Help to Buy or Shared Ownership? These are two major buying options if you’re a first-time buyer. I had to learn the pros and cons of these schemes from scratch when I bought my first house, and I’ve tried to explain simply below how they work.
If you don’t want to rent forever, but aren’t sure if there’ll ever be a property and a bank that wants to marry your deposit, one of these initiatives might be for you.
There is a third option. You can go your own way, just like the Fleetwood Mac song. Fleetwood Mac were part of the soundtrack to my childhood, and so this song always come to my mind when there’s a choice in a situation to go things alone. (It also has the kind of tempo that makes you feel like taking on the world).
I am not a mortgage broker or financial advisor etc. I can’t tell you where to put your money. Please do your own research and get professional advice where needed after reading this.
The Help to Buy scheme has been extended as I write this, but the scheme might also evolve beyond the information below. Politely let me know in the comments or email me and I will eagerly update the post. You may catch something in the news before I do; I will not be looking at the post daily as I have plenty of other stuff I will be blogging about going forward. By all means nudge me if you see any maths booboos also.
Here’s what I’ve covered:
What is Help to Buy?
The Cons of Help to Buy
The Pros of Help to Buy
Some More Cons of Help to Buy…
What Is Shared Ownership
The Cons of Shared Ownership
The Pros of Shared Ownership
The Final Stats on Both
Or You Can Go Your Own Way!
This post is for you if you feel stuck renting because:
No one on this planet will give you a mortgage because you have no or little savings
You can’t afford the maintenance costs of ownership and your landlord is supposedly covering this for you
You’ve had to move around so far for work
It’s also for you if you’d rather own your own home because:
A monthly mortgage payment would cost you less than you pay in rent
Your landlord only fixes things once a year, or never, or only if they can DIY it badly for a few pennies
You dream of sprucing up a cheap fixer upper in a good location, but the cheap rents are in dodgy locations
You’re ready to plant roots for at least five years
You just want your own fricking space!
After reading this post, I hope you’ll be more informed about Help to Buy vs shared ownership including all the pros and cons. I hope you’ll also be closer to getting out of The Twilight Zone that we call the UK rental market.
Now you need to ask yourself one question: do I feel lucky? Well, do ya, punk? Sorry, that was two questions and they were both the wrong thing to ask.
The real question is: do you want a so-called quick fix, or are you ready to play the long game?
Let’s start with the so-called quick fixes.
What Is Help To Buy?
I’m talking about HTB equity loans. If you earn enough and have a 5% deposit, you can get a government loan of 20% (40% under Help to Buy London) towards a new build worth up to £600000.
Add your 5% to the goverment’s 20 or 40% and the mortgage LTV will be 75% or 55%.
Can you use the Help to Buy equity loan on Shared Ownership? Nope. So if you already think the latter is more up your street then skip down. I’d say forgive the pun too, but I’m not sorry. Sorry).
5% deposit from you + 20% loan outside London + 75% from bank = your own hobbit hole
5% deposit from you + 40% loan in London + 55% from bank = your own hobbit hole in the city
This is a “short term fix” because the 5% deposit is relatively small:
£600k home = £30k deposit
£400k home = £20k deposit
£200k home = £10k deposit
Key word being relatively. Also good luck finding a new build for £200k.
Scotland has it’s own scheme, but the maximum purchase price is £200000 and the loan covers 15%. Wales has a 20% loan on properties up to £300k.
The Cons Of Help To Buy
- It’s best for higher earners
- Interest and charges kick in after five years
- Some new estates have additional service charges
- If you profit from selling, you share the profit with the government
- New builds tend to be overpriced and miniature compared to existing property
- Part repayments of the equity loan have a potentially steep minimum boundary
If those deposit amounts still look laughable to you, then I’m guessing you don’t have a salary that will cover the mortgage amount. Now you know why I kept writing “short term fix” with quotes. It’s only a quick solution if you earn a lot but routinely spend most of your salary and so have little in the way of a deposit.
You still need to earn enough to warrant the bank lending you their bit. E.g. a £600k house would still need a mortgage of £330000. That means you (or you and your other half) need total income around £90000-100000.
If this is news to you, you should read more about how banks calculate whether you can afford a house.
Why would the government be so kind?
If your parents always told you to stay away from loans, then this warning will make sense after the first five years.You pay your mortgage and any service charge under this scheme at first. Then in year six, you start paying interest at 1.75% on the loan. If you went for the £600k new build, that’s £350 extra per month.
I grew up thinking service charges were only payable to maintain common areas if you nab a flat. However, lots of buyers have been stung by service charges to maintain the estate that their new build is on plus ground rent if their new build house has been sold on a lease. (The lease means you don’t own the land it stands on).
With flats, leaseholds make sense because lots of neighbours are on the same little parcel of land. I wouldn’t touch a house that wasn’t freehold with a barge pole. I don’t even own a barge pole, so that makes that easier…
In year seven you pay 1.75% plus inflation based on the Retail Prices Index,* plus 1% on top of that. If that sounds like a lot of pluses, it’s because it is, and none of this repays the loan itself. Most homeowners would sell at this point to get out of the loan costs.
*The Office of National Statistics publish this UK measure of inflation monthly. It tracks certain retail goods and services to see how costs change and it’s the same thing your mobile phone network use to
bleed you dry increase your contract.
What if I don’t want to sell my forever home?
You might not have a choice if you can’t afford the additional costs. The way it’s predicted most will repay the loan is by selling the house. At this point the government gets their percentage back. (See what they did there? Guaranteed a return on their loan).
If the house has increased in value, they also get their percentage of the profit. I.e. if there is £50000 profit leftover after a sale and the government gave you 20%, you can’t keep all of the £50000. The government gets £10000.
Well done if your new build house increases that much in value in five years.
If you really can’t sell for some reason, then the other route would be to try and remortgage and reduce costs that way if possible. Since you will have been making repayments for five years, you will owe the bank less than you did and should be able to switch to a kinder interest rate depending on what the economy is doing.
Do you know what the economy will be doing? No? That’s okay. No one else has a clue what the economy will be doing in five or six years either.
What if the house falls in value?
Unlike with an ordinary mortgage, this might benefit you slightly because you will owe less accordingly on the equity loan. The 20% proportion stands as the value of the house changes. Even if the government stumped up £80k towards a £400k purchase, if that house drops in value to £350000, your loan value would reduce to 20% of £350k. The government portion of the loan becomes £70k instead. (But your house is still worth less than when you bought it, which is a can-open-worms-everywhere situation).
The loan is supposed to cushion you personally if you fall into negative equity on an ordinary mortgage. For instance, let’s say you qualify for a 95% mortgage without the Help to Buy loan. You are taking a much bigger risk. If you took a 95% mortgage without Help to Buy on a £400k house, you alone would have borrowed from the bank £380k before interest.
If your house drops in value to £350000, your mortgage will now be worth more than your house. This is negative equity. (Of course, most of us wouldn’t qualify for a 95% mortgage on a £400k property without government help, so maybe it’s irrelevant…)
What’s a new build really worth?
Certainly very few first time buyers qualify for 95% mortgages on properties approaching half a million pounds, hence why the government created the Equity Loan. The house needs to increase a lot in value to make it worth your while though. This is a tough ask since developers usually charge a premium for new builds anyway.
For example, in the village I grew up in, an existing three bed house will have around 950 square feet of living space for £315000, give or take.
For the same list price on a brand new estate, you will only get two bedrooms and 670 square feet (and these are all identical houses). A preloved home comes with nearly an extra 300 square feet!
You can also usually ask more for more bedrooms, so a three bedroom house will nearly always fetch more in future than a two bedroom house. There’s a ceiling to how much a two bedroom house can increase in value regardless of square footage because two bedrooms is… two bedrooms.
In this article, a group of buyers ran into Help to Buy problems because of the premium charged on new build properties. They found qualifying difficult as the mortgage lenders disagreed badly with how much the developers had overvalued their planned purchases. Instead of negotiating lower prices, the developer encouraged them to find a lender who would give a higher valuation instead.
If the price drops on your Help to Buy home and you sell, the government still owns their stake. If there’s no profit, you still owe them a percentage out of the sale.
Otherwise you can repay the loan in part or full whenever, except if you are making a part repayment, it needs to be at least 10% of the market value of your house at that time. If like me you have had enough maths for one day, let’s just say it would need to be thousands of pounds.
If unlike me, you love maths, then you may also want to read this comparison of help to buy versus renting (in the South East) which suggests a £250k new build would cost an extra £259k over its lifetime vs the same time spent renting. (Most first-time buyers can ignore the stamp duty though).
I won’t attempt a cost comparison of Help to Buy vs shared ownership in the same way, as they’re aimed at buyers with different finances anyway. More on that below.
Ask this question: What’s this going to cost me over the lifetime of the mortgage?
The Pros Of Help To Buy
That was a lot of ifs, so where are the pros?
- It makes a new build (or any home ownership) accessible if you live in an area where very little gets listed for sale
- You won’t need to do any renovations before moving in
- Everything will be shiny and new
- You get to choose all your furnishings from scratch
- The builder warranties defects at first
- New builds theoretically require less repairs
- Unlike shared ownership, there are no location restrictions
- You might be able to access special interest rates
Some More Cons Of Help to Buy…
Fudge it, there’s no denying that the list is long. So long, that I had to create two sections in this blog post to write about all the potential pitfalls otherwise you would never have gotten past the first part. Sorry, but I can’t resist. Every time I read about HTB loans, my spidey sense starts tingling.
At the same time, I don’t want you to be discouraged from home ownership if that’s what you really want. Information is a weapon. Better to know something then get caught out later.
Mind the following:
- New builds are usually priced higher than secondhand homes
- New builds are usually smaller than existing homes despite the higher price tag
- You might be living on a building site while surrounding homes are in progress
- There is no right to a view in law, so builders can put new houses close to your boundary
- Did I mention service charges and ground rents?
- The only thing shiny and new will be the walls and windows: you need to furnish everything yourself unless you are buying a turnkey property (again, at a premium)
- The gardens are sometimes finished to a very basic standard so that any landscaping will be your (financial) responsibility
- If you must sell in five years, you also incur all the other costs of moving
- Some buyers have horror stories of new builds sold with defects
- Not all lenders offer the special interest rates, or Help To Buy mortgages
- I’ve written about the extra legal costs of Help to Buy in this post How To Choose A Conveyancer Or Solicitor You Don’t Hate
- They can be built on estates that haven’t had any forethought otherwise
Basically, don’t expect to be able to cross a nearby busy road or post a letter easily for several years.
Unfair? Half of these could very well apply if you’re buying an existing property too. Some of the cons of Help to Buy are just things all buyers should beware.
Help to Buy versus shared ownership isn’t really a scoring match. They’re designed for different needs. The cons of shared ownership are more specific to the nature of shared ownership.
One major commonality in Help to Buy vs shared ownership is that they both up the legal fees easily. (Read about staircasing below under shared ownership).
The real niggly bit is that everyone markets it with no restriction on earnings. This completely ignores the fact that the bank is still only going to lend a certain multiple of your income. You still need to earn a MINIMUM amount depending on the property you spy. In the Southeast the properties are priced so high that a large number of first-time buyers will never be eligible for a scheme that was supposed to help them.
A new build is likely not for you if:
- You could care less that someone else lived in the house before you
- The thought of paying all the above plus furnishing a house from carpets to curtains makes you shudder
- The thought of deciding how to furnish a house top to bottom gives you interior design hives
- Or: you’d like the kind of project where you bring life to an old house
- You want to live in an established neighbourhood
- The place you have your heart set on has existing housing stock for sale
I told you I’d rain on your parade at first
If you don’t earn enough, or all of the above reads like a five year suspended prison sentence, then you have two options. Either read on for quick fix number two, or look at your savings options.
I saved 50% of my wages while renting in London on a low five figure income. If you have household earnings in the region of £90000, then why not save more than a five percent deposit and go your own way? More on that below.
Just to mention that Help to Buy loans are not the same as Help to Buy ISAs for first time buyers (which closed to new applications end of 2019).
Lifetime ISAs are also for first time buyers. I can’t explain these better today than the guide at MoneySavingExpert.
The only other Help to Buy option I haven’t written about is the special scheme for members of the Armed Forces which looks a lot more forgiving, but the loan amounts are much smaller. Speak to your employer if this applies to you.
What Is Shared Ownership?
If you read the above and you have the kind of salary mentioned, then you should skip down because you could be playing the long game well instead.
The key difference between Help to Buy vs shared ownership is that if you earn less than £80-90k then shared ownership is designed to be a quick fix.
Shared ownership lets you buy a share of a property if you’re eligible. Your share is generally between 25 and 75% (that’s quite a difference!) A housing association or private developer owns the rest of the property, and you pay rent to them.
The HA is supposed to charge discounted rent i.e. it’s less than what you’re probably used to paying in rent. However, you also have a mortgage payment and service charges as most shared ownership homes are usually leasehold.
If you want to own more of your home, you “staircase“. This isn’t some kind of gym torture. Instead you buy more shares in your home in 10% increments and by default, this reduces the monthly rent.
Unlike Help to Buy, this is for earnings below £80k. In London you have to be a first time buyer earning less than £90000. The developer or housing association selling those particular homes control the scheme. They might have eligibility restrictions like you can only apply if you already live or work locally. The deposit is 10% of the share that you buy.
Property worth £400000
You want a 25% share: £100000
Your deposit: 10% of £100k = £10000
Voila, affordable housing.
The Cons Of Shared Ownership
The key difference in Help to Buy vs shared ownership is that shared ownership’s extra costs stem from staircasing and rent.
- Staircasing can be an expensive process
- There are restrictions on selling
- Your monthly costs may be high because of rent and service charges in addition to the mortgage
- There’s no discount on service charges even though you only own a share
- You don’t get to make up the definition of “affordable rent”
As much as I like the motto Treat People With Kindness, when it comes to help from governments, councils, and businesses, we sometimes have to ask “Why would they be so kind?”
As with the Help to Buy scenario, profit awaits someone else once we get through the door with our small deposit. If we want to staircase for instance, we don’t just pay for the share we want to buy, but go through all the rigmarole we would if we were buying a new house.
When staircasing is expensive
To increase our share of ownership we pay:
A valuation fee to confirm the current value
Legal expenses because we’re changing our lease
Any mortgage fees if we are changing lenders
We have to work out if a better interest rate cancels out the cost of a new arrangement and valuation fee, and any exit fees for our existing mortgage.
Restrictions on selling
The developer/HA also usually have first rights to buy the property if you want to sell, even if you magically managed to staircase to 100% ownership.
This is done so they can sell it on a shared ownership wait list again, which is great for anyone on the list, but restrictive for you. If it doesn’t sell after x amount of time, you can then sell on the open market, but you still have to sell it to someone eligible for shared ownership.
Extra monthly costs
They can also increase the maintenance charges and rent. If you fall behind on these, you might lose ownership over your share completely.
You pay full service charge. Although you only own a share and the rent should be reduced therefore, you pay the same service charges and council tax as someone owning the whole of an equivalent property. This means your monthly costs will be more than someone who owns outright.
Everything is meant to be costed so that you are paying less than renting a new build in the same area while retaining some ownership. In an overall expensive scheme, the rent portion is meant to be lower so that housing associations can still call them “affordable”, keeping in mind that the cap on income is £90k.
I still feel like this is penalising you for not being able to afford 100% in the first place. Like when insurers charge you more for paying monthly.
What’s an affordable rent?
Like a lot of people I also don’t agree with the government definition of “affordable” private housing: that your monthly mortgage payment should be somewhere between council rents and market rents. This is bull if you are spending over 40% of you wages on rent alone.
Yes, I saved 50% of my wages renting in London, but it took a lot of maths, discipline, a bit of shivering, and a casual disrespect for Maslow’s hierarchy of needs.
This is only a quick fix in that you don’t need to earn or save much to take this option, providing you can find a scheme where you’re eligible. As with the HTB loan, you could be buying into a new build priced at a premium with no guarantee that the value will go up. You could fall into negative equity and need to be able to ride out the market. Shared ownership might make you a homeowner quicker, but then you need to plan to stay long enough for prices to go back up again after a drop.
You can’t usually alter the property because it’s leasehold, so that means looking for a shared ownership home that will still be suitable for you in five years or more. Conversely, if the value goes up, you’ll earn a percentage of profits equal to your share. So if you have a 75% share, you get to keep 75% of the profit.
The Pros Of Shared Ownership
So where are the pros, are they all playing tennis? As with the HTB Equity Loan, the good stuff mainly revolves around access and the perks of having a new build.
- The only real “affordable” housing in London is shared ownership
- Most of this is built in regenerated areas so you get various shiny new amenities simultaneously
- This makes these potential property hotspots in future
- You won’t need to do any renovations before moving in to a new build, or repairs in the short term in theory
- Everything will be shiny and new and warrantied in a new build
- You get to choose all your furnishings from scratch if you want
- Lower entry point than other options
- It’s a long-running concept compared to Help to Buy
Alternatively, Social HomeBuy is a separate initiative that lets social housing renters buy shares in that home after five years. Rent to Own is a Wales-only scheme that puts your rent towards a deposit on the home you’re renting.
The Final Stats On Both
So what are the scores, George Dawes? (Thanks to YouTube, all ages can potentially get this reference…) Who wins in the battle of Help to Buy vs Shared Ownership?
Below are the key takeaways about both quick fixes (including HTB not being a quick fix if you’re a low earner).
Help to Buy
Only on new build properties
More choice than shared ownership of what to buy and where
Still need a high salary to qualify
Monthly costs likely to be lower compared to shared ownership
Less affordable once loan repayments become due
You might have no choice but to sell when it’s time to repay the loan
May make a profit during the sale
Not just for first time buyers unlike HTB ISAs and Lifetime ISAs
Must be a first time buyer
Mostly new build properties
Schemes usually have geographic restrictions and are oversubscribed
Must earn below a certain income threshold
Monthly costs can be high
Rent is also increased annually
The Housing Association will have rules to follow if you want to sell
You may make a profit or decide to buy the rest of the shares
Or You Can Go Your Own Way!
This is the long game. No government loans or shared ownership. It requires more patience, but the steps are very simple.
- First you begin to save towards a mahusive deposit…
- Twist! It’s a pick your own adventure!
Either you have X and can borrow X so you look for properties in that range. Or when X still gets you diddly squat, you look for the worst property in the best location then work out the gap you need to fill in income/savings.
- Cry in despair a little
- Pick yourself back up again because we’re not quitters
- Continue to save a mighty deposit
- Get a mortgage offer through a broker
Regards buying the worst property in the best location, don’t just rely on photos on property sites. Until you go to viewings you won’t know if a house has dropped in price because it’s something obvious turning people off. You need to see past certain turn offs to compete. I found myself going back and looking critically at photos I initially dismissed once the listings went down in price.
Remember you can often change a house, but you can’t transform the neighbourhood. I would look at whether it might be possible to extend in future or move walls inside if you are concerned about space. (Although often, we need less stuff rather than more space…)
You might not even want to do any of these things personally, but in several years you might want to make a layout more practical to increase the asking price if you want to sell.
If your curiosity is piqued but you’re unsure, go and view anyway, because then you will at least have a comparison when you see somewhere you can actually imagine living. By choosing a dive I was able to simultaneously imagine where everything would go and stay a bit detached as it was impossible to fall in love with in it’s current state. (I had to use my imagination as it was unfurnished at the first viewing).
I’ve got a post on the way all about converting a fixer upper and whether it was worth the discount on the asking price. Join the mailing list at the bottom of this post if you want to know when that’s published.
Let’s Wrap This Up Like New Carpet
- If you earn enough, you only need 5% towards a Help to Buy mortgage and the goverment will cover 20-40%
- Think about how you will repay the equity loan AND your mortgage, especially after five years is up
- Do the maths on what it will cost you long term versus renting for longer and saving a bigger deposit
- Beware that you will likely pay more for less square footage
- This will protect you better against negative equity, so be wary of pursuing 95% mortgages outside of Help to Buy for this reason
- Compare mortgage deals via a broker
- Remember if you have to sell that the government gets their stake back (but you may profit also)
- If your salary is lower, research whether you are eligible for Shared Ownership in your area
- Budget higher monthly costs to include rent and other charges
- Choose a SO property you can grow into
- Look closely at the restrictions if you might want to sell
- Or increase your earnings, increase your savings, and buy without these options
Help To Buy Vs Shared Ownership: Which Should You Choose?
I can only leave that up to you, my loves. I wasn’t eligible for Help to Buy, and nothing I read about Shared Ownership made me confident that it was right for me. It might seem bizarre that actually the most affordable thing was for me to do what first-time buyers have been doing for decades and buy an existing house with a good old-fashioned deposit and mortgage, but here we are.
I do have friends who are very happy with their shared ownership properties because it was right for their circumstances and the pros have outweighed any cons so far.
Similarly, not everyone would want to buy an existing house in the condition that I did and spend the time and money and effort to glow it up.
The aim of this post wasn’t a smackdown of Help to Buy vs shared ownership, as they’re different creatures entirely.
Who benefits from Help to Buy vs shared ownership?
If I have sounded down on Help to Buy, then let me share a little anecdote about a BBC documentary called The New Builds Are Coming. In the first episode, certain residents in the village of leafy Culham failed to block houses being built on their green belt. There was loud opposition, but it got through the public consultation.
One elderly resident (an existing homeowner?) told the filmmakers that he thought it would be good for young people to have new houses built there and that it should bring other opportunities.
Where I grew up, these estates have been useless to the majority of my generation because we’re priced out of taking part. They won’t benefit the children of the village as they likely won’t be able to afford them in future either. None of the businesses and amenities that were promised were built. Meanwhile the local schools and GP surgeries overflow.
That’s my biased two bits. The situation might be different for you locally, or wherever you want to buy if that is somewhere far, far away. Personally I like to know all the potential pitfalls before deciding to go ahead and do something anyway!
Let me know in the comments if you have questions, or if you’ve benefited from any of the above options. (Or not! Feel free to make my one-sided post more rounded with your positive experiences with Help to Buy or Shared Ownership).
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