equivalent property would cost to rent privately and this is with the mortgage repayments included. Presenting the opportunity to reduce monthly outgoings whilst building your equity.
Lower Staircasing Percentage Opportunities
Following changes made by the government, Share to Buy now allows for staircasing increments of as little as 1%, which means smaller and more affordable steps can be taken towards full ownership or holding a bigger share in the property.
Cons of Share to Buy:
It isn’t exactly sharing
It is important to define from the start of considering this process that shared “ownership” is more effectively described as an assured tenancy with shares. Yet, despite not owning the property outright, 100% of all maintenance, repair, service and administration costs are all to be paid by the part owner after the first 10 years irregardless of the share percentage. Prior to changes made in the last year, previously those who bought through Share to Buy scheme were solely responsible for maintenance costs from the outset which has recently led to devastating costs in the wake of the cladding crisis.
Approval to Sell
Selling a Share to Buy home is referred to as 'resales' and the ways in which this can be done will dependent on the housing association you have purchased your share from - they will most likely list the home for you and you will be paid the money based on the percentage share you own of the home's total market value.
If at any stage and at any level of percentage ownership you want to sell your property you can in fact do so but you would need to contact your housing provider first of all - as in you cannot simply put the property on the market. This is because the provider will, as per your contract, have a set amount of time in which to sell the property to others wishing to purchase through the Share to Buy scheme. After this time frame you will be able to list yourself, however you will be responsible for all fees associated.
It is also important to consider that the landlord/housing provider, even in the case of full ownership, still retains the right to buy the property back from you, this is known as ‘first refusal’ and can be enforced for up to 21 years after you acquire full ownership.
Staircasing Hidden Costs
There are several factors to consider when increasing the ownership of the home and it is important to fully understand your position when it comes to further share purchase before you signing contracts. Make sure to clarify when you can begin staircasing, the maximum number of times you can staircase in total and the minimum increments you can purchase at a time. On top of this there will be additional fees to pay that are worth bearing in mind.
Valuation Fees: The housing provider will instruct a surveyor to confirm the current market value of the property, meaning if you bought your share of a property in area that has become more desirable over the time period you have been living there, the properties market value will have increased meaning to buy further shares you will need to purchase in accordance with this new valuation.
Legal Expenses: Staircasing involves changes to the existing lease you have signed and because of this you will be required to pay for the solicitor fees to accommodate these changes.
Mortgage fees: If you want to change lenders to buy your additional shares you will need to pay the lenders valuation fee, a mortgage arrangement fee and any penalties that may be applied by your existing lender for terminating the previously agreed mortgage.
Restrictions To Home Improvements
When it comes to home improvements there are restrictions with the changes that can be made, and making these chanegs, particularly structrual, will require explicit permission from the housing provider. In most cases it is not a requirement to ask for permission to decorate. However, if you do make any changes to the home with permission you may increase the value of the home which may work in your favour when it comes to resales, as this will be taken into account when the sale percentage is paid to you.
The Negative Equity Risk
Share to Buy homes are often completely new build properties, and like buying a new car, these properties will depreciate in value as soon as someone moves in. If house prices fall you may end up in negative equity which means you could lose money if you choose to move. However, it is important to note that if you are looking for longevity, moving into new builds may make more financial sense.
You Are Unable To Sublet
Should opportunities arise where your property will remain unoccupied for extended periods of time (say a job opportunity for a fixed period) you will, in almost all cases, be unable to sublet your home.
From Share to Buy homeowners to solo buyers read on to find out how members of the Stack community bought their first home:
The Share to Buyer
Industry: Management Consultancy
Annual salary: £65k
House price: £365k
Share in Property Initially: 25%
Bank that approved the mortgage: Barclays
Solo Buyer: Yes
On buying her first home The Share to Buyer had “never really thought about buying because it just felt out of reach, but my parents offered me £20k for the deposit.” When buying her first home the Share to Buy scheme felt the most viable option “I wanted to live in London and I probably could have gone for a bigger percentage but with an overpriced market I preferred the idea of staircasing.” Sharing that the scheme left her feeling a sense of freedom “no one can say they are selling the place or putting up the rent or even that they want you to leave, I really feel like this way I can put down roots.”
The Share to Buyer explained the process to us “With shared ownership a lot of the process is out of your control. They chose my mortgage broker for me which means they do the negotiating, so I never actually got to say which one I’d like to go with. In a way though that does make it easier, from viewing to completion it took a total of 12 weeks.”
As with all schemes, Share to Buy will not work for everyone, this is why this homeowner suggests doing as much research about what's out there as possible before committing to a particular route, “there's no right or wrong way to do it, there's just your way and I think it is important to know that.”
Age when bought first home: 33
Annual salary: £44k
House price: £325k
Postcode: SE6, Bromley
Bank that approved the mortgage: Leeds Building Society
Solo Buyer: Yes
For The Achiever the idea of owning her first property was a milestone in her life, using the Government scheme Help to Buy, to purchase her apartment in London’s SE6, The Achiever explaining that “it feels great to own my property. It was something I really wanted to do and I wouldn't have been able to if it wasn't for schemes like Help to Buy.”
To make the scheme work for her she moved back into her parents home to be able to save up money but was hit with an unexpected change in circumstances “ I moved back with my parents who luckily live in London, but I did have this very stressful moment where my completion date got pushed back because I had been made redundant from my job and had to reapply for my mortgage but luckily I found a full time job just in time.”
Though she felt she wasn't aptly supported by her mortgage broker “I think to be honest they were more interested in selling me life insurance on top of the mortgage than they were in helping me secure my home."
The WFH Saver
Age when bought first home: 32
Industry: University Lecturer
Annual salary: £40k
House price: £370k
Postcode: N19, Holloway
Solo Buyer: No
The WFH Saver began her journey into buying her first home with her partner in London’s Holloway after realising the bonuses of working from home, “I was surprised as we could only afford to buy as WFH had saved us so much money from what we used to spend on commuting."
By making a conscious effort of getting her and her partners affairs in order The WFH Saver managed to reduce some of the buying stresses, “we had been trying to get in good admin shape for a few months before, so that helped keep the process smoother.” Which stood her in good stead to buy her £370k house during the pandemic, “I am grateful we had been prepping all of the documents and even though the process did take longer due to Covid-19 we could always put our hands on what the bank or solicitor needed to keep things running smoothly.”
Though the prospect of homeowning is still a daunting feeling for The WFH Saver, who explained, “I am excited to not have to move again or rent, I feel more secure now than I have in last 10 years but the knowledge that all the rest is on us now and being able to pay a mortgage for the next 35 years is very scary”.
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