The government introduced several affordable home ownership schemes to help those on lower incomes or having trouble saving a deposit to take their first steps on the property ladder.
Shared ownership is one of the more popular schemes. It allows (typically) first-time buyers to buy a share in a new property, putting down a far smaller deposit than they’d need to buy it outright.
The good news is that having a poor credit history doesn’t stop you from joining the scheme.
Yes, it will be a little trickier than if you held a healthy credit score, but with a little help from a seasoned mortgage broker matching you with an appropriate mortgage provider, there’s little reason why you shouldn’t be able to buy a share of your home. As long as you fit the eligibility criteria, there’s no reason why you shouldn’t apply for a shared ownership mortgage; bad credit can be forgiven in these financially tricky times, allowing you to take your first important step onto the property ladder.
So, today, we’re talking about bad credit shared ownership mortgages, how they can help you get your first mortgage, and how to build on it until you own your home outright.
What are shared ownership mortgages?
Shared ownership is a government scheme that helps first-time buyers get onto the property ladder. Where buyers can’t stretch to the likely deposit required, shared ownership allows the buyer to buy a share of the home and pay a reduced rent on the remainder to a government-backed housing association. It’s a part-buy/part-rent deal that’s designed to deliver lower overall repayments for buyers with less money.
How does that help you own your own home?
Well, owning a share is just the first step. As and when you can afford to pay more into the scheme, you can buy further shares of the property—known as staircasing—until, over time, you own the property outright.
Eligibility criteria for shared ownership
In England, the fundamental eligibility factors are:
- You’re a first-time buyer or previously held a mortgage but can’t currently afford to buy a property without assistance.
- You have a mortgage under the shared ownership scheme and want to move home.
- You can afford to buy a share between 10% and 75% of the property’s total market value.
- You can afford to pay the dictated rent to the landlord for the share they own.
- You can also afford the monthly ground rent and service charges for communal areas.
- The property must be a new-build home or an existing property that’s part of the shared ownership resale scheme.
- Your total household income is lower than £80k/yr (or £90k/yr in London).
In 2021 the government changed the rules on shared ownership in England, making it even better for buyers.
- The minimum share a buyer can apply for is now only 10% (previously 25%).
- Initial home share percentages are 10%, 25%, 50%, and 75%.
- There is now a 10-year period where the housing provider must support you with the cost of essential maintenance and repairs to your home.
- They’ve lowered the size of the minimum staircasing share purchase to 5% (previously 10%).
- And they’ve also introduced a new form of staircasing, allowing you to purchase an additional 1% of the property each year.
Advantages and disadvantages of shared ownership
The main advantage is that first-time buyers (or those needing an extra helping hand) don't have to find as much money to buy their home. It also provides a stepping-stone approach to buying a property a little at a time, allowing you to grow into full home ownership as and when you can afford to.
However, shared ownership properties are always leasehold, so you’ll have to budget for ground rent, service charges, and your mortgage and rent. You’ll pay 100% of those charges, whatever percentage of your property share.
Also, when you add to your share, you’ll need to have the property re-valued. If the market value of the property has increased, so will the price of each share. And if you choose to sell the property, you have to give the housing association first refusal.
How can I achieve shared ownership with bad credit?
If you have a low credit score, the high street banks and mainstream mortgage providers will likely reject any mortgage application. Likewise, those who have experienced severe debt issues (such as bankruptcy, defaults, CCJs, etc.) will be rejected immediately.
However, specialist mortgage lenders work closely with buyers who have previously faced financial difficulties. So while it may require a little extra effort and hard work to prove you’re no longer a risk and can afford to take on a mortgage, these lenders are ready to listen and deliver the loan you need.
How does my bad credit report affect my application?
Applying for a mortgage to access the shared ownership scheme works like a typical homeowner mortgage. Lenders will consider you a high risk with defaults or court actions on your credit report and will expect to see how you’ve overcome those issues and how you plan to pay for a new mortgage. Because of the higher risk involved, they’ll likely expect a larger deposit than usual and charge a higher interest rate on your policy.
Standard mortgages typically include deposits as low as 5%—10 or 15% to achieve the best interest rates—yet a specialist lender will expect a buyer with a poor credit history to provide up to a 15% deposit and charge the higher range of interest rates.
Buying a smaller share of the property helps you get over the initial hurdles
However, the good news, under the shared ownership scheme, is that however much deposit you have saved, you can apply for a fair share of the property.
Let’s say you can’t afford the more standard 5% or 10% deposit on a £100k property—£5k or £10k—but buying a 25% share means taking out a mortgage of only £25k. Even at a higher rate of 15%, often requested for those with poor credit scores, the deposit is a more affordable £3,750. If you could qualify for a 5% or 10% deposit, they’d only be £1,250 or £2,500.
Improve your chances by cleaning up your credit score
One of the things that specialist lenders want to see, apart from that you can comfortably cover their mortgage payments, your shared ownership rent, and the other costs a comfortable lifestyle brings, is how you deal with your debt issues.
If you can show that you have repaid any debt or responsibly managed the issue that’s left a black mark on your credit report, they’ll view that positively, boosting your chances of approval.
They’ll also look favourably on any effort you take to get your credit report looking as good as possible now. If you can reduce your current combined debt amount, correct any errors, or follow the best practices to upgrade your score, they can all help in the bigger picture.
How to apply for shared ownership property
A lot of careful planning is required if you’re hoping to land a bad credit shared ownership mortgage.
First, you must include everything in your budget. As well as the deposit and mortgage payments, there are a lot of associated costs when buying a home. You’ll have to find the money for solicitor’s fees, moving costs, leasehold fees, ground rent, and other less predictable costs (decoration, new appliances, essential unseen repairs, etc.). As well as your mortgage and rent payments, you’ll also be expected to be able to afford an acceptable lifestyle quality for you and your family.
You’ll need to deal with your local housing association to start looking for suitable properties. They’ll expect to see the necessary paperwork to consider you a suitable applicant.
So, as well as the affordability assessment we can help you create, you’ll need proof of identity, your current address, employment details, payslips (yearly accounts if you’re self-employed), evidence of your deposit, and, of course, your credit report.
Once you’ve got all your paperwork ready, you can find the appropriate agents for your area on the Own Your Home website.
A specialist mortgage broker will help you explore all the necessary figures required of a shared ownership mortgage and, if they add up, help you find precisely the right lender for someone in your situation.
Not only will they ensure you can meet your affordability assessment, but they are also the best placed to pick from the vast selection of specialist lenders they work with every day.
To learn more about shared ownership with a bad credit rating, speak to one of our expert advisors today. They’ll give you a clear idea of what’s involved and how your application will look to their specialist lenders. You could be closer to getting on the property ladder than you think!