For many first-time buyers, getting onto the property ladder can feel like a huge financial challenge. To help make homeownership more accessible, the government has offered several schemes designed to reduce the amount of money you need upfront. The two most well-known are Shared Ownership and the Help to Buy: Equity Loan.
While both are designed to help you buy a home, they work in very different ways. Understanding the key differences is crucial for deciding which, if any, is the right path for you. This guide will break down how each scheme works, their pros and cons, and who they are best suited for.
Shared Ownership
Shared Ownership is an active, government-backed scheme that offers an alternative route to homeownership.
How it Works:
Shared Ownership allows you to buy a share of a property (usually between 10% and 75% of its full value) and pay a subsidised rent on the remaining share to a housing association.
Because you only need a mortgage for the share you are buying, both your deposit and your monthly mortgage repayments are significantly lower than if you were buying the property outright on the open market.
Here’s a simple example:
- Full Property Value: £200,000
- Your Share: You decide to buy a 25% share, which is £50,000.
- Your Deposit: A 5% deposit on your share would be just £2,500.
- Your Mortgage: You would need a mortgage for the remaining £47,500.
- The Rest: You would pay rent to the housing association on the 75% (£150,000) that you don’t own.
Over time, you have the option to buy more shares in your property through a process called ‘staircasing’. In many cases, you can staircase all the way to 100% ownership, at which point you would no longer pay any rent.
Pros of Shared Ownership:
- Smaller Deposit: This is the biggest advantage. The deposit required is much lower, making it a very accessible route onto the property ladder.
- Smaller Mortgage: Your mortgage is only for the share you are buying, meaning lower monthly repayments and making it easier to meet lender affordability criteria.
- Security of Tenure: You have the same security as a full owner-occupier.
- Staircasing: It offers a flexible path to full ownership, allowing you to gradually increase your stake as your financial situation improves.
Cons of Shared Ownership:
- You Don’t Own 100%: Initially, you are both a homeowner and a tenant, which means you have both a mortgage and rent to pay.
- Leasehold Properties: Shared Ownership properties are always leasehold, which can come with service charges and ground rent.
- Restrictions: There can be restrictions on making major alterations or subletting the property.
- Selling Can Be More Complex: When you decide to sell, the housing association often has the right to find a buyer for your share first, which can add an extra step to the process.
Who is it For?
Shared Ownership is ideal for people on lower to medium incomes who have a smaller deposit saved and would otherwise be priced out of the property market in their local area.
Help to Buy: Equity Loan
Important Note: The Help to Buy: Equity Loan scheme closed for new applications in October 2022 and officially ended in March 2023. However, hundreds of thousands of people used the scheme and are now approaching the end of their five-year interest-free period. Understanding how it works is therefore still very relevant for a huge number of homeowners.
How it Worked:
The Help to Buy: Equity Loan scheme allowed buyers to purchase a new-build property with just a 5% deposit. The government would then provide an equity loan of up to 20% (or 40% in London) of the property’s value. The remaining 75% (or 55% in London) was covered by a standard repayment mortgage.
The crucial feature of the scheme was that the equity loan was completely interest-free for the first five years. After five years, homeowners would start paying interest on the loan.
A key detail is that the amount you have to repay is based on the property’s market value at the time of repayment, not the original loan amount. If the property value increased, the amount of money owed on the equity loan also increased.
What if I Have a Help to Buy Mortgage Now?
If you used the Help to Buy scheme, it is critical to plan for the end of your five-year interest-free period. When this date arrives, you have several options:
- Start Paying the Interest: You can simply start making the monthly interest payments on your equity loan in addition to your regular mortgage payments.
- Pay Off the Loan in Part or Full: You can use savings to make lump sum repayments (usually a minimum of 10% of the property’s current value at a time).
- Remortgage to Repay the Loan: This is the most common and often most effective option. You can remortgage your property to borrow more money, which is then used to pay off the government’s equity loan in full. This makes you the 100% owner of your home and consolidates your borrowing into a single, standard mortgage.
Navigating the end of a Help to Buy deal can be complex. Speaking to a mortgage advisor is the best way to understand your options and find the most cost-effective solution for your circumstances. They can help you remortgage and secure your home at 100% ownership, ensuring you switch to the best possible deal.
