Shared ownership may be the only route left to buying a home, but beware the pitfalls...

Is shared ownership now the only way for young people to buy their own home?

With the latest iteration of the government’s Help to Buy scheme in the rear-view mirror, it is one way for would-be owners to overcome the significant hurdle that raising a deposit presents.

It is true that mortgage rates are coming down: Barclays and Santander have just become the latest to offer “very significant” reductions following on from Halifax, HSBC and several other lenders over the festive period.

However, the most recent update from the Office for National Statistics put the average price of a UK home at £288,000. First-time buyer properties, obviously, tend to be cheaper. So let’s look at the deposit on a £200,000 property: it would come to £20,000 with a 90 per cent mortgage or £10,000 with a 95 per cent mortgage. Remember, however, the latter tend to carry a premium price. If you want the best deals, you need a bigger deposit.

If we move down to £150,000, those figures are still £15,000 and £7,500. For those unable to call upon the services of the Bank of Mum & Dad LLC, those are substantial sums that can take many years to save for, particularly when you consider the impact of the cost of living crisis on younger people’s deposable incomes. However, if you are only buying a share of a home, the deposit amount falls considerably.

Here’s how it works: typical schemes see buyers stumping up for between 10 and 25 per cent of a new-build property, although some will allow purchasers to buy up to 75 per cent at the outset. The purchase is usually made on a leasehold basis, presenting another can of worms that I could write an entire column about. Suffice it to say, leasehold properties come with service charges and a ground rent.

In the case of a 25 per cent share, however, the deposit on our £200,000 home falls to £5,000 with a 90 per cent loan and £2,500 for the 95 per cent. The corresponding figures for a £150,000 property would be £3,750 and £1,875.

Rent is paid to a landlord on the part the purchaser does not own. This is usually a housing association, but the proceeds may ultimately go to an investor. Insurer Legal & General is, for example, active in this space. The amount paid is based on a percentage of the outstanding value

The buyer can increase their share of their property by adding extra chunks over time through what is called “stair-casing”. And you have to be below a certain level of income to get involved, partly because shared ownership properties are considered part of the social housing sector.

Now, let’s be clear: many would still see this arrangement as a great improvement over the private rented sector, with its one-year tenancies, ruinous prices and the difficulty of creating a real home when it can be taken away at short notice should the landlord want to sell.

But shared ownership can get quite complicated. Complexity married to any sort of financial product is not good. The advantage is always with the institution as opposed to the individual, a common cause of financial services snafus. People can easily trip up by failing to read the small print or by failing to understand what it is they are getting into.

Critics of these schemes also point out that they can lead to the worst of both worlds. You may own as little as 25 per cent of a property – while at the same time having the responsibility of upkeep, which would be down to the landlord with a pure rental property.

Some schemes have sought to address this, sometimes via warranties or other means. Shared ownership schemes are also based on new-build homes, so they ought to have fewer problems than older properties. That’s the theory, at any rate.

Moving on, the rent is usually subject to annual escalators, often based on the Retail Prices Index, plus an additional percentage. RPI inflation is an outdated and much-criticised measure, one which has also tended to outpace the official Consumer Prices Index. Best hope your income rises sufficiently to keep pace or this could lead you into trouble... and remember, shared ownership properties are subject to repossession if you fail to keep up your mortgage repayments – as with any property.

There are fees incurred at the outset that can be quite substantial too. A report, Share Ownership: The Consumer Perspective by Shared Ownership Resources found more than a third of shared owners displayed indicators of financial vulnerability. They had lower financial resilience and capability compared with other homeowners buying with a mortgage.

This isn’t surprising. If you could afford to bypass only buying part of your home and paying rent to a landlord on the rest, of course you would do so. Another other issue raised by the report is the ever-increasing costs associated with these schemes. It isn’t just the rent. Those service charges and leasehold ground rents also chip away at participants’ resources. And they rise, to the extent that these schemes could become unsustainable.

They also vary widely. Those contemplating the jump would be well advised to do their research. This means looking beyond the glossy YouTube tutorials you’ll often see on operators’ websites.

As someone who has reported on and written about financial services and property for many years, I must confess, shared ownership makes my head ache almost as much as spending a weekend with a tax return.

I’m not saying it can’t work. And for some people, given the high prices of homes in modern Britain and the continuing high price of mortgages, after 14 consecutive interest rate rises, this could be the key to unlocking their dreams. But on the flipside: it could also end up as an entry into housing hell.

This is what worries me. One thing I can say with certainty: I would have been very wary of entering into one of these schemes when I started out on the property ladder. Make of that what you will.