Does Shared Ownership Rent Increase? – An Explanation

Buying a shared ownership home isn’t really difficult. However, the intriguing part after acquiring a shared ownership home is the rent. Does it go up or remain the same? Well, this remains a mystery we would unveil over the course of this article.

When privately renting an apartment, the rent usually increases over time. But is this still the case for the rent for shared ownership?

Quick Summary

By simply paying off a mortgage for shared ownership, you can benefit from the following:

• If you choose to sell the house, you stand a chance of making profit from the sale, especially if the price of the house has increased.
• Increased speed of purchasing a home on time.
• The share of your home can be increased and this would benefit you in the long term.

Understanding The Rent Limit Set By Government

One thing is specific for a shared ownership home, it is inevitable for the homeowner to avoid paying some rent on the part they don’t own. So, in order to avoid losing your home and the money invested, it is important not to break the agreed terms of lease.

The highest rent rate limit is set at 3% of the selling price for a new build shared ownership home. Housebuilders are encouraged to charge less than this – normally around 2.75% of the equity that they still own. It’s important to check your lease as this will confirm the rent details.

For example, if you buy 40% of a home worth £300,000 this leaves the landlord with 60% equity of the home (£180,000). A maximum rent of 3% on the landlord’s equity comes to £5,400 per year.

Beware Of The Rent Review And Inflation link

When buying a shared ownership home, always keep in mind that there will be a rent review and an inflation link. Your rent is usually going to be reviewed each year, but some landlords may review it more often.

Landlords are usually able to increase the rent each year by RPI + 0.5%. RPI is a measure of inflation that gets calculated regularly.

Your rent is likely to go up when being reviewed. So, if you want to pay less rent, you may have to buy more shares.

Why Do Rents Increase Overtime?

Property Value

Rent is really just the cost of having something that belongs to someone else. Just like renting a car, the more expensive cars have a higher rental price.

This is similar for properties. If a property increases in value over time, then the owner of this property needs to be compensated for allowing someone else to continue occupying it.

Usually landlords are able to increase rents by whatever level they want to. But if they increase the rent too much compared to other landlords, they won’t get a high level of interest from people looking for somewhere to live.

Shared ownership properties have the benefit of restricting the rate that the rent can increase. The landlord would only be able to increase rent by RPI + 0.5%. As we mentioned before, RPI is just a measure of inflation, so one year it could be 1% and another year it could be 8%.

Is a Higher Rent A Good Thing?

You might think that a higher rent is always bad, because it costs you more as a home owner.

But a higher rent can actually be a good sign of the market. Renting rates a very sensitive to the property market. If there is high demand from tenants in a location, they are willing to pay more and landlords will charge accordingly.

Does Higher Rent Improve My Area?

High demand can sometimes be a sign that things are looking up for an area. Maybe there are now more people who have moved in with better paying jobs (and can afford higher rent). It might be that the area has recently had some facilities developed that attract a higher income population.

Whether it’s new trendy bars, an updated high street or a modernised station, any improvement in an area has the chance of increasing market rents.

Rising Property Values

Many buy to let landlords who rent their properties out value them based on how much rent they get each month (the technical term is a ‘rental yield’). If the rent increases, then there’s a good chance the property value will also increase. And if your neighbour’s property has increased in value it’s highly likely that your property will also increase.

So whilst higher rents may increase your rent bill each month, it’s possible that your share of the home has also increased during this time.

How To Reduce Rent By Staircasing

To reduce your monthly rent each month, you need to buy more shares of your home through staircasing.

A tenant can buy more shares whenever they want to as there is no timeframe to achieve this. You can buy in smaller increments to make it manageable for you, and many people end up remortgaging to pay for more shares. There are costs to pay each time too, so be sure to read our full guide to staircasing.

Are There Any Other Costs?

Separate from rent, it’s important to know the full details of your service charges each year (if there are any), as these will always need paying.

Conclusion

To sum it up, it’s very likely that your shared ownership rent will increase over time.

Several clauses give the landlord the right to increase the rent. But this shouldn’t discourage you from shared ownership.

Instead, this should serve as a motivation. The more shares you buy, the less rent you have to pay – and it’s that simple. Also, there is a limit the government set on maximum rent yield and rent increase, which should provide some basic protection.