Shared Ownership Vs Shared Equity
Shared ownership and shared equity are both government schemes that help cash-strapped, first-time buyers purchase a property. It’s important to understand the difference between shared ownership and shared equity schemes before deciding which would be best for you.
Shared ownership involves buying a share of a property and paying rent on the rest. Shared equity involves paying a low property deposit, using an equity loan for a percentage of the property’s value, and getting a mortgage for the remaining amount.
To help you make an informed decision, Compare My Move has worked with property experts to create a guide describing what each scheme is, the differences between them and how they may relate to you.
What is Shared Equity?
Shared equity schemes enable a buyer to pay a small deposit (at least 5% of the purchase price), take out an equity loan for a proportion of the property’s value (usually 20%), and then take out a mortgage for the rest of the purchase price.
Since it’s launch in April 2013, around 272,852 properties were bought with an equity loan, according to the Ministry of Housing, Communities & Local Government’s data in March 2020. Approximately 82% of these buyers were first-time buyers.
Help To Buy is the biggest shared equity scheme in the UK. Others are run by property developers or aimed at certain types of borrowers (i.e. key workers). Despite the name, a shared equity property will 100% belong to you. It's important to note that the Help to Buy Equity Loan scheme in England ends on 31st March 2023. Help to Buy -Wales has been extended until March 2025.
You will need to repay the equity loan at some point. This might be:
- At the end of the mortgage term
- When you move house
- When you remortgage
- When you have adequate savings to do so
An equity loan will be for a percentage of the property’s value. If the property rises in price you may have to repay more than you originally borrowed. If the property falls in price, you could end up repaying less.
For example, if you buy a £200,000 property using an equity loan of 20%, it will equate to £40,000. If the property rises in value to £300,000, you’ll owe £60,000 (20% of £300,000). If the property value falls to £150,000, you’ll owe £30,000 (20% of £150,000).
Once the mortgage term ends, you will be required to repay the equity loan in full, if it’s not paid-off already. The typical time period for the mortgage term is 25 years. The amount you pay back will be proportionate to the value of the property at the 25-year mark. This means you could end up paying back more than you borrowed, depending on the housing market at that time.
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Pros and Cons of Shared Equity
To help you decide which is right for you, it’s important to weigh up both the advantages and disadvantages of each scheme. To get you started, we’ve created a list for both the pros and cons of shared equity:
| Pros | Cons |
|---|---|
You only need a 5% deposit making it easier to get on the property ladder. | Shared Equity is usually only available with repayment mortgages. |
You will own 100% of the property. | If property prices increase, so will your loan. |
It’s available to first-time buyers and home movers. | Depending on this change in prices, it can be more expensive in the long-run compared to other types of loans available. |
There shouldn’t be any resale restrictions. | |
It’s available for a variety of property types and developments. |
What is Shared Ownership?
Backed by the government, the shared ownership scheme allows first-time buyers and those with a lower income to buy shares of their property whilst paying rent on the rest. For example, you might buy a 75% share of a property and pay rent on 25%. You will then have the option to buy additional shares later on until you own 80-100%. In April 2021, the minimum for this decreased from 10% to 1%, making the process of staircasing much more flexible for buyers.
According to the English Housing Survey, there were approximately 157,000 households living in shared ownership homes throughout 2017/18. This equates to around 1% of all households in England.
You will typically enter into a shared ownership agreement with a housing association or similar organisation. You’ll also need a shared ownership mortgage. This will involve putting down a 5% or 10% deposit.
You will own a certain percentage of the property to begin, then pay the rest in rent with the opportunity to purchase more shares during your time living there. For example, you could buy 40% of the market value of the property and then pay rent on the remaining 60%.
The rent agreed is often set at an affordable rate and is usually 3% of the other party’s shares of the property value. When you’re financially able to, you can then increase your percentage stake in the equity of the home.
To do this, you will need a shared ownership mortgage. These will usually be smaller mortgages as your only purchasing a share of the property. A smaller mortgage often means a smaller deposit. You can expect to pay a deposit of around 5%-10% of the share you’re buying.
Pros and Cons of Shared Ownership
Below, we’ve listed the pros and cons of shared ownership to help you make an informed decision:
| Pros | Cons |
|---|---|
It’s accessible to those with a lower income as you’re only required to pay a 5% deposit instead of 10-20%. | Shared ownership properties are usually leasehold. Although you only own a percentage of the property, you’ll have to pay 100% of ground rent and service charges. |
You have the potential to own 100% of your property but increasing your charges. | There will be restrictions on what you can do to the property – for example, it’s unlikely you’ll be allowed to let it out. |
It might be the only way you can get on the property ladder in some areas. | Buying an increase in shares in your property can be expensive. |
The rent will be much cheaper. | You won’t own 100% of your property and will still be renting. |
You can choose how you pay your Stamp Duty - either as one payment or in stages. | The scheme is restricted to specific properties. |
The shares you own can be sold at any time. | Not all lenders will offer a mortgage for a shared ownership property. |
It can be difficult to sell a shared ownership property. |
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Help to Buy Shared Equity and Shared Ownership in London
Property prices are generally more expensive in London than elsewhere in the country. According to the UK House Price Index, the average property price in the UK is currently £230,232, whilst in London, it’s £471,053.
This large price difference means that each Help to Buy scheme must adapt when looking at London property. For example, when looking at the Help to Buy ISA, it can be used for properties priced up to £250,000 in the UK, but up to £450,000 in London. Changes are also evident in both the Shared Ownership and Shared Equity schemes.
In London, the shared equity scheme offers a loan of 40% of the property value instead of the 20% that’s offered to the rest of the UK.
There are a variety of shared ownership schemes in London, but the earning thresholds are slightly different. If you want to be part of a shared ownership scheme in London, then you need to be a first-time buyer and have a household income of under £90,000, compared to £80,000 for the rest of the UK.
Shared Ownership Vs Help to Buy Shared Equity
To further help you understand the main differences between each scheme, we've created an informative table showing the main factors that make up the shared ownership and shared equity schemes:
| Criteria | Shared Ownership | Shared Equity |
|---|---|---|
Who is eligible? |
|
|
Property type | Leasehold only | Freehold and leasehold |
Minimum deposit | 5% of the share being purchased | 5% of the property’s full price |
Initial share of ownership | Less than 100% | 100% |
Mortgage requirement | Between 25% and 75% of the property value | Minimum of 75% |
Other costs required |
|
|
*It's important to note that, in April 2021, it was announced that the Shared Ownership scheme will now include a 10-year period where the Registered Provider will cover the cost of repairs and maintenance, saving the buyer more.
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Which Scheme is Right for Me?
Deciding whether shared ownership or shared equity is right for you, ultimately depends on your personal preferences and individual circumstances.
Something to consider is that shared ownership could be seen as cheaper initially, as the deposit you’ll need to provide is only on the proportion of the property that you’re purchasing. You can buy more shares later on, but the initial price and deposit is typically lower, making it a cheaper option for those with lower incomes or lower savings.
This factor also makes it a quicker process for some people, as you don’t have to wait until you’ve saved for a larger deposit. It makes it easier to find a property in an area you love, without having to wait a long time to save up for a large deposit and begin the buying process.
Shared equity, however, ensures you purchase all of the property and not just a portion of it. If your income is sufficient enough to gather the larger deposit and repay the mortgage, then the Help to Buy Shared Equity scheme may be better suited to you. You won’t have to pay rent, but you will have the general maintenance costs that come with owning your own home.
Shared equity is also available for first-time buyers and homeowners in the UK, whilst shared ownership has limited eligibility. Shared equity can also be used for either a freehold or leasehold property, whilst shared ownership is leasehold only due to the added rent required.
Everyone has different circumstances and so only you know which scheme would be the best option for you. The biggest advice anyone can provide is to choose the scheme that is most affordable for you, both now and in the future.
Learn More About Help to Buy
This article has been part of our help to buy guide. In our next article we take a detailed look at all the terms you're likely to here when you're buying a house, from completion to gazumping, we cover it all. To find out more read first time buyer jargon buster: a glossary.
