Understanding the differences can help prospective tenants or buyers make an informed choice
When it comes to housing, many Britons face a crucial question: Is it better to rent or pursue shared ownership? Both options offer unique advantages and challenges, and understanding these differences can help prospective tenants or buyers make an informed choice.
The decision often depends on individual financial circumstances, future goals, and lifestyle preferences. For someone prioritising flexibility or who cannot save a substantial deposit, renting may appear to be the natural choice. However, for those eager to step onto the property ladder but unable to afford the initial costs of full home ownership, shared ownership could be a viable alternative.
Appealing option for renting
Renting provides the freedom to live without a long-term commitment. It is an appealing option for many, particularly younger individuals or those who appreciate the ability to relocate quickly due to changing careers or personal circumstances. Additionally, rental properties are often available fully or partially furnished, which makes transitioning into a new home easier.
However, one downside of renting is that tenants are essentially paying for a home they will never own. Rent payments can often be as high as, or even higher than, a monthly mortgage, without the benefit of building equity over time. Additionally, tenants may face restrictions on personalising the rented space or keeping pets, depending on the landlord’s policies.
Understanding shared ownership
Shared ownership schemes were created to bridge the gap between renting and full home ownership. With shared ownership, you buy a share of a property (ranging from 25% to 75%) and pay rent on the remaining portion. Over time, you can purchase a larger share, a process known as staircasing, until you eventually own 100% of the property.
One of the key advantages is the lower upfront costs. Deposits are calculated based on the share you are purchasing, making it far more attainable for first-time buyers. For example, instead of needing a 20% deposit on a £250,000 home (£50,000), if you buy a 50% share, your deposit would be £25,000 on a reduced purchase price of £125,000. However, it’s important to note that, along with rent, shared owners still need to cover maintenance and service charges.
Financial implications
Commentators often emphasise that rising rents can make it difficult to save for a deposit. According to government figures, more than 50% of renters in the UK currently spend over a third of their income on housing costs, which can limit opportunities to invest in property later. Conversely, renting can sometimes be a more manageable financial commitment since tenants are not responsible for property maintenance or unexpected repair expenses.
For shared ownership buyers, affordability requires careful consideration as well. Although shared ownership lowers the barrier of a hefty deposit, ongoing costs must also be taken into account. Rent on the unsold share, in addition to mortgage payments, can accumulate into significant expenses. Furthermore, shared ownership properties are typically leasehold, indicating that longer-term costs, such as lease extensions, may apply.
Which option suits your lifestyle?
Renting may appeal to those who embrace a nomadic lifestyle or work in fields that necessitate frequent relocation. For instance, young professionals in cities like Manchester or London might find that renting apartments near their workplaces is a more practical option. Additionally, renting enables you to reside in areas where purchasing could be cost-prohibitive, such as prime urban locations.
On the other hand, shared ownership provides the stability of homeownership while distributing the financial burden. For families, the opportunity to establish themselves in a permanent residence with the potential for full ownership over time makes shared ownership attractive. However, buyers should consider how long they intend to stay in the property, as shared ownership schemes often come with restrictions on selling.
Weighing the pros and cons
It’s essential to consider your long-term financial and personal goals thoughtfully. Renting allows you to keep your options open, but over the years, you could spend tens of thousands on rent without accumulating equity. Shared ownership, while a route to homeownership, entails a commitment and potential costs that renters do not encounter.
Deciding between renting and shared ownership will likely depend on prioritising what is most important to you now and in the future. Factors such as job security, family plans, and budget all influence ensuring you enter into an arrangement that best meets your needs.
Are you ready to explore mortgage options for your new home?
Whether you’re stepping onto the property ladder for the first time or considering your next move, knowing your options is essential. For more information or personalised advice and insights on gaining clarity on your mortgage options, contact Fitch & Fitch at 020 7859 4098 or email us at info@fitchandfitch.co.uk.