What is a Shared Equity Mortgage?
If you’re a first-time buyer or have a smaller deposit and are struggling to buy your first home, a shared equity mortgage means you can apply for a smaller mortgage amount by securing a loan to top up you deposit. Read on to find out how these loans work and how you could benefit from one.
Shared equity mortgages, also known as partnership mortgages, are primarily designed to help first-time buyers. They are also designed to help people who could not otherwise afford to buy a home to get on the property ladder.
This is achieved through the provision of a loan on top of your mortgage. The loan acts as a ‘top up’ to your deposit and when you sell the house or repay the loan, the lender also receives a share of any profits you’ve made on the house.
How does shared equity work?
Suppose you want to buy a home valued at £200,000. You have £40,000 saved up for the deposit but you don’t have a high enough income to obtain a mortgage for the remaining £160,000. You could, however, get a mortgage for £120,000. Under a shared equity mortgage scheme, another lender may be prepared to lend you the additional £40,000 you need as a separate loan, known as an equity loan, in order for you to access the £120,000 mortgage available to you. Your £40,000 deposit gives you a 20% share (also known as equity) in the house, and the lender also has 20% equity via its £40,000 top-up loan.
You can pay back the equity loan in instalments or when you come to sell. Imagine, for example, that 10 years later the value of your home has grown to £300,000, or £100,000 more than you paid for it. If you decide to sell the house, and you haven’t repaid any of the equity loan, you’ll need to repay £60,000 to the lender, consisting of the original £40,000 plus a 20% share of the £100,000 gain in the value of the home, equivalent to £20,000.
» MORE: What is equity?
Am I eligible for a shared equity mortgage?
There are a number of shared equity mortgage schemes on the market.
The government’s Help to Buy Equity Loan Scheme is available in England only and allows qualifying first-time buyers to access an equity loan (interest free for the first five years) from the government of up to 20% of the cost of a new-build home (or up to 40% in London). It does require the buyer to stump up a minimum 5% deposit of their own, however. It is only open to first-time buyers and has regional price caps.
The Scottish, Welsh and Northern Ireland governments offer their own shared equity mortgage schemes, which also aim to help first-time buyers and those on low to moderate incomes to buy a home.
» MORE: Help for first-time buyers
Local councils may also offer specific schemes for purchases in certain areas. Wigan Council, for example, offers a shared equity scheme with an interest-free equity loan to help purchasers buy a new-build home.
Housebuilders and housing associations may also offer alternative shared equity mortgages.
Advantages of shared equity mortgage schemes
- Shared equity mortgages offer a path to home ownership for people who would not otherwise be able to buy their own home.
- The cost of buying the home will be lower than with a traditional mortgage because of the interest-free element of the equity loan.
- The main advantage over renting is that you’ll benefit if the property increases in value. The value of your equity will rise, and this could help you take the next step on the property ladder.
- You can pay off the equity loan in full or in part when you can afford it, and so increase your overall equity in your home.
Disadvantages of shared equity mortgage schemes
- Shared equity mortgages are only available for new-build homes and developers may limit the number of houses available under these schemes.
- New-build homes can fall in value after they’re built, so you could find yourself in negative equity until the house rises above its purchase price. But it is important to remember that negative equity is a paper loss and it’s only a problem if you need to sell.
- If your house goes up in value, you’ll have to pay back more than the lender originally loaned you.
How to apply for a shared equity mortgage
To apply for the government’s Help to Buy scheme, you need to reserve a qualifying property with a registered homebuilder and then apply online through the Help to Buy agent in your region. Alternatively, you can speak directly to either a lender or an independent financial adviser.
You can usually borrow between 5% and 40% of a home’s value through shared equity mortgage schemes.
Alternatives to shared equity mortgages
You could borrow money from close relatives (for example, your parents). But remember that if you fail to repay the loan, you may jeopardise your relationship with them.
Under this scheme, you buy a share (generally between 25% and 75%) of the home and pay rent on the remaining amount. You have the option to increase your share during your time in the property via a process known as ‘staircasing’. However, while you always own 100% of your home under a shared equity mortgage, this isn’t the case under shared ownership. So, there will be restrictions on what you can do with the property, such as letting it out. It can also be more complicated to sell a shared ownership property.
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Joint borrower, sole proprietor mortgage
These mortgages also offer a means for those on relatively low incomes to get onto the property ladder. They allow another party, such as parents, to take out a mortgage along with the first-time buyer. Under this scheme, there could be more than one mortgage borrower, but only one will be named on the title of the property.
Tenants in common mortgage
This type of mortgage allows two or more people to own a share in a property. The shares don’t have to be equal. It can be a useful vehicle for parents who want to help their children onto the property ladder and protect their investment.
Can I remortgage with shared equity?
You can remortgage a house bought through shared equity mortgage schemes. It’s also a good idea to approach a mortgage adviser to consider your options once the interest-free period on the equity loan approaches.
» COMPARE: Remortgage deals
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Anthony is a BBC-trained journalist. He has worked in financial services and specialised in investments for over 20 years, writing for various wealth managers and leading news titles. Read more