Shared Equity Mortgage: What is it & How Does it Work?

Updated: November 2023

Unlocking the door to your dream home might be easier than you think with a shared equity mortgage.

Imagine owning your perfect house with a financial plan that’s designed for your success, not your stress.

Dive into our guide to discover how shared equity can turn your homeownership dreams into reality.

What is Shared Equity?

The term “shared equity” often sparks curiosity among potential homeowners, especially those exploring various pathways to property ownership. So, what is shared equity, and how does it stand apart in the realm of home buying options?

At its core, shared equity refers to a financial arrangement where a buyer acquires a property with the aid of an additional loan, alongside their primary mortgage. This extra loan, known as an equity loan, typically comes from a lender or a government program and is used to supplement the buyer’s deposit. The uniqueness of shared equity lies in its structure: the buyer legally owns 100% of their property, but the equity loan adds a layer of partnership in the financial aspect of the purchase.

Shared Equity vs Shared Ownership

This arrangement should not be confused with shared ownership, a different concept where the buyer owns only a portion of the property, usually in partnership with a housing association. In shared ownership, the buyer purchases a share of the property (say, between 25% and 75%) and pays rent on the remaining share, with the option to increase their share over time. In contrast, shared equity involves owning the entire property from the outset, with the equity loan as an additional financial component rather than a divided ownership stake.

By understanding the nuances of shared equity, potential buyers can better navigate the landscape of homeownership options and make informed decisions that align with their financial and personal goals.

How the Shared Equity Schemes Work

Shared equity schemes offer a unique approach to home buying, one that can make the dream of homeownership more attainable for many. Understanding the mechanics of these schemes is crucial for anyone considering this route.

The Mechanics of Shared Equity

In a shared equity scheme, the buyer receives an equity loan from a lender or a government program. This loan is used in conjunction with the buyer’s own savings to form a more substantial deposit on a property. Essentially, the buyer has two loans: the primary mortgage and the equity loan.

The equity loan typically covers a significant portion of the property’s value, often ranging between 5% and 25%. This means that the buyer’s required deposit is less than what would be needed for a traditional mortgage.

Role and Impact of Equity Loans

The equity loan plays a pivotal role in making properties accessible to a wider range of buyers, especially those who may struggle to save for a larger deposit. By reducing the mortgage size, it often results in more manageable monthly payments.

However, the impact of an equity loan extends beyond just the initial purchase. The amount owed on the equity loan is not fixed; it fluctuates in line with the property’s market value. If the property’s value increases, so does the amount owed on the loan. Conversely, if the property’s value decreases, the amount owed on the loan reduces as well.

When the property is sold, or the mortgage term ends, the buyer must repay the equity loan in addition to the mortgage. The equity loan repayment will be based on the property’s current value, not the amount initially borrowed. Depending on the property market’s performance, this can significantly affect the total amount to be repaid.

Overview of Shared Equity Mortgages

Shared equity mortgages represent a distinct category within the housing finance market. They are designed to bridge the gap for buyers who might struggle with the demands of a conventional mortgage, but they also come with their own set of characteristics and considerations.

Specifics of Shared Equity Mortgages

A shared equity mortgage involves a partnership between the homebuyer, a mortgage lender, and typically, a third party providing an equity loan. The buyer obtains a mortgage for a portion of the home’s value and receives an equity loan to cover another part, which supplements their deposit. This arrangement reduces the mortgage amount needed from a lender, making monthly repayments more manageable.

Differences from Traditional Home Loans

Shared equity mortgages differ from traditional home loans in several key ways:

1. Lower Initial Costs: With the additional equity loan, buyers often face lower initial costs compared to traditional mortgages, as the required deposit and loan-to-value ratio are reduced.
2. Two Loans in Play: Buyers juggle two loans – the mortgage and the equity loan. While the mortgage functions like a standard home loan, the equity loan’s repayment is typically tied to the property’s value and repaid under different conditions, such as upon selling the property or at the end of the mortgage term.
3. Fluctuating Equity Loan Repayments: The equity loan’s repayment amount can vary based on the property’s market value over time. If the property value increases, so does the amount owed on the equity loan, and vice versa.
4. Potential for More Affordable Monthly Payments: Since the mortgage amount is usually lower than in a traditional setup, monthly repayments can be more affordable, making homeownership accessible to those with lower initial savings.
5. Specific Eligibility Criteria: Shared equity mortgages often come with particular eligibility requirements, such as income caps or restrictions to first-time buyers or specific property types like new builds.

Understanding the specifics of shared equity mortgages is crucial for buyers considering this path. While they offer a more accessible route to homeownership, they also entail a unique set of financial dynamics and responsibilities. Potential buyers should weigh these factors carefully against their long-term financial goals and capabilities.

The Advantages & Disadvantages of Shared Equity

Shared equity schemes provide an alternative route to homeownership, but like any financial decision, they come with their own set of pros and cons. Understanding these can help potential buyers make informed choices.

Advantages of Shared Equity

1. Lower Initial Deposit: One of the primary benefits is the requirement for a smaller deposit. This makes homeownership accessible to those who may struggle to save for a traditional 10% or 20% deposit.
2. More Affordable Property Options: With the additional equity loan, buyers can potentially afford properties that would otherwise be out of their price range.
3. Reduced Monthly Mortgage Payments: Since the mortgage is taken out on a lesser percentage of the property value, the monthly repayments are often lower compared to a standard mortgage.
4. Flexibility in Repayment: Many shared equity loans offer the advantage of no interest or repayments for the first few years, providing financial breathing space.
5. Access to Better Property Markets: Shared equity schemes often allow buyers to access property markets and locations that might otherwise be unaffordable, particularly in high-demand areas.

Disadvantages and Risks of Shared Equity

1. Increasing Loan Amount with Property Value: If the property’s value increases, so does the amount owed on the equity loan. This could mean paying back more than anticipated.
2. Limited Property Choices: Shared equity schemes are often restricted to certain types of properties, like new builds, which might not appeal to all buyers.
3. Complexity in Selling or Remortgaging: Selling a property or remortgaging can be more complicated with a shared equity mortgage, as the equity loan needs to be settled or transferred.
4. Long-Term Financial Implications: The fluctuating nature of the equity loan amount, tied to property value, can pose a long-term financial risk, particularly in volatile property markets.
5. Additional Fees: There may be additional fees associated with shared equity mortgages, including higher legal fees and potential fees for early repayment of the equity loan.

Shared Equity Houses: What you Need to Know

When delving into shared equity schemes, it’s essential to understand the types of properties typically involved, especially when we focus on “shared equity houses.” These properties often come with specific characteristics and limitations that potential buyers should be aware of.

Types of Properties in Shared Equity Schemes

1. New Build Homes: Many shared equity schemes, including the well-known Help to Buy, are predominantly available for new build homes. These properties are often part of developments by house builders participating in shared equity initiatives.
2. Specific Developments: Shared equity houses are usually located in specific developments earmarked for these schemes. These developments are often part of strategic housing initiatives aimed at boosting affordable homeownership.
3. Range of Property Sizes: Shared equity houses can vary in size and type of house, from smaller apartments to larger family homes, catering to a range of buyers, from singles and couples to growing families.

Restrictions and Considerations

1. Location Constraints: The availability of shared equity houses can be geographically limited, focusing on areas where housing development is encouraged or needed. This might restrict buyers’ choices in terms of preferred locations.
2. Price Caps: There are often price caps on properties eligible for shared equity schemes, which vary by region. For instance, in some areas, the cap might be lower than in high-demand urban areas.
3. Eligibility Criteria: Buyers interested in shared equity houses typically need to meet certain eligibility criteria, which might include being a first-time buyer, income limits, or not owning another property.
4. Resale Considerations: Selling a shared equity house can involve additional steps, such as settling the equity loan. Buyers should be aware of these processes and how they might impact the resale.
5. Long-term Commitment: Entering into a shared equity scheme is a long-term commitment. Buyers should consider their future plans, such as the potential need to move or change their living arrangements, and how these might align with the terms of the shared equity agreement.

How to Get Involved in a Shared Equity Scheme

Participating in a shared equity scheme can be a viable route to homeownership, but it’s important to understand the steps involved. Here’s a guide to help you navigate the process:

Step 1: Assess Your Eligibility

• Understand the Criteria: Check if you meet the eligibility requirements for shared equity schemes. Common criteria include being a first-time buyer, income limits, and the purpose of the property (usually for primary residence).
• Research Specific Scheme Requirements: Different schemes may have unique eligibility criteria. For instance, some might be exclusive to key workers or have specific regional restrictions.

Step 2: Research Available Schemes

• Identify Suitable Schemes: Look into various shared equity schemes available in your region. Government initiatives like Help to Buy are popular, but local authorities and housebuilders may offer other options.
• Gather Information: Visit official websites, attend housing seminars, or consult housing associations for detailed information on each scheme.

Step 3: Find a Suitable Property

• Property Type and Location: Based on the scheme, search for properties that fit the criteria, focusing on eligible new build homes or specific developments.
• Visit Developments: Consider visiting show homes or developments to get a feel for the properties available under shared equity schemes.

Step 4: Financial Preparation

• Assess Finances: Ensure you have the financial capacity to manage the mortgage and the equity loan. Consider future financial stability as well.
• Save for Deposit: Start saving for the deposit required under the scheme, typically around 5% of the property value.

Related: How to get out of and avoid debt

Step 5: Mortgage and Equity Loan Application

• Apply for Mortgage Pre-approval: Approach mortgage lenders to get an idea of the mortgage amount you could be eligible for.
• Equity Loan Application: Once you’ve found a property, apply for the equity loan through the scheme provider. This process may involve additional documentation and financial checks.

Step 6: Legal and Financial Advice

• Seek Professional Advice: Consult with a financial advisor or mortgage broker who specializes in shared equity schemes. They can guide you through the application process and help you understand the long-term implications.
• Legal Considerations: Hire a solicitor experienced in shared equity transactions to handle the legal aspects of the purchase.

Step 7: Completing the Purchase

• Finalize the Mortgage and Equity Loan: Once approved, finalize the details of both the mortgage and the equity loan.
• Complete the Purchase: With all financial aspects settled, you can proceed to complete the purchase and become a homeowner.

Conclusion

• Stay Informed: Keep abreast of any changes in the terms of your shared equity scheme and be prepared for future financial commitments, such as repaying the equity loan.

Final Thoughts & Key Takeaways

Shared equity mortgages offer a unique and accessible path to owning a home, especially for those who might find traditional routes challenging. It’s a concept that creatively bridges financial gaps, making the dream of homeownership a reality for many.

Key Takeaways

1. Understanding is Crucial: Grasping the nuances of shared equity, including how it differs from shared ownership, is essential for making informed decisions.
2. Weighing Pros and Cons: The benefits of lower initial deposits and potentially more affordable property options come with the need to carefully consider the long-term financial implications, especially the fluctuating nature of equity loans.
3. Property Types and Restrictions: Remember that shared equity schemes often apply to specific types of properties, like new builds, and can come with geographical and financial restrictions.
4. Navigating the Process: From assessing eligibility to completing the purchase, each step in the shared equity journey requires careful consideration and planning.
5. Seek Professional Guidance: Consulting with financial advisors and legal experts who specialize in shared equity can provide invaluable insights and support.

In conclusion, while shared equity schemes open doors to new possibilities in property ownership, they also require a thorough understanding and a strategic approach. Considering these key points, prospective buyers can navigate the shared equity landscape with confidence and clarity.